(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world threatened by trade wars. Sign up here.
Brexit shattered 50 years of trade policy in Britain, divorcing the country from its single largest market. Prime Minister Boris Johnson is now trying to glue the pieces back together.
Since Britain left the European Union on Jan. 31, Johnson has dispatched his foreign secretary on a tour of Australia and Japan to show that Britain is open for business, while his government has pushed the idea of a trade agreement with the U.S.
But there is one market that matters more than any other: the EU. The bloc is by far the U.K.’s biggest trade destination, accounting for 436 billion pounds ($570 billion) of commerce last year -- almost 50% of the country’s total trade in goods.
Here’s a look at some of the numbers that will dictate Britain’s priorities in coming months.
Pecking Order
The country that is Britain’s biggest individual trading partner is the U.S., with Germany close behind. That explains Johnson’s priority to strike a deal quickly with President Donald Trump’s administration. But the EU as a whole remains by far the biggest bloc that Britain does business with -- even if the share of U.K. exports going to the EU has fallen over time.
Yet Brussels is in no hurry to give Britain access to its market unless Johnson agrees to abide by its rules. If the prime minister cannot reach a deal with the bloc by the year-end, Britain will crash out of the EU in what would look much very like a no-deal Brexit. Hence Johnson’s interest in inking additional deals with countries around the world.
Just Next Door
Trade volume isn’t the only reason for the U.K. to prioritize a deal with the EU. The theory of trade gravity states that the level of commerce between two countries is in proportion to their size and proximity. It’s logistically easier to buy and sell from your neighbors -- a point that ultimately didn’t convince British voters about the merits of staying in the bloc.
Talking Shop
For the U.K. government, forging agreements with the U.S., Japan, Australia and New Zealand is a key aim. The idea there is that Britain’s historic ties with those countries will make deals easier to accomplish, but judged by the amount of bilateral trade, New Zealand and Australia would come a long way behind China and India.
Growth Dividend
But the crucial deal remains that with the EU itself. Analysis by Bloomberg Economics using a gravity model suggests the benefits of such an accord would offset only about half of the cost of leaving the EU.
What Bloomberg’s Economists Say...
“Forging trade deals round the globe is seen as a significant benefit of Brexit, but it’s far from certain that they will confer the same economic benefit as membership of the world’s biggest single market. The government has ambitions to improve ties with all four corners of the globe, but the reality is the biggest prize lies on the U.K.’s doorstep in the form a deal with the EU.”
--Dan Hanson, senior U.K. economist
Staying Friends
One challenge of exiting the EU is that any trade deal the bloc has struck will no longer apply to the U.K. once the transition period ends on Dec. 31. Britain has so far rolled over deals with 48 countries, accounting for a value of almost 48 billion pounds of trade. Agreements linked to a further 33.5 billion pounds of commerce in goods are still in the works.
