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#CRCC – The Economics of Commonwealth Trade

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“The UK will have to rebalance trade if they are going to grow their economy and the Commonwealth would be the first natural outlet for their goods” – South African High Commission

A central tenet of any discussion or proposal for a post-Brexit economy focuses on trade and trading partners. This is easily understandable. British trade is worth thirty-eight percent of its GDP. Therefore, for the UK to achieve economic diversification and growth, alongside working on improving future UK-EU relations, it must trade more. Increasing trade increases GDP, and increasing GDP increases British national wealth.

Fourty-four percent of the UK’s exported goods and services go to EU nations. When all of the continent is included in, its share of UK exports rises to 55%. While the UK would appear beholden to the EU for trade, the share of UK exports imported into the EU member-states has declined from nearly 55% in 2006. This does not prove that the UK is exporting less to the EU, but when viewed in value, it has remained steady around £200 to £250 billion since 2010. Therefore, the UK has been growing and diversifying their trade network while not leaving the lucrative EU market behind. Continuing with this strategy will be key for the UK post-Brexit.

Commonwealth trade has been increasing in recent years. The UK exported £13 billion worth of goods to the Commonwealth in 1999. By 2015, it had risen to £25 billion, down from a peak of £30 billion in 2013; the dip being “consistent” with a current UK trend (ons.co.uk). For exported services, the statistics are staggering, rising from a mere £8.5 billion to £22.3 between 1999 and 2015.

UK Exports (telegraph.co.uk)

Despite these impressive increases in value, only 9% of the UK’s imports and exports are to and from Commonwealth nations; a quarter of UK-EU trade. As noted previously, the Commonwealth, as a share of global GDP, is larger than the EU, and is estimated to grow at a considerably faster rate. Yet to presume that Brexit alone is sufficient to access this growing market would be quite literally attempting to cross horses midstream. To deny Brexit is difficult would be unwise and factually incorrect, but that is to deny the crucial point – the UK has chosen its direction at the crossroads – and the ‘Rest of the World’ was the direction it took. It is to this end, the Commonwealth is a great asset. Baroness Scotland, the Secretary-General of the Commonwealth, “argued that the it will become ‘more pivotally important that it has ever been’” (gov.uk). We at the Commonwealth, Realms & CANZUK Campaign  (CRCC) agree wholeheartedly.

The accusation frequently levelled against pro-Commonwealth groups is that at best  they and we are seeking a purely political idea, and at worst ‘sneaky’ neo-colonialism. The accusation could not be further from the truth: The proposal that the UK should realign with the Commonwealth is based on sound economic and geopolitical theory. Leaving aside the geopolitical aspect of affairs for the moment (A sufficient precis would be the question ‘who provided forces to protect Belize from Guatemalan Annexation?’), we come to the science of economics.

The Commonwealth Advantage

According to classical Ricardian macroeconomic theory, free trade is mutually beneficial and leads to economic development, a position held in near unanimity by economists today. Indeed, when a Free Trade Agreement (FTA) is signed between a larger and smaller nation, it will benefit and enrichen the smaller nation to a greater extent. In his great work, Assessing the Efficiency Gains From Further Liberalization, Professor J.A. Frankel, the leading US economist, argues that there are five main factors that reduce trade. These are: (1) lack of shared history/culture; (2) lack of an FTA (Free Trade Agreement); (3) geographical factors; (4) currency differences or volatilities and (5) language differences. The Commonwealth Exchange, a London based think-tank, has suggested that a sixth factor be added: legal differences.

Based on these six factors, an FTA between Commonwealth Nations would be beneficial to the nations involved, as they have similar cultures, values, societies, and governmental systems.

