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The UK’s Trade and Development agenda can help tackle global inflation and the cost of living crisis

Expert comment

Written by Dirk Willem te Velde

Hero image description: UK money. Photo: Images of Money, CC BY 2.0.

A coordinated and effective UK trade and development agenda provides incentives for low- and middle-income countries to transform their economies. It simultaneously addresses key aspects of the current economic crisis around high inflation rates and the higher cost of living (with changes in nominal incomes not keeping pace with changes in price levels).

Inflation in the UK was already up and it has increased rapidly since the Russian invasion of Ukraine. Higher food and energy prices are felt globally, including in the UK and low and middle income countries. The latest forecasts by the IMF have sharply revised global growth forecasts down and inflation up. Together with monetary tightening, capital outflows from emerging markets, sharply increased public and private debt after the Covid shock, this has become a perfect storm for low and middle income countries.

As the new UK Prime Minister Liz Truss and the Foreign Secretary (to be announced) will soon be focusing on the role of UK trade policy, we suggest four ways through which a trade and development agenda (which we understand as a combination of import policy, promotion of outward Foreign Direction Investment (FDI) and development finance, migration and targeted aid) can support low and middle income countries (LIMCs) and address some of the UK’s challenges too.

1) An effective UK import policy

As a member of the Strategic Trade Advisory Group (STAG) and other advisory groups, I have seen the operation and formulation of the UK’s trade policy from close by. There is ample attention to promoting UK exports through new Free Trade Agreements (FTAs), especially with Asia such as CPTPP, ASEAN associate membership, India etc, as one would expect. But that is only half the UK trade policy and perhaps not the most relevant dimension for UK or global development. Unfortunately, the UK does not pay the same attention to import policy (even in Free Trade Agreements), despite the fact that importing brings major economics gains to the UK (greater availability at cheaper prices). Now that both energy and food availability and prices top the government’s agenda, it seems appropriate to reconsider this gap and develop an effective import policy which secures reliable, cheap, environmentally friendly and high quality food and energy, as well as other products and services. This will also help the countries exporting to the UK. A slight widening in the scope and use of preferences was one small step, but more can be done to decrease tariff and non-tariff barriers, including wider Rules of Origin (RoO) and more active import facilitation from key sources. Trade with Africa has been fairly static for a decade, but Africa has key goods and services to offer the UK, such as garments, critical natural resources, renewable energy, horticulture and business, health and transport services. A more active import for development policy could also help build value chain resilience in the context of economic shocks and geo-political tensions in relation to Russia and China.

2) More ambitious investment partnerships

The UK has recently provided British International Investment (BII) with a greater mandate to cover firms in more countries, especially around renewable energy. Nearly a decade ago, I was specialist advisor to an enquiry which sought to answer whether the UK should have a public development bank. There are numerous advantages, especially around expanded development finance volumes in appropriate contexts. Our analysis suggests that development banks and Development Finance Institutions (DFIs) have contributed significantly to African growth and productivity, particularly when they work with national policy makers. At the same time, DFI investment can increase the global supply of (renewable) energy which can help to ease global energy prices, which have recently spiked. The UK should provide more firepower to DFIs should work more closely with local policy makers to have greater impact. They could also work closely with the City of London's financial expertise and the UK private sector with the aim to mobilise and channel additional finance to productive opportunities.

3) Effective mobility partnerships

During my travels and discussions in the UK, Europe and East Africa this summer, one can feel there is an acute skills mismatch. Skills and staff shortages in many sectors have pushed up prices and led to weaker services in the UK (and the rest of Europe). Previous ODI work has already highlighted the importance of immigration to the UK during the Covid crisis. Unfortunately, migration restrictions are still inexplicably tough. For example, even after the singing UK-Kenya mobility partnership, Kenya does not seem to have experienced many new migration opportunities to the UK. Back in 2005, we suggested how the UK and LMICs can aim for win-win solutions around the availability of health professionals. Such partnerships now need to be taken much more seriously, and should cover more sectors, to match staff shortages in one location with abundance of labour elsewhere, again addressing some of the current challenges globally. Recently agreed mobility provisions in the UK-Australia FTA should also become the norm for all trade agreement partner countries, and more could be expanded as part of economic partnership agreements.

4) Returning from 0.5% of GNI to 0.7% of GNI through targeted aid

We recently estimated the impact on LMICs and the UK if the UK aid budget had been maintained at 0.7% of Gross National Income (GNI), and the additional spending had been directed towards investment with spillovers to both productivity and trade costs. The paper reviews academic studies which demonstrate that investment directed towards trade facilitation (Aid for Trade) can significantly reduce the costs of trading with the recipient countries. If additional spending had been directed towards trade- facilitating infrastructure in the recipient countries, this would have reduced global trade prices by about 0.3% by 2025, and increased the volume of world trade slightly. By investing more in trade related infrastructure and facilitating trade (including through supporting the African Continental Free Trade Area AfCFTA), the UK can help to reduce trade prices and reduce UK inflation. Other types of targeted aid may help too. For example, in other work we discuss the benefits to the UK (and recipient countries) of spending aid on covid vaccines in LMICs.

The new UK government under Liz Truss has a fresh opportunity to review and significantly raise the ambition in its aid, trade and development agenda, which can better support LMICs whilst also addressing the cost of living crisis.