Doing worse than Russia

The reality is quite different.

In some ways, Britain has retained its presence on the world stage, particularly through its response to Russia’s invasion of Ukraine. For the authors of the (pre-invasion, 2021) Integrated Review of foreign and defence policy, there may be a sense of vindication: the review predicted that Russia would remain Europe’s greatest and most immediate threat, and it was proved right.

At the start of 2023, however, Rishi Sunak’s priority is not foreign policy, but the economy. Like other countries, the UK faces record energy and food prices caused primarily by Russia’s invasion of Ukraine; a global slowdown in manufacturing and increasingly fragmented supply chains, exacerbated by US-China tension and China’s exit from zero-Covid.

But other challenges are uniquely British. Brexit has left a gap in the UK’s labour force, not helped by Covid’s “great resignation”, which makes it costly for firms that struggle to recruit. The Brexit deal created friction for UK-EU trade through extra paperwork, so UK exports to the EU (its largest trading partner) collapsed overnight, and is now 16-20 per cent lower than it would be if we had stayed in the EU. Sterling has also collapsed, and in 2022 came the closest it has ever come to dollar parity in its entire history, thereby exacerbating inflation. But a weak pound has not shielded exporters, as shown by the 16 per cent drop in exports to the EU. Many exporters rely on importing inputs for manufacturing, and paperwork has made exporting costly.

Britain’s economic malaise is perhaps the biggest threat to its role in the world, and the “Global Britain” project which the Government has made a defining feature of Brexit.

Firstly, because the economy is a signal of credibility. If Britain continues its slide down the global GDP ranking, having already been overtaken by India, it may have to work harder to justify its prestigious position in international diplomacy.

Compare, for example, India, which is not in the G7, despite having a larger economy than the UK, France, Canada and Italy. Neither is it in the UN Security Council, despite being a nuclear power. Brazil and Indonesia may soon be in a similar position, economically. If they can’t back up their claims with economic clout, Western powers like the UK will be forced to concede that their place at the table is based entirely on historical legacy.

Second, a weak economy means that there is literally less money available to spend on whatever global ambitions the UK might have. Rishi Sunak has effectively abandoned his predecessor’s ambition to spend 3% of GDP on defence. In another world, such spending might have been a bold way to boost Britain’s security profile, especially if it wishes to establish itself as a major player not just in Europe, but also in the Asia-Pacific, and also on new defence technologies. In the real world, 3% is simply not affordable, even if GDP shrinkage means it is less in absolute terms.

Similarly, UK aid has effectively been reduced twice: once when the economy shrunk, as the 0.7 commitment is a percentage of national income, and then again when 0.7% was cut to 0.5%. This has not gone unnoticed by Britain’s developing partners, particularly in cases where projects have been cut midway. Politicians from all parties claim that UK aid is a key part of its soft power, and an important counter to China’s infrastructure investment in Africa and South America. A two-stage cut to aid, triggered by Britain’s economic decline, was cited by developing country partners at a recent Chatham House event as a reason for worsening relations, which comes amid West-Global South disagreements over responding to Russia’s invasion of Ukraine.

Third, a weak economy sucks political energy away from everything else, including foreign policy. As Britain battles energy shortages, strikes and record inflation, the government understandably has less time to think about Britain’s role in the world or implement the Integrated Review. The “refresh” of the Integrated Review, originally expected around Christmas, has been delayed until March.

Other policy areas, even long term economic policies such as boosting the UK’s science and technology sectors, have taken a back seat as politicians and civil servants prioritise an ailing economy.

Were they less distracted, the UK’s leaders might have the bandwidth to address some of the longer term weaknesses in the UK’s economy: fixing productivity, for instance, will require 5-20 year plans for education and retraining. Reforming planning, building houses, transitioning to green energy and finding new trade partners all take time. But the immediate focus will (quite understandably) be on short-term fiscal support for households struggling to make ends meet, rather than developing long term solutions to the root causes.

So, what should the UK Government do?

Perhaps the first step is to simply recognise the economy’s role in UK foreign policy. “Global Britain”, defence spending targets, the ambitions in the Integrated Review, the goal of being a “science and technology superpower”… all these things cost money. They are harder to achieve if Britain is perceived as a mid-ranking economy, if its leaders are busy putting out fires, and if there is literally less money to spend.

The Integrated Review did a good job of “integrating” foreign and defence policy, as shown by the UK’s rapid response to Russia’s invasion of Ukraine. It didn’t, however, integrate foreign and economic policy. It did not set out a strategy for generating the growth, trade and tax receipts needed to fund Global Britain. The hope was perhaps that Global Britain would pay for itself through new trade deals. Clearly, this hasn’t happened.

The UK should also capitalise on where foreign and economic policy can complement each other. Trade is the obvious priority here, but the Government’s new deals (with Australia and New Zealand) offer very little economically. Instead, the UK should look to reduce frictions in UK-EU trade, something that will only be possible if it resolves its differences with Brussels over the Northern Ireland Protocol – on which there has been some recent progress.

A UK-US trade deal is politically near impossible, due to political constraints in both countries. But joining US-led initiatives, such as the Indo-Pacific Economic Framework (IPEF) or the US-EU Transatlantic Technology Council, ought to be less controversial, and could make up for some of what was lost to Brexit. The UK could also use its new defence partnerships, such as with allies in Eastern and Northern Europe, to support its defence industry. As these countries expand their military capabilities, the UK defence industry could re-pivot. This seems like a win-win: we protect our allies, win contracts, and it’s less morally questionable than selling arms to places like Saudi Arabia.

Another win-win, at least economically, is fixing the UK’s labour supply. This summer, the UK recorded a record exodus of workers: those who were neither in work nor looking for work increased by 252,000 from February to May 2022, the largest increase since records began in 1971. Commonwealth and developing country partners, particularly India, have pushed for labour mobility, including in trade negotiations. But rather than accommodate what could be a mutually beneficial arrangement, the UK Home Secretary offended Indian officials with anti-immigration comments, freezing trade talks. A new approach will be needed if the Government wants to stimulate growth through attracting global talent: this could look like a Commonwealth visa scheme, an extension of the number of years that graduates can stay in the UK, and a waiving of visa fees for key industries such as science and technology.

These measures will not fix everything: as mentioned earlier, some of the UK’s economic woes are longer term challenges whose solutions lie in education and training, investment in science and technology, and the ongoing need for a post-2008 economic model that relies less on the financial sector. But they would be an important way of integrating the UK’s economic and foreign policy ambitions, which, although inextricably co-dependent, have rarely been treated as such. Perhaps this economic crisis, after a year of war and chaos, will be an inflection point.

David Lawrence is a Research Fellow at Chatham House