Brexit: lifetime chance for exports

Pakistan can capitalise on this by diversifying trade, deepening linkages with UK

ISLAMABAD:

The exit of the United Kingdom from the long economic and trade partnership with the European Union, ie Brexit, is going to become a reality on December 31, 2020.

The UK has already initiated the exit process and is keen to complete it soon. Among other logistical, legal and administrative infrastructure required for smooth trade flows across the English Channel from January 1, 2021, the UK has launched a series of negotiations to revisit its economic relations with the rest of the world.

The recent announcement of potential trade deals with Australia, New Zealand, Canada and Kenya indicates a shift in policy priorities for strengthening trade and investment relationship with countries outside the 27-nation EU bloc. This policy change presents many opportunities and challenges for developing countries, including Pakistan.

Pakistan can capitalise on this opportunity to diversify its trade and deepen its linkages with the “Global Britain”. The UK is Pakistan’s fifth largest export market with annual trade of approximately $2.58 billion, of which Pakistan’s exports are around $1.72 billion and imports around $0.86 billion.

Currently, the trade balance is in Pakistan’s favour, mainly because of a large fraction of textile products in the country’s export basket.

The trade volume between Pakistan and the UK doubled from $1.24 billion in 2000 to $2.58 billion in 2018. Although the bilateral trade has expanded, the increase is not commensurate with the untapped trade potential of these two economies.

Keeping in view the trade complementarity between the two countries and presence of large diaspora networks, the volume of bilateral trade is very small. In most countries, immigrants seem to facilitate trade, especially in differentiated goods such as cultural products and ethnic foods. The diaspora network reduces information costs for trading these products. Secondly, they exert a pro-export effect that partially offsets the trade-inhibiting effects of geographical distance.

Agriculture

Brexit also offers a key opportunity to expand Pakistan’s agricultural exports. Agriculture is a relatively small component of British economy. In 2014, its contribution to the UK gross domestic product (GDP) was less than 1%.

This sector is highly uncompetitive and has remained protected by EU-wide quotas and subsidies, which are going to be dismantled once the transitional arrangements are over. The withdrawal of EU subsidies, amounting to $4 billion, would further affect competitiveness and production of this sector.

Moreover, agriculture is reliant on temporary EU labour for core business processes such as sorting of potatoes, picking of apples, etc. British farmers are facing an acute shortage of seasonal labour because many contractual workers do not show up due to uncertainty surrounding the immigration policy, which is further compounded by ravages of Covid-19.

In the post-Brexit period, the complex system of tariff rate quotas (TRQs) currently applied to imports of food items into the EU would also change. It would improve the comparative advantage of Pakistan’s firms and strengthen their position to compete on a level playing field.

TRQs are applied to a range of products to protect producers located inside the EU. For instance, TRQ on oranges protects growers in Spain, the largest producer of oranges in the EU.

The UK is small in terms of population but relatively large in terms of economic size and purchasing power. Last year, it imported oranges valuing at $170 million. Since Pakistan already exports such products to this market, it could expand the supply manifold once the TRQs are eliminated.

New Zealand and Australia are keen to strike a deal with the UK as both countries have a comparative advantage in agriculture – Australia in beef and New Zealand in lamb. But the relative remoteness of these countries means high costs of transporting perishable items.

Since Pakistan is blessed with cheap labour, fertile land and direct air connectivity with the UK, it is ideally placed to fill this vacuum.

Free trade

The best policy option could be to strike a comprehensive free trade agreement (FTA) as the UK is keen to deepen its trade relations with members of the Commonwealth. It has recently launched negotiations with India, Malaysia and New Zealand.

Compared to these economies, Pakistan can offer a better deal as most of the trade with the UK is inter-industry, not intra-industry. Pakistan exports textile, fruits, vegetables and miscellaneous items to the UK, while the UK exports metals, machinery, electronics and chemicals to Pakistan.

This inter-industry trade pattern suggests that exporters of these countries operate in different sectors and thus do not compete with each other. Besides trade in goods, the UK is keen to engage with the emerging markets to compensate for the potential loss to services exports following Brexit.

Pakistan being the fifth largest country in terms of population has a considerable potential to expand services imports such as banking, insurance, education and trade-related activities. Brexit, therefore, offers a wonderful opportunity to strike a deeper and comprehensive trade deal encompassing trade in goods, services and foreign direct investment (FDI).

Currently, trade negotiations with Australia, New Zealand, the US, Gulf states and India seem to be the UK’s priority, but these countries are reluctant to negotiate until the UK-EU relationship is settled.

It is a perfect time for Pakistan to avail itself of the first-mover advantage and put forward win-win trade proposals for both economies.

Pakistan’s existing FTAs are with developing countries, such as Sri Lanka, China and Malaysia. Empirical evidence, however, suggests that FTAs with developed countries offer large trade diversification prospects as rich country consumers have more buying capacity and consume a larger variety of goods.

To conclude, Brexit potentially offers an exciting opening for strengthening the bilateral trade relationship as well as diversifying Pakistan’s exports. However, to cash in on this opportunity, Pakistan needs to expand its agricultural production as it can only export what it produces.

Second, Pakistan has to invest heavily in building the capacity of private sector for implementing sanitary and phyto-sanitary (SPS) regulations as well as meeting sustainability standards of large retailers such as Morrison, ASDA and Sainsbury.

Buyers in the developed world are becoming increasingly conscious of environmental sustainability, labour rights, food safety and business ethics. They want to ensure traceability of products all along the supply chains, from production at farms to delivery in supermarkets.

Imparting training to farmers and exporters to meet product standards can facilitate participation in the supply chains.

The writers are international economists

 

 

Published in The Express Tribune, December 21^st, 2020.

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