UK trade is less exposed to the direct effects of Russia’s invasion of Ukraine than many other countries. The UK’s largely services-based economy and lack of energy dependence on Russia leave Britain freer than its European allies to criticize Russian policy and actions, or to call for robust responses like oil embargoes, with minimal economic repercussions.
However, this does not mean that the war in Ukraine is unimportant for UK trade. The principal effect of the war is to exacerbate existing economic and trading challenges. The most pressing of these, in the short to medium term, is cost-based inflationary pressure. Much of this is the product of global issues, such as the supply-chain crunch resulting from the COVID-19 pandemic and the ongoing lockdowns in China.
Some of those existing challenges, though, are uniquely British: the UK currently has the highest rate of inflation in the G7 (at just over 10 per cent in July 2022), in part because Brexit has increased the cost of imports to the UK – particularly the cost of food products and manufacturing inputs, which now require arduous paperwork and customs checks. There is also a shortage of workers in the labour market due to reduced inward migration post-Brexit and post-pandemic, which in turn has pushed up wages and increased prices in specific sectors, including agriculture and hospitality.
Another effect of the war could be on London’s links to kleptocratic wealth – especially that from Russia – amid growing calls for the UK financial services sector to take a more robust approach. A crackdown could bolster London’s credibility and reputation, but it could also mean that such money leaves the UK for more kleptocrat-friendly jurisdictions and that investors from certain countries no longer see the UK as a ‘safe’ place to put their money.
Potentially the most significant effect of the war for the UK will be the trajectory of EU–Ukraine relations over the next five to 10 years. If Ukraine is prevented from joining the EU, for any number of reasons, the UK will be watching closely. Another more radical outcome of the war, with significant implications for the UK, could be an invitation for Ukraine to participate in a new, two-tier model of European cooperation. Such an outcome could provide a model for a future UK–EU relationship – presumably under a future, more pro-European UK government.
Finally, the war provides a test for the UK’s Indo-Pacific tilt. Although that region may become the focus of the UK’s future foreign policy, European security is the government’s immediate priority, and will continue to be for years to come. As European allies invest in weapons and defence systems, the UK may be tempted to deploy its comparative advantage in weapons technology and intelligence systems closer to home.
In the short to medium term, the challenge posed by higher commodity prices is the most significant effect of the war on UK trade – through both the immediate hit to household budgets and the rerouting of supply chains for geopolitical reasons. In the longer term, much will depend on the outcome of debates on globalization vs deglobalization. While political rhetoric and COVID-19 have undoubtedly altered the outlook for global trade, the actual figures imply that concerns over deglobalization may be exaggerated.
The UK’s trading relationship with Europe will remain paramount, despite the Indo-Pacific tilt and other similar attempts to shift the focus of British foreign policy away from the UK’s immediate neighbourhood. Although Ukraine is – in terms of economic clout as a future trading partner – of little significance, its future relations with the EU are much more consequential for the UK and other non-member countries in Europe.
In response to these possible outcomes, the UK should focus on the long term. While China is growing in significance as a geopolitical challenger, Europe is likely to remain the most important region for UK trade. British investors who might be attracted to the Asia-Pacific region could miss out on opportunities in post-conflict, liberal economies in Eastern Europe – some of which have already demonstrated an impressive record on digital consumer technologies.
Difficult trade-offs will have to be made. There are good geopolitical and economic reasons for aspiring to be an Indo-Pacific power, but Russia’s invasion of Ukraine is a reminder of the importance to the UK of European security. Being both a European and Pacific power may just be achievable, but may also mean cutting back on strategically important areas of British influence elsewhere, such as Africa and the Middle East. In an era when the UK no longer has the resources to influence every region of the world, it must prioritize.
Most significantly of all, the war highlights the importance of resilience for the UK, as it has for all Western nations. Russia’s invasion of Ukraine has disrupted supply chains and undermined food security for both neighbouring and distant countries. While the UK has relatively high levels of energy and food security, it is by no means immune to inflationary pressure in these sectors. Indeed, the cost-of-living crisis is likely to dominate the UK’s domestic political affairs for the reminder of its current parliamentary term.
Building resilience means planning for the unexpected. Even without the war in Ukraine, certain key ‘chokepoints’ for UK trade would still need to be addressed, including both dependence on the cross-Channel route to and from France, which is beset by Brexit-related delays and paperwork, and a labour shortage resulting in part from fall in inward migration post-Brexit and post-pandemic. The UK government should consider these chokepoints as critical not just to the country’s future economic prosperity but also to its security.
