Time to stitch together a Commonwealth free trade bloc

by India Inc. Staff

There are seemingly insurmountable hurdles in the path of reinventing the Commonwealth as a multilateral free trade bloc but the potential upsides could make it a proposal worth pursuing.

There is a superstition in some parts of India which posits that inauspicious beginnings beget the best outcomes. If this proposition contains even a grain of empirical truth, then the proposal to reimagine the 52-nation Commonwealth as a 21st century trading bloc couldn’t have got off to a better start.

In the run-up to the Commonwealth Trade Ministers’ Meeting in London in March, an unnamed British official dubbed the discussion in some circles to reimagine the Commonwealth as a trade bloc as “Empire 2.0” – exactly the kind of language that raises the hackles of people in the former colonies.

Thankfully, it proved to be an individual opinion that didn’t find any resonance elsewhere and the meeting went off without a hitch.

Confluence of factors

British Prime Minister Theresa May’s decision to trigger Article 50 of the Lisbon Treaty, which signals the start of the messiest and most costly divorce in world history – the exit of the United Kingdom from the EU – is, to quote Mrs May not a “move towards isolationism but rather, an opportunity to become even more global and internationalist in action and spirit.”

Britain is hoping its negotiators can get a good exit deal from the EU – one that secures British interests, gives its businesses and people continued access to the Common Market and protects the City of London’s centrality in the world of international finance – while bureaucrats in Brussels seem determined to pull out all stops to deny Mrs May and her team exactly that.

The hard fact is staring everyone in the face: The UK needs to cut mutually beneficial trade deals not only with the EU but also with its other trading partners and this is where the Commonwealth as a potential trading bloc comes in.

The British government needs to demonstrate, in no uncertain terms, that it can find alternative markets and tie up trade deals that compensate for the losses that will accrue from Brexit. This, most observers believe, is the minimum condition Mrs May has to fulfil to get a fair trade deal from Brussels. And that is why this may be a good time for the UK to pursue its traditional ties with the Commonwealth and try and stitch together a new trading bloc that allows UK industry space to succeed.

At least on paper, such a trading bloc can benefit the rest of the Commonwealth as well. With US President Donald Trump tearing up the Trans Pacific Agreement (TPA), which would have tied up countries accounting for 40 per cent of global trading volumes into a new trading bloc, countries such as Australia, New Zealand, Singapore and India – all Commonwealth members – among others could find themselves under pressure from aggressive Chinese trade policies.

A coming together under the aegis of the Commonwealth and securing mutually beneficial trading concessions could ease the pressure and open up new opportunities for economic expansion for all the 52 member countries.

Shared culture and values

In a vast majority of cases, a country’s largest trading partners are those with which it shares the greatest cultural connections. And that could be the starting point for reimagining the Commonwealth as a trading bloc – by extending Indian Prime Minister Narendra Modi’s inclusive clarion call of Sabka Saath, Sabka Vikas (Development for all, discrimination against none) – to the comity of nations.

In the days leading up to the trade minister’s summit in London last month, the Commonwealth Secretariat pointed to the “distinct Commonwealth advantage underpinned by shared values, the English language that serves as a bridge across diverse ethnicities, familiar institutions and similar legal and regulatory systems”.

“This makes two Commonwealth countries trade on an average 19 to 20 per cent more with each other as compared to their non-Commonwealth partners,” it said.

Not quite a walk in the park

Shared values, similar legal systems and familiar institutions may be good binding agents but even a preliminary agreement to bind all 52 members to seek a common trading bloc will not be an easy task.

Trading ties between the former colonies of the British Empire began to weaken when the UK decided to join the European Community in 1973. In the 44 years since, every large economy within the group have forged strong trading relations with other countries, regions and blocs that are now central to their economies.