The Commonwealth is already known as an economic developer: When Rwanda applied to join, their President was quoted as saying “We hope to tap into the trade and investment opportunities that the Commonwealth offers so that Rwanda can expand its economy and effectively participate in the global marketplace” (Kagame, 2010 & Bennett et al, 4). Historically, this has very much been the case – a natural continuation from colonialism and Dominion Status, but was much weakened with the dissolution of the Sterling Area (a British Commonwealth & Empire tied currency system) and later Britain’s accession to the EEC, which in turn became the EU. In the 1990s, the economic advantage of the Commonwealth was researched in detail by Lundan and Jones in their paper ‘The “Commonwealth Effect” and the Process of Internationalisation’.  They found that Commonwealth nations did indeed trade more with each other, but according to their immediate estimations, it would decrease as time continued. Indeed, the Commonwealth itself was deemed to be relegated into history, a relic of imperialism.

However, in 2010 The Royal Commonwealth Society’s Bennett, Chappell, Reed ,and Sriskandarajah did more research into the “Commonwealth Effect,” specifically to see if it was indeed shrinking, in their working paper “Trading Places: the ‘Commonwealth Effect’ revisited.

They found the opposite had occurred and that intra-commonwealth trade had significantly increased, as had the percentage of the world’s GDP created by the Commonwealth. They stated in their conclusion: “the value of trade is likely to be a third to a half more between Commonwealth member states compared to pairs of countries where one or both are not Commonwealth members. This effect can be seen even after controlling for a range of other factors that might also explain trade patterns” (Bennett, et al, 13).

The authors continue to note it is hard to find precisely why the ‘Commonwealth Effect’ exists, but propose it may be getting stronger. Their explanations for this phenomenon include laws and economic policies being similar.

The Commonwealth, as a share of the world’s GDP has consistently grown, and the NGO that apparently offered no economic growth potential, has overtaken the EU in relation to total GDP. Trade between the Commonwealth, which was forecasted to decrease considerably post-independence has shown no signs of decreasing either proportionally or in net worth, but has rather increased, as can be seen in Figure 1 below. Current estimates calculate that Inter-Commonwealth trade will be worth $1 trillion by 2020.

Further benefits also exist. According to a report from the Commonwealth in their 2015 Trade Review, the cost of trade between two Commonwealth nations is 19% less than non-Commonwealth nations.

When combined, the two statistics mean the UK would have 33-50% more traded, at 81% of the cost, from a Commonwealth Bilateral Trade Agreement. When calculated on a cost-benefit analysis, with the rest of the world being ‘1/1’ equalling 1.00, the Commonwealth grants between a ‘1.33/.81’ to ‘1.5/.81’, or 1.64 and 1.85. Hence, the Commonwealth offers a 64% to 85% added advantage for the UK, before the size of the markets are taken into effect.

Figure 1: Increase in CW Trade (Bennett et al, 9)

Therefore, it makes more sense for the government to invest time and effort in seeking trade agreements with Commonwealth nations than with non-Commonwealth nations when growing trade. This is especially true when considering the quote at the beginning from the South African High Commission.

A Hypothetical Example of Specialisation & Trade

Using basic economic theory, the economic benefits for specialisation and trade can be seen through a basic economic graph. For the purpose of the below example, there are only two nations in the world and two goods; a gross oversimplification required to briefly explain the concept. In this ‘world’ the UK requires 5 tons of sugar and the Caribbean Realm of St Kitts and Nevis needs 2.5 tons of potatoes for internal consumption. The key concept is ‘Opportunity Cost’, which is defined as how much of the second good it must give up to produce more of the first).

The UK can produce fifty tons of potatoes or twenty-five tons of sugar. It gives up two tons of potatoes to make one ton of sugar – this is its ‘opportunity cost’ of sugar. The British opportunity cost of potatoes is the inverse – it needs to give up only half a ton of sugar to make a ton of potatoes.

St Kitts and Nevis, being a Caribbean nation, can produce five tons of potatoes or ten tons of sugar. Its opportunity cost for potatoes is two tons of sugar, and its opportunity cost of sugar is half a ton of potatoes.

