Coronavirus response sheds light on tough UK trade choices ahead

Trade policy has rightly taken a back seat in the United Kingdom since the global battle against coronavirus took centre stage. But the challenges aren’t going away, some will be exacerbated. By David Henig.

Trade policy has rightly taken a back seat in the United Kingdom since the global battle against coronavirus took centre stage. Somewhat reluctantly the UK cancelled planned rounds of trade negotiations with the United States and the European Union.

The government stopped running online adverts for the benefits of a US trade deal – though the Trade Bill that lays the ground for Britain’s trade policy was reintroduced to Parliament. Meanwhile the global trade policy focus largely turned to the flow of essential goods, to stop exports in some cases, to keep them open in others.

Short and long-term challenges to UK trade

Yet the UK government has not been able to escape awkward questions about our trading future.

This is due to its refusal so far to extend the ongoing transition period of ‘trade as usual’ with the EU, and to its confused and contradictory responses as to whether we would want to join an EU-wide procurement scheme for essential medical equipment.

At the time of writing there are only nine months until Britain is due to end our transition period – whether there is a deal or no deal with the EU or with anyone else.

As things stand, on January 1 2021 the UK will need to introduce new customs procedures for the half of our trade that is with the EU, ensure our regulatory agencies are ready to take over all the functions of the EU regulatory bodies of which we are currently a member, and put in place a unique trading status for Northern Ireland.

UK business will also have to make changes, and hence had until recently been involved in dialogue with the government. Meetings have now been put on hold, government is likely to be falling behind on their timetable, and business is fearful that without an extension they will struggle to make the required changes given their current focus on coronavirus.

Then there are the longer term policy questions thrown into prominence by COVID-19, such as food security, manufacturing capability, and a services sector which still mostly requires people to be able to travel.

These can be put alongside the existing trends in global trade, the threat to the future of the WTO, the seemingly unsolvable tensions between the big three of the EU, US, and China, not to mention the tensions between each of these and the countries considered the second tier of trade powers, namely Japan, Brazil and India.

On the upside global technological developments continue to offer opportunities. There is a cluster of trade liberal countries emerging, with New Zealand in the vanguard.

That’s the emerging background for the UK to face.

Dealing with the powerful-but-not-like-minded

The UK’s potential trade deal with the United States is most affected by coronavirus, in two ways. The first is purely logistical: that the US President’s current authority from Congress to negotiate full trade deals expires on June 30, 2021. In the meantime, the US will hold a general election, so time is tight. Although President Trump hasn’t been overly worried about Congress, passing a full trade deal without it may be a struggle.

The content of a future agreement with Washington is increasingly a problem as well, as US demands for greater opportunities for their farmers through changed UK food rules was already being resisted by UK farmers even before coronavirus increased the salience of food security as a public policy issue.

A symbolic deal of some sort remains likely later in 2020 if the current crisis abates, but it would likely have little economic impact. Note that US political figures have been concerned about signs of what they see as stubborn UK insistence on its independence such as over the decision to authorise Huawei to operate 5G services or to proceed with a Digital Services Tax.

There’s no suggestion that the current crisis will change the UK’s limited ambitions for a minimal or no trade deal with the EU.

Although the government was sensitive to the suggestion it was putting “Brexit before breathing” in refusing to join the EU medical procurement scheme its hard ‘red line’ regarding Britain’s regulatory alignment with EU regulations remains.

The likelihood remains that UK manufacturers will continue to wish to follow EU product rules in order to export to that market. Such is the global reach of EU regulation thanks to the ‘Brussels Effect’. The latter is a phenomenon by which market forces lead non-EU countries to also adopt EU rules – for example on data privacy or safety of industrial products. This means that even companies not exporting to the EU may wish to see us follow EU rules.  Without Britain’s formal regulatory alignment with the EU companies are however likely to see increased costs from exporting to the EU, for example due to certification requirements. Over time some companies will relocate production.

All this is likely to run counter to a potential post-coronavirus determination to retain manufacturing capacity. However in the past those suggesting a link between regulatory alignment and UK manufacturing have been written off as embittered ‘remainers’. It still seems unlikely therefore that the UK will change approach on regulatory alignment.

Japan is near the top of the UK government’s list for a deal to replicate the existing EU-Japan Economic Partnership agreement.  But this pursuit goes with an accompanying risk that Japan’s asks could include immediate tariff free access to the UK automotive sector – casting further doubts over the future of manufacturing.

As with the US, concluding a deal in time for 31 December 2020, when the transition period ends, now looks challenging in any case. This is another reason why the UK government may yet seek a transition period extension. We also need to remember that Japanese business and government remain unhappy about what they consider to be the UK breaching our commitment to them of remaining in the EU’s single market.

As if tensions with US, EU, and Japan were not enough, some in the UK are arguing that coronavirus shows we must reduce our reliance on China. While this is not at the top of the UK’s trade priority list post-Brexit, some services sectors, most notably education, are going to suffer heavily if travel to and from China continues to be restricted.

On the positive side there are some signs that the coronavirus outbreak may yet see UK immigration policy loosened, which many in the services sector have been requesting for some time with little previous success.

Future friends: like-minded but not powerful enough?

Given the potential for strained relations with all of the most important trade policy powers it is worth considering who may be our friends in the future.

The UK’s most obvious trade policy allies are the countries loosely led by New Zealand and including many of the signatories of the CPTPP or Comprehensive and Progressive Transpacific Partnership – who seek currently to keep markets open. CPTPP members includes countries such as Canada, Mexico, Japan, Australia, New Zealand, Vietnam – among others.

Some of these countries recently concluded a ‘digital trade agreement’. The UK’s lead trade official Crawford Falconer is said to believe that the UK needs to be part of a bloc of countries, and that outside the EU the CPTPP countries are the most obvious candidates.

However there are some drawbacks for the UK. Economically, trade with these countries is likely to be insignificant, and globally such countries together are not strong enough to resist the power-politics of the bigger players in safeguarding the WTO. Psychologically the UK may find it frustrating to be part of, not leading, a group of smaller countries.

Conclusion – even more uncertainty

The world is heading for a coronavirus recession of indeterminate duration, making economic and trade policy predictions more uncertain than ever. Even if the Brexit transition period is extended the UK will soon face life outside the EU economic zone, adding to our uncertainty.

Barriers to our trade will rise in aggregate, even while we may claim to be leaders in global free trade – though that may be in line with global trends before and after coronavirus.

Perhaps more than anything else, the current situation exacerbates the problem that we still don’t know what our trade policy is for, what we are trying to achieve with it. Our negotiating mandates have narrow objectives mostly focused on tariff reduction. There’s never even been a ‘white paper’. And there’s little chance to change this With officials rightly distracted by coronavirus but still facing a December deadline.

For the moment, personal and business survival is on top of everyone’s mind.

Soon the government will face renewed pressure though. It will operate in an uncertain world where little can be taken for granted, and with many existing strains in our relationships.

David Henig is member of the UK Trade Forum’s Steering Committee.

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