The dangerous obsession with trade deals

20 Jan 2017

I don’t like or agree with Brexit but I get the basic logic behind most of what Theresa May is trying to achieve in her ‘clean Brexit’.

 

If immigration control is a key strategic objective, then this is difficult to reconcile with Single Market status (though ‘having cake and eating it’, as Boris Johnson puts it, wasn’t explored very far). If escape from the European Court of Justice was an overriding concern (though, I must ask, why?) then we have to leave the common commercial arrangements over which the Court presides. If we are to have a national trade policy then we have to leave the customs union (though the costs to our supply chain industries are potentially serious). If border control and security trump economics and living standards then the costs of Brexit become bearable: necessary collateral damage.

 

But there is one thing about Brexit that I don’t begin to understand: the passion of the Brexiteers for running round the world signing trade ‘deals’. Presumably more is involved than keeping Dr. Fox occupied and out of mischief.

 

If the aim of having a post-Brexit trade policy is to be protectionist, like Trump in America, then having a distinct national trade policy matters. But the government says that it is not its intention. Indeed, it seeks the opposite: free trade.

 

But if the aim is free trade, then the government can achieve this best by stripping away our own trade barriers (there aren’t many left) and selling ourselves to the world as an open economy, welcoming investment and trade with all. Singapore and Hong Kong operate on that basis. And, if other countries engage in abusive practices, the World Trade Organisation (WTO) can resolve differences through dispute settlement panels (which operate like the European Court of Justice at a global level). And we could become the champion of multilateral free trade through the WTO.

 

The reason why regional and bilateral agreements have proliferated in recent years is in order to take integration to a deeper level than available from global, WTO -mediated, agreements: to include services (which very often means people moving across borders to provide services) and to get rid of the non-tariff barriers created by national systems of regulation.  Yet these are exactly the reasons why the EU Single Market was established and why Britain joined it (indeed created it). If the UK doesn’t now like the consequences of deep integration and wants to move to shallower waters, why on earth do the Brexiteers now want to replicate the thinking behind the Single Market in a succession of deals with other countries?

 

 

Let us take the most important countries with which these deals could be negotiated, and start with the USA. The US is already an important trade partner, though our exports are only a quarter in value of those to the EU (11% as against 45%, for goods). But the interest in the US has been heightened by the fact that Trump has gone out of his way to give encouragement to the idea of a deal with the UK. 

 

We should perhaps put the tweets to one side and look at the practicalities. There could be no agreement until the UK leaves the EU. That, even on present ambitious time-lines, is likely to be well into 2019. By then, the agreement will have to be passed by a US Congress which may well be different from the current one, and has never been very receptive to trade deals. Trump himself has been scathing about trade deals of all kinds (the Trans-Pacific agreement was a ‘rape’ of America, according to the incoming President).  Any trade deal with Britain would have to be much more favourable to the USA. And this will prove awkward since the UK currently runs a substantial trade surplus with the USA (because of a surplus on services).

 

Undoubtedly the US could and wants to export more food to the UK. This may be economically efficient, though it would come at the expense of British farmers, struggling to adjust to a world without EU subsidy. It would also involve lifting the current EU regulations that restrict GM foods and hormone-enhanced beef. Again, science should determine food safety issues, though I suspect that there will be strong resistance from UK consumers to these products. The US will also want to secure preferential access for its companies to invest in the UK. This will potentially open up the politically toxic issue of American health-care companies operating private services to supply the NHS. Plus, the model that the US will want for settling disputes is the so-called Investor-State Dispute Settlement (ISDS). It is difficult to see why these courts should be seen as any less intrusive than the European Court of Justice. 

 

Since Britain already runs a trade surplus with the US, and since most of the remaining trade barriers facing UK exporters are non-tariff barriers, what do British exporters gain? No doubt some extra business; but nothing to offset the loss of preferential access to the much bigger EU Single Market.

 

The larger question however is why the UK, which the government wants to portray as a global champion of free trade, would want to seek a special deal with a US administration committed to the destruction of such a world.

 

Until recently, Brexiteers waxed lyrical about the potential to ‘do deals’ with major emerging economies. On some measures, China is the world’s largest economy and will become more so in future. And, until recently, Britain was well positioned to have an especially close relationship with China (something that wasn’t in any way inhibited by EU membership).  Yet the relationship has cooled markedly. The Chinese were attracted to the UK at least in part because the UK provided a platform for Chinese companies to operate within the Single Market. That rationale has now gone.  The hesitation over the Hinckley Point nuclear plant also sowed doubts about the May government’s commitment to a special relationship with China.

 

 

No doubt the Chinese will judge that if the British are desperate to have a piece of paper to wave, they can be offered one on terms which are very favourable to China.  What the Chinese want is for Britain to concede that China should have ‘market economy status’ within the WTO which will give them stronger safeguards against protectionist actions by the US in particular. But it is difficult to see how Britain can simultaneously seek a special relationship with the Trump administration and the Chinese at the same time.  It is much more likely that China will seek closer relations with the EU, and Germany in particular.

 

Japan too. The Japanese government and leading Japanese companies are mortified by Brexit. They have invested heavily in the UK on the basis that the UK is the gateway to the Single Market. Tactically, companies like Nissan will try to salvage what they can from the Single Market and customs union in some kind of special deal for automobiles. But Brexit has made it more likely that the Japanese will concentrate on seeking to conclude their negotiations on a EU-Japan bilateral agreement and to work more closely with Germany rather than the UK.

 

India is also proving to be a graveyard for Brexiteer hopes. The EU laboured for years to negotiate an agreement with India but the main obstacle was the UK. The UK has been demanding a liberalisation of the Indian services sector and this has been happening slowly, as in retail. But the Indians in turn demand concessions for their service exports; involving the free movement of labour for Indian IT specialists. The Indians are also incensed by discriminatory restrictions on Indians visiting and studying in the UK and sent Mrs May away with a flea in her ear. Not much joy here.

 

So what is left? The Old Commonwealth? Canada is cool having just spent eight years having laboriously negotiating a bilateral deal with the EU. Australia and New Zealand have made more friendly noises about a trade deal with the UK. But both are now in the Chinese economic orbit and have close links with the US too. Neither country is going to realign its regulatory system with the ‘mother country’ which abandoned them 40 years ago and which is now relatively unimportant to them. The idea that New Zealand with a population and economy 1% of the EU can offer a counterbalance to the EU Single Market borders on the comical and tells us something about the desperation of those who see the future in terms of clocking up trade deals.

 

Neither collectively nor individually can the world’s major economies offer trading opportunities that will offset the loss of participation in the Single Market. That is not to say trade and investment opportunities are not available to companies or that the government shouldn’t do its best to support them. But let us forget this silly nonsense about lots of trade deals. If the government means what it says about free trade, it can best do that by being a constructive player in the WTO and by retaining as many of the liberalising features of the EU as Brexit will allow.

 

Vince Cable is the former Secretary of State for Business, Innovation and Skills (2010-2015) and Member of Parliament for Twickenham (1997-2015).

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