The UK Is Lining Up Trade Deals

UK trade negotiators have been busy. Last week, they finalized a hard-fought fishing rights accord with the EU and a trade deal with Norway, Iceland and Liechtenstein. Next up: a UK-Australia trade agreement set for mid-June. Talks are also in progress with New Zealand, most of the Pacific Rim, India and America. Note: We still don’t know if all or any of these deals will happen—the EU fishing and the Norway (et al) deals still need ratification, for example. But the symbolism is noteworthy: Post-Brexit Britain doesn’t seem to be retreating from the world, confounding a popular view of Brexit as a protectionist, isolationist move. That is a good lesson, we think, in not taking political rhetoric at face value.

Five years ago this summer, in the wake of Britain’s referendum to leave the EU, many pundits proclaimed the vote meant the UK was turning its back on the world and global trade. Others went further, suggesting it was a sign globalization was in retreat. Meanwhile, the negative thinking went, the UK was shooting itself in the foot, there was no upside to severing EU ties and calamity would result. We always thought such sentiment was a weeee bit overstated, considering leaving the EU freed Britain up to pursue new deals of its own. Now that seems to be happening in full swing, and we suspect those still waiting for protectionist disaster may be disappointed.

The UK has been making every effort to embrace trade with the rest of the world. Even before Brexit took effect, there was the main EU trade agreement struck Christmas Eve and deals with 67 countries to preserve the trade agreements Britain was party to as an EU member-state. Then there was the UK-Japan trade deal reached last September and signed the next month. But now activity is really picking up speed. Last Thursday, the UK agreed on fishing rights for the next year with the EU, a point of contention they punted on in last year’s broader trade deal. Then on Friday, it announced a trade deal with Norway, Iceland and Liechtenstein—the non-EU members of the European Economic Area (EEA), which allows them to participate in the EU’s single market.

The fishing rights deal determines what—and how much—EU nations and the UK can catch in shared waters. It is similar to annual talks the EU has with Norway to coordinate access and prevent overfishing. Now the UK is conducting them, too—a sign of normal trade relations that would otherwise not be noteworthy from a capital markets standpoint. The UK’s trade deal with the non-EU EEA members mostly just preserves the arrangement it had with them when the UK was in the EU, but it does open up tariff-free exports of Norwegian white fish (like cod) to English processing plants and lower tariffs on some British cheeses crossing the North Sea.^[i]

With those in the bag, the UK is now closing in on a trade deal Down Under and starting the accession process to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP. UK-Australia trade talks are pretty far along, and negotiators are shooting for an agreement June 15. The main remaining sticking points: British farmers are lobbying to retain tariffs on Australian beef imports, fearing they will undermine domestic production. Meanwhile, the UK seeks removal of Australia’s 5% tariff on Scotch whisky. While more steak and whisky sound good to us, we don’t know whether negotiators think it is a good tradeoff, but we daresay they probably aren’t so far apart as to scuttle a deal altogether—countries have a long history of adding small carve outs to protect niche industries or placate producers with a multiyear phase-in.

Clinching an Australia deal might just be an appetizer for the main course: joining the CPTPP, which would give the UK free access to a trade bloc rivaling the EU’s size. The CPTPP’s current 11 members—Japan, Canada, Australia, Singapore, Malaysia, Mexico, New Zealand, Vietnam, Chile, Peru and Brunei—comprise about 13% of global GDP.^[ii] Members enjoy the removal of tariffs on 95% of goods traded among them. (No word on whether adding the decidedly non-Pacific UK would require a new name.) Then too, the UK is also currently pursuing bilateral trade deals with America, India and New Zealand. If all or most of these come to fruition, it would make Britain’s trade with the whole world significantly freer than it was as an EU member-state.

While we wouldn’t overrate trade deals’ impact—they can take years to negotiate and years more to take effect—the flurry undercuts the notion the UK is turning toward protectionism after Brexit. Far from it, from our standpoint. Once again, reality is proving better than expected—a modest tailwind for global stocks, in our view, even if these deals aren’t cyclical economic drivers. The UK’s broadening trade scope underscores the importance of not taking the popular interpretation of current events at face value. For investors, we think it pays to look deeper and think critically about what everyone else might be overlooking.