China, for example, is the largest trading partner of both Australia and India, though both countries are wary of the rising clout of the Middle Kingdom in world affairs. Canada’s top trading partners are the United States and Mexico, while China (the 800 pound gorilla in the room) has emerged as a major benefactor of most African and many Pacific Rim nations.

Then, the UK itself has deeper and more widespread linkages with the 27 countries in the European Union than it does with its former colonies. In 2015, for example, the EU accounted for 44 per cent of all exports from the UK. The comparable figure for the Commonwealth was a mere fifth of that.

India today has a larger economy than the UK, while Canada is a member of the G-7 and Australia has a higher per capital GDP than the UK, but just how far trade deals with these countries, under the Commonwealth umbrella, can compensate the UK for losses arising out of Brexit remains a question mark.

The smaller countries

Africa and the Caribbean account for 32 Commonwealth members, or 60 per cent of the grouping. Almost all of them have signed Economic Partnership Agreements, which give their exports duty free and/or quota free access to the EU.

Will they risk the EU’s ire – and the threat of such access being cut off or reduced, if Brussels chooses to play hardball – by signing on to a Commonwealth trading bloc, especially when their preferential access to the UK market will be cut off the moment the latter leaves the EU?

“Those EU trade agreements are vital for (these states’) development goals. (And) the UK will no longer be able to champion their access to the EU market as we have in the past,” Sir Simon Fraser, former head of the UK foreign office, has said recently.

Worse, till the UK and all these nations sign the proposed Commonwealth Trading Agreement or fresh bilateral FTAs, these former colonies will face severe challenges trading with Britain.

It’s all about free trade

Prime Minister May has reiterated more than once that Brexit is not about the UK isolating itself from the world but rather about giving itself the flexibility to fulfill its full economic potential free of EU’s rules.

Her Trade Secretary Liam Fox has also repeated what his boss said. “I have long believed that free trade is one of the most powerful tools we have to help those in greatest need around the world. As we establish our own position after we leave the European Union, Britain will proudly carry the standard of free and open trade as a badge of honour.”
Dismissing suggestions that Brexit indicated a protectionist turn for his country, he added: “Protectionism can be a seductive but a false friend. I have described it as the class A drug of the trading world – it can make you feel good at first but you will pay a terrible price in the long term.”

That message is being taken seriously in world capitals. Indian Finance Minister Arun Jaitley, who was in the UK recently, has said the British government had insisted that London was not turning protectionist and that free trade would be the way forward.

But selling this idea to the other Commonwealth countries will be a Herculean task.

What India wants

There were expectations in the immediate aftermath of the Brexit vote that the UK would quickly finalise a free trade agreement with India, both to signal to the EU its ability to strike such deals as well as to at least partially compensate for the losses expected from Brexit.

Her choice of New Delhi as the destination of her first foreign as Prime Minister raised expectations further, but the lack of any movement on the issue belied those hopes.

Typically, such negotiations take a long time as several knotty issues have to first get sorted. India, on its part, is in no hurry to seal either bilateral or multilateral trade deals unless the opposite side agrees to its demand to allow free movement of its professionals.

This is understandable as the Indian economy is overwhelmingly service sector oriented and it is the skills and talent of its people that keep the wheels of its economy running at a fast pace.

The UK, on the other hand, is not very keen to liberalise entry norms for Indian professionals as the Brexit vote was primarily driven by popular angst against unchecked migration from the EU.

This is creating a seemingly intractable problem. Given the mandate in the UK against unchecked immigration, the May government cannot be seen to be making concessions for India. But given India’s needs, the Modi government, too, cannot grant liberalise trading norms for UK companies without a reciprocal gesture on the movement of Indian personnel into the UK.

commonwealth countries

The same issue will almost certainly come in the way of any proposal to sign a Commonwealth Free Trade Agreement.

But there can be no denying that there are huge synergies elsewhere. As Prime Minister Narendra Modi’s government steps on the gas on easing India’s business processes and walks the extra distance to link Indian businesses to the global value chain, free trade and preferential trading agreements with important partner countries will play a key role in helping India move to a higher growth trajectory. And membership of a large multilateral bloc could be just what the doctor ordered.