When both island nations produce separately, the total production is forty-five tons of potatoes and 7.5 tons of sugar, the UK having a surplus of forty tons of potatoes, and St Kitts having a five tons sugar surplus. 42.5 tons of potatoes and ten tons of sugar are produced between the two nations.

Without FTA The UK St Kitts & Nevis
Potatoes 40 2.5
Sugar 5 5
National Total 45 7.5

The UK can produce potatoes more efficiently compared to St Kitts & Nevis, when comparing each nation’s opportunity cost. St Kitts and Nevis, in turn, can produce sugar more efficiently than the British. If the nations specialise and trade, the two nations now have fifty tons of potatoes and ten tons of sugar – an increase of 5 tons of potatoes and 2.5 tons of sugar.

With FTA The UK St Kitts & Nevis
Potatoes 50 0
Sugar 0 10
National Total 50 10

In this example, the British economy grows by eleven percent, while St Kitts and Nevis has expanded their economy by thirty-three percent.  (If the extra 7.5 tons of produce is split evenly, St Kitts’ economy has grown from 7.5 tons to 13.75 (7.5 + 2.5 + 3.75) – 83% economic growth. The UK is not left out either, and grows output from 45 to 48.75, and has 8.3% economic growth.)

These numbers are merely hypothetical statistics, and not representative of either nation’s economy, but serve as examples as to the benefits of free trade and specialisation.

As seen above, free trade between any two nations would increase both nations’ GDP (Gross Domestic Product: a nation’s production/output). However, there are difficulties in creating an FTA between nations without historical ties or many similarities. Such a process would be tedious, drawn out, and there would be little chance of a successful “fast track” agreement. The most recent trade agreement, the 1,598-page CETA (Comprehensive Economic Trade Agreement), signed between Canada and the EU, was ratified after 12 years of planning. Few developing countries can afford to spend the time, money, and have the necessary experience and experts for such a marathon. For this reason, if the process of producing and signing an trade agreement is to speed up, it must build off an already firm and well constructed foundation of previous arrangements. For the UK, it need look no further than the Commonwealth.

Works Cited

Bennett, Joanna, et al. “Trading Places: the ‘Commonwealth Effect’ Revisited.” Trading Places: the ‘Commonwealth Effect’ Revisited, thercs.org/assets/Uploads/Trading-Places-the- Commonwealth-effect-revisited.pdf. Accessed 7 Mar. 2017.

Sanders, Sir Ronald. “The Implications of Brexit for the Caribbean’s Future Relationship with Britain and the EU.” The Round Table, vol. 105, no. 5, Feb. 2016, pp. 519–529., doi:10.1080/00358533.2016.1231313.

“Why Trade in Commonwealth Markets.” Commonwealth Exchange, www.commonwealth- exchange.org/why-trade-in-commonwealth-markets/. Accessed 7 Mar. 2017.

“Why We Need The Navy.” Save the Royal Navy, 23 Aug. 2014, www.savetheroyalnavy.org/why-we-need-the-navy/. Accessed 13 May 2017.

Ashworth-Hayes, Sam. “Do Half the UK’s Exports Go to Europe?” Full Fact, Full Fact, 9 Nov. 2015, fullfact.org/europe/do-half-uks-exports-go-europe/. Accessed 13 May 2017.

Spence, Peter. “British Reliance on Trade with the EU Falls to an All-Time Low.” The Telegraph, Telegraph Media Group, 9 June 2015, www.telegraph.co.uk/finance/economics/11661581/Trade-deficit-shrinkage-set-to-boost-UK-growth.html. Accessed 13 May 2017.

https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/

About Isaac Anderson

Profile photo of Isaac Anderson
Isaac is a British undergrad studying Political Science and Business on the US-Canadian border. Having been an expat since 2010, he's a globetrotter who enjoys visiting different cultures. Describes himself as a Classical Liberal / Conservative, Messianic, history fan, with a passion for the Commonwealth & Anglosphere. He also probably spends too much time on political issues.

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