8 January 2021: This week’s chart shows that the UK’s economy represents just over 3% of global GDP, demonstrating its relative prosperity given this is generated by just under 1% of the world’s population.

The UK completed its departure from the European Union on 31 December, when it ceased to be a member of the EU Single Market & Customs Union and entered into a new trading relationship with the EU and many of its other trading partners.

As illustrated by the #icaewchartoftheweek, global economic activity amounted to approximately £65tn in 2020 (down from over £67tn in 2019), with the UK’s £2.1tn economy representing just over 3% of global GDP. This reflects the relative prosperity of the UK, given this is generated by just under 1% of the world’s population.

Despite that wealth, the UK’s economy is overshadowed by the Big 3 economies, with the largest trade bloc in the world – the US, Mexico and Canada Free Trade Agreement (£18.2tn), comprising the United States (£16.2tn), Canada (£1.3tn) and Mexico (£0.7tn) – being almost nine times as large. Even with the departure of the UK, the second largest economic bloc in the world remains the 31-country EU & EFTA internal market (£12.5tn), led by Germany (£3.0tn), France (£2.0tn), Italy (£1.5tn) and Spain (£1.0tn), is six times as large. China (£12.0tn), the second largest individual economy behind the US, is not far behind.

The UK economy is also smaller than that of Japan (£3.9tn) and ASEAN, the 11-member Association of Southeastern Asian Nations (£2.4tn), but it is larger than India (£2.0tn), South Korea (£1.3tn), Australia (£1.1tn) and Russia (£1.0tn).

The UK has provisionally entered into a new EU-UK Trade and Cooperation Agreement that provides for zero-tariff trade in goods, but faces a number of non-tariff frictions on both goods and service trade that it did not have as a member of the EU. The Department for International Trade has been very successful in rolling over EU trade agreements with 63 different countries, including Japan, Canada, Mexico and Turkey, albeit some new trade frictions will be encountered, for example on rules-of-origin requirements for manufactured goods.

The UK hopes to negotiate a trade agreement with the US, its largest individual trading partner, but whether this might be possible this will depend on the incoming Biden administration, as well as on some potentially very tough discussions on agricultural products. Given that a trade agreement with China is pretty unlikely (for multiple reasons) and the new EU-UK trade agreement will need some time to bed in, the principal potential opportunities for improving trade flows will involve negotiating more extensive trade agreements with trading partners outside the Big 3. 

As a consequence, the UK Government has an ambitious plan to negotiate a large number of more comprehensive trade treaties with countries around the world, building on the roll-over agreements just agreed. 

One area of particular focus is to improve trade ties with Asia-Pacific countries such as Japan, India, South Korea, Australia and Indonesia. For Japan and Australia, both members of the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership on trade (CPTPP), one way to do this would be for the UK to join – despite being on the other side of the world!