Taking UK trade policy back to the future

With Brexit now on track, the United Kingdom’s international trade policy remains very much up for grabs. Behind the slogans there doesn’t seem to be the substance. It’s time to grapple with the detail and harness key bilateral trade relationships at a time of crisis in the World Trade Organization, writes David Henig.

Global trade: from ‘non-tariff’ back to ‘tariff’ barriers

For many years until 2016 trade policy was not overly concerned with tariffs. Successive rounds of multilateral trade liberalisation had brought global tariffs down. It was assumed that in most trade deals non-agricultural tariffs would be reduced to zero, and that there would be a haggle over the exact outcome on agricultural tariffs. But that was economically marginal and some solution would be found for both parties.

Non-tariff barriers were the real big concern, a reflection of the rise of regulation globally, much of which was divergent and thus caused extra trade costs. In their different ways the World Tade Organization’s Trade Facilitation Agreement, the Trans Pacific Partnership, and the abortive Transatlantic Trade and Investment Partnership (TTIP) all sought to reduce these costs.

Enter President Trump and Brexit. In some way the vote for both reflected a failure of trade policy, though the nature of that failure and the contribution to the overall results is disputed. Some argue trade agreements started to cover too many topics, including those of great domestic concern such as regulations. For others allowing China into the WTO was the big problem, in particular the distributional consequences. Certainly it seems the advocates of trade agreements became too complacent.

The Trump administration and the WTO

President Trump is a self-confessed “tariff man”. Successive rounds of tariff increases on products from various countries have been justified in various dubious ways, such as national security, thereby undermining fundamental WTO rules.

Evidence suggests the cost falls almost entirely on US consumers, but his domestic stimulus has generated the growth he can use to claim his policies are working. Re-election will likely see four years of the same.

The United Kingdom’s focus on tariffs has been a function of the Brexit debate.  Since 2016 there have been numerous articles from prominent Brexiters suggesting that a zero tariffs (WTO ‘Article 24’) deal with the EU would be easily achievable and maintain existing UK access to the single market.  These articles have sometimes suggested unconvincingly that WTO rules mean costs of regulatory divergence would not be an issue.

Services, accounting for close to 50% of UK exports, have been scarcely mentioned.

The debate on the future has been to an extent been a sideshow to the broader ‘remain versus leave’ argument. But now that the last general election has settled that the UK will leave we need to return to a serious consideration of UK trade policy.

Defending UK interests bilaterally

For the immediate future we can exclude new WTO agreements as a likely delivery mechanism for British aspirations. With President Trump in office the WTO faces an existential threat. Survival will be the name of the game, rather than significant new agreements that can deepen global trade.

Should Trump win the 2020 US election there will have to be serious consideration about whether it is possible to even preserve the WTO while waiting for a US return, or whether the entire system will have to be rebuilt. The UK can play a role in that discussion, but only as one of many.

Looking at specific sectors

This leaves the UK having to make decisions about trade relations on a bilateral basis, starting with the EU. Our aspirations are then all important, for the decisions made are likely to have long term economic impacts in the UK. In particular a shallow goods-only, tariffs-only trade deal, if even negotiable, is likely to present UK goods exporters with significant new costs for exporting. The automotive, pharmaceuticals, and food and drink sectors would then all seem to be vulnerable, given in many cases low margins.

A deeper trade agreement that included regulatory alignment in these areas should help protect these sectors to a degree, and in reality in at least automotive and pharmaceuticals regulatory divergence is unlikely. But whether we choose to enshrine it in treaty another matter.

This example should illustrate that choices in trade deal need to be made on the basis of serious consideration and evidence at a sectorial level. There are some who suggest the automotive sector is declining anyway, so should not be protected in trade policy. Others would argue that as a major employer in many regions trade policy should help ensure its survival. That is a decision that only politicians can take, but there must be some form of public debate otherwise significant problems are likely to follow.

In the food and drink sector the biggest question the UK faces is whether to continue to align with EU regulations, or sign up for a US trade agreement allowing certain food imports to be imported which are currently prohibited, and which may be produced with significant cost advantage. There will be knock-on effects into all food and drink exports to the EU.

In ICT and many services sectors the transfer of data is all important, movement of people relatively, and other regulations less so.

The missing services dimension

Free Trade Agreements also tend to do less to liberalise services than goods compared to the WTO schedules. Sign shallow trade deals and the effect on the UK economy may actually be to strengthen UK services relatively compared to manufacturing. Which may not be what the new Conservative voters in the north wish to see.

There is no such thing then as a simple trade deal, certainly not now between UK and EU, given the depth of the current relationship. A goods-only zero-tariff deal may not even be deliverable. On the EU side there will be an insistence on level playing field measures such as on labour and the environment.

These could be extended to food standards. After all having tariff-free access to the UK market may not offer much for EU food producers if US producers can undercut them on cost because the UK has changed food regulations. The EU will have to be making their own judgements, as the stronger player, as to what the price is for obtaining tariff free access to the much larger, with higher tariffs, EU market.

Another thought to consider is whether it is even worth trying to negotiate a shallow deal, offering only limited economic benefits above WTO schedules. Given even the brief analysis above, there may be little for either side in such a negotiation. In particular the EU achieved some of their core aims, such as recognition of geographical indications, in the Withdrawal Agreement.

The same could apply to a UK-US trade deal, where the potential economic benefits seem limited given the US does not really liberalise much in their bilateral agreements.

There is much more that could be discussed, all the different sectors, all the UK’s potential trade partners, and all the different ways we could address trade barriers particularly those around regulatory divergence. Hopefully the UK government is examining all of this.

From a business point of view the important thing is to be ready with the detail of priorities, and to make the case for why certain things are important.

The UK’s trade policy remains very much up for grabs. Behind the slogans, such as regulatory divergence and zero tariffs, there doesn’t seem to be the substance. That’s what we now badly need to see – an understanding of the real economy and the way that it could be affected by UK trade policy. This could take some time to achieve, with some false starts on the way.

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