The building blocks

But the raison d’tre of a Commonwealth trading bloc remains basically sound. If it comes into being, it will be the only such bloc to straddle the entire globe. With a combined annual GDP of $10.4 trillion, annual growth of 4 per cent and a population of 2.4 billion, or 40 per cent of the world’s population, it will definitely carry a haft that no individual member can match.

The 52-member grouping came into being in 1931 as the British Commonwealth when it was founded under the Statute of Westminster with the United Kingdom, Canada, the Irish Free State, Newfoundland, and the Union of South Africa as its five founding members.

Those EU trade agreements are vital for (these states’) development goals. (And) the UK will no longer be able to champion their access to the EU market as we have in the past.– Sir Simon Fraser, Former Head of the UK Foreign Office

Several entries and exits later, the word British was dropped and in 1949, the London Declaration dropped the requirement of members recognising the British monarch as their head of state and only required that they recognised the monarch as the head of the Commonwealth.

This allowed many of the newly independent former British dominions that chose to become republics or reverted to their traditional monarchies to also join the grouping. Today, the Commonwealth comprises 33 republics (such as India), five are monarchies and 16 are constitutional monarchies with the Queen/King of the United Kingdom as their head of state (such as Canada and Australia).

Massive gains

The potential benefits of such a trade bloc could be humungous. The UK would find a readymade, if somewhat smaller, substitute for the EU,; Australia and India will definitely welcome the emergence, and their own leading roles, in another global counterweight to an expansionist China, while mid-sized economies such as South Africa and Nigeria will benefit from being part of a large trading zone. And the smaller African and Caribbean nations will get a platform that will stand up for their interests and make it easier for them to sell their wares across the globe.

Jury is out

Can such a disparate grouping, born more out of nostalgia than need, come together to address the aspirations and demands of 2.4 billion people.

Right now, there seems to be more nay sayers than backers. For every proponent like Fox there is a Shashi Tharoor, former United National Under Secretary General, former minister in India’s previous United Progressive Alliance government and Indian parliamentarian who predicts it will sink like a lead balloon.

An article in Britain’s Guardian newspaper also tore the idea to shreds, saying: “Rather than accept reality the government has deluded itself into thinking that Britain can just install an update for Empire and return to former glories on the world stage. But outside the EU and devoid of colonies, Britain will find that any nostalgic visions of Empire are a mirage, providing nothing to sustain it.”

The Scottish conundrum

Complicating the idea of reinventing the Commonwealth into a Free Trade Zone is the demand by Scottish National Party and Scottish First Minister Nicola Sturgeon for a second referendum on Scottish independence.

Her grounds: Scottish voters voted to stay on the EU in the Brexit referendum and the UK’s decision to leave is forcing the Scots into backing a decision they opposed.

So far, indications are that May’s government may block such a referendum, but till the matter is settled, it will remain another question mark over the proposed Commonwealth Free Trade Zone.

Long road ahead

The Commonwealth is rooted in the idea of Empire, a bad idea whose time is clearly up. It’s a fact acknowledged by everywhere, including, in the UK, notwithstanding the occasional cheep from the fringe about its 2.0 iteration.

But is its reinvention as a modern 21st century trading and economic bloc an idea whose time is here?

As a first step, India, the UK and a few other large Commonwealth members can agree to underwrite a study on the pre-feasibility and viability of such a bloc. India, as the largest country in the group, could offer to set up a secretariat for the purpose. This will help shield the exercise from “Empire 2.0” kind of comments.

The report of the secretariat will at least deserve detailed study, in-depth discussions and informed debate before a decision is taken.

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2018-08-06T13:32:35+00:00April 11th, 2017|2017/2018, April 2017, Commonwealth, Year|

About the Author: India Inc. Staff