Boosting post-Brexit appeal in Asia-Pacific is key UK goal

ONE of the central claims of many Brexiteers has long been that leaving the European Union will significantly enhance the United Kingdom’s global economic attractiveness. Yet, a UK government review has recently concluded that there is a growing, £50 billion (S$84 billion) investment gap per year between the UK and other advanced nations.

The eye-catching £50 billion number comes from the fact that many of the UK’s competitor economies generate around 12 per cent of gross domestic product (GDP) in business investment (both domestic and foreign), whereas the counterpart figure for the UK is around 10 per cent. So the potential prize is a big one, as Richard Harrington, who led the government review, rightly highlights.

The stark facts are that foreign direct investment (FDI) into the UK fell in value every year since the Brexit referendum, from 2016 to at least 2021. This saw the country dropping down the OECD rankings for FDI flows, from 12th place in 2015 to 20th in 2022.

Accountancy firm EY said that total FDI projects into the United Kingdom also fell in 2022, putting it second behind France. The UK also slipped to third for perceived attractiveness in Europe for FDI, behind Germany and France.

To try to turn this troubling picture around, Harrington’s review concludes that the UK government must radically reform its offer to foreign investors with the goal of making the nation the most attractive destination in Europe for internationally mobile investment. This includes emulating the subsidy-led, strategic state-backed approach of larger economies such as the United States, EU and China.

Harrington (who is on the moderate wing of the UK Conservatives, and was a “Remainer” in the 2016 Brexit referendum) writes in his more-than-120-page report that he has “formed the view during this process that capitalism has changed”. The reality, he said, is that “many of our competitors chase investments via their industrial strategies backed by substantial government support” such as the US Inflation Reduction Act (IRA).

Harrington therefore proposes what is, in effect, the need for a clear, new UK business investment strategy. He suggests focusing on five sectors as economic growth engines, namely: green industries, digital, life sciences, creative industries, and advanced manufacturing.

As a Conservative politician, Harrington is keen to stress that this would not see the UK government seeking to pick individual corporate winners which would be anathema to many economic liberals in his party. However, he does advocate the need to “pick the race” (for example, green technology) that the UK wants to entrench a global competitive advantage in.

Harrington also qualifies his conclusions by stating that the UK cannot and should not try to outcompete bigger economies such as the US with mega-subsidies like the IRA. However, he nonetheless advocates that the UK’s current offer must be significantly enhanced, and that “a complete culture change” is needed in the nation’s approach to attracting FDI.

Harrington engaged with more than 200 individual firms, financial institutions and sovereign wealth funds, and his conclusions have been welcomed by many business leaders including groups such as Make UK (the manufacturer trade group) and the British Chambers of Commerce. The review nonetheless represents a key challenge for UK Prime Minister Rishi Sunak.

This is because he has repeatedly rejected calls for such a UK industrial strategy. As indeed have all the four preceding Conservative prime ministers since 2010, with the sole exception of Theresa May when she headed the government from 2016 to 2019.

Yet, while the interventionist thrust of Harrington’s recommendations will not be shared by every UK politician, there is a broad consensus that the nation needs to improve its FDI record. Data shows that, by and large, one of the geographies in which most improvement is needed is the Asia-Pacific.

In 2021, for instance, there was a significant boost in US investment into the UK, and America now accounts for around a quarter of FDI into the nation. Yet, the same year saw a decline from the world’s third-largest economy, Japan.

This underlines how much the Asia-Pacific is a huge target for the UK government with its FDI and wider economic strategy. UK Finance Minister Jeremy Hunt, who was previously the UK foreign secretary, has long spoken of his country’s need to strengthen its links with Asia-Pacific, building ties with some of “the most dynamic economies of the world” which are forecast to account for at least 50 per cent of global growth between now and 2035.

This includes UK membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam. The clearest, immediate UK opportunities in this economic club will be country- and sector-specific. For instance, Brunei and Malaysia (which currently collectively account for less than 0.5 per cent of total UK trade) are the two CPTPP nations that the UK doesn’t have an existing trade deal with.

On the sectoral side, it is anticipated that dairy producers will gain export opportunities to markets such as Japan. Moreover, the provisions could also help UK producers of items such as machinery and medicines – among the UK’s most valuable exports to the CPTPP bloc – by allowing them to expand supply chains across member nations.

According to the British Chambers of Commerce, the CPTPP could have the most relevance for small and medium-sized UK firms to build efficiencies by importing components from member countries to use in manufactured goods for export. There are also generous terms for data flows which underpin an increasing part of global trade.

Yet, while the CPTPP opportunity may be significant in the longer term, even the UK government’s own impact assessment declares that the economic gains for the UK will be fairly small in the medium term – only around 0.08 per cent of GDP over 10 years.

However, optimists such as UK Business and Trade Secretary Kemi Badenoch argue that CPTPP is akin to a startup, and those medium-term estimates do not account for the fact that some members – for example, Vietnam – are rapidly growing in importance in global trade. She also flags that a key perk of the new deal is greater access to all CPTPP markets, including a pledge to eliminate or reduce 95 per cent of import charges or tariffs.

Taken together, now is therefore the time for the UK to step up its FDI game. This includes in the Asia-Pacific where the nation must now double down, economically, to try to take advantage of the economic opportunities that post-Brexit deals such as CPTPP bring.

The writer is an associate at LSE IDEAS at the London School of Economics