Free trade (not agreements) will make Britain great

To judge from most of the “progressive” press and my Twitter feed, there is a great deal of ruin in Brexit.

I hear that Britain is so integrated into the EU it will be rootless outside. The UK, I’m told, will need to ‘rejoin’ the WTO after Brexit. It has no trade agreements other than EU trade agreements but may not negotiate any until after it has agreed on exit terms with the EU. Even then, the UK does not have enough negotiators to create a suite of trade agreements any time soon. Bereft of free access to the EU market and EU management of its commercial policies, it will shortly be isolated, friendless and poor.

I disagree with almost all of that. But I do find it unsettling that so far we don’t know what trade policies the UK will pursue once it recovers its commercial autonomy. Neither side in the “Brexit” debate was very clear about future economic policies. The then-Chancellor, George Osborne, forecast disaster if voters chose the wrong thing. But, so far, the only casualties have been Mr Osborne and his boss.

Still, there are hard choices ahead for the UK government and for their European counterparts. Disentangling Europe’s second biggest economy from the Rube Goldberg juggernaut of EU treaties and regulations bodes to be bloody; made more so by the wish of some European governments to discourage further defections from the Union. What Bismarck said of sausages and laws will no doubt prove true also of their unmaking.

Nor is it clear yet whether Brexit will be good or bad for the rest of the world. A more autonomous, competitive and open UK market would be a tonic for all. But it is clear that a market-tightening European response to Brexit, designed to make the UK made to “pay” for its decision, would hit both UK and European growth and then every other economy in the world. Over the years since 1973, the EU has created different kinds of hoops for its neighbors in Switzerland, the Nordic countries and the Mediterranean to jump through on their way to doing business in Europe. There’s every sign the 26 remaining members of the Union will insist on one of these, or even on a new set of acrobatics from the UK, as the price of continuing to do business.

But they would be foolish to disrupt the access of the UK to the single market, because such a policy would turn the implied ‘insult’ of Brexit into an actual injury for Europe. First, Europe depends more on exchange with the UK than with its other neighbors. Only four economies in the world — China, Germany, Japan, USA — produce and consume more than the U.K. (Switzerland is 19th). Then, one of the few unfailing predictions of economics is that putting rocks in your own harbor will sink your own ships, too.

Prolonged negotiations across the Channel on severing links would also hold up the development of the UK’s restored, autonomous trade relations with third parties. The EU’s exclusive competence in trade, enshrined in the EU treaties, is a legal barrier to the exercise of this autonomy. London cannot begin or conclude trade treaties until it wraps up the UK’s treaty obligations to the EU. In one sense, this is merely a legal barrier that does not bind a ‘sovereign’ UK Parliament. The UK has the power to begin talks with other countries whenever it wishes. But the UK would ignore the EU treaty at peril of a vengeful political reaction from its European neighbors that could spill over to future cross-Channel relations on a broad front.

So it seems the UK will stew in an awkward sort of limbo pending the end of the “Article 50” negotiations. It may be a couple of years yet before the UK could begin work on even “easy” trade deals with natural, low-protection allies such as Australia, Canada, New Zealand and the USA. Some “Remain” recidivists see this as a just and forewarned punishment for the UK’s promethean folly. They point out, too, that once it has reached a deal with the EU, the UK will have to open talks on a global front to begin to match the breadth of EU external trade treaties. Yet London has lost the knowledge and personnel to do so during the years spent lurking behind Brussels’ apron. And when, finally, it exits the EU, the ambiguous legal status of the UK’s WTO market-access rights will only deepen its isolation. Oh the horror!

Well, maybe. Trade agreements are overrated. 

Let’s start with WTO. The UK’s Membership is secure. The UK has been a full Member in its own right of GATT since January 1948 and of WTO since January 1995. The problem is more technical. All Members have market access schedules, negotiated usually when they join the organization. In 1973 the UK abandoned its national schedule and adopted the EU (EEC) schedule. Now, on the day the UK recovers its trade autonomy, post-Brexit, the EU schedule will no longer apply and the UK will need to propose another to WTO Members. But it will probably take years of tedious negotiations to agree to these new schedules. In the meantime, the UK’s situation will be “irregular” and unprecedented in WTO.

So there’s little reason to panic. History strongly suggests WTO will be stymied for years by an unprecedented problem. Unless the UK decides to hike protection beyond the levels agreed between the EU and its trading partners in 1994 (!), there is little risk to its interests in WTO. Besides, the need for a new WTO schedule is a somewhat theological problem; even the existing EU(27) schedules are technically in operation under a waiver. Also, the EU schedules, like most others in WTO, are 20 years out of date, thanks to the successive failures in multilateral negotiation.

For the present, sadly, the WTO is not worth worrying about. Since the Doha round of negotiations ran into the sand in 2008 it has proved is to be not much more than a placeholder; waiting to find out what role, if any, multilateral trade agreements will play in the 21st century.

It is also true that the U.K. would face a mammoth task to replicate the EU’s bilateral and regional agreements with the world outside Europe. So maybe it should not bother. The evidence for the superior benefits of FTAs over other options is very slim. Except in a few high-profile cases (the EU and NAFTA in the 20th century) it is not clear that these agreements create more trade than would have taken place in their absence. They also impose their own red-tape costs (‘rules of origin’). For most, ex-post estimates of their impact on growth are small (or tiny or none). Then, whatever preferences they secure for the partners in each others’ markets tend to erode in a short time as new agreements are reached and changing commercial priorities, or exchange rates, undermine them. Finally, it’s an open secret among trade economists that every time they attempt to measure or model the impact of one of these deals, they find the biggest gains come from cutting barriers to imports and not from the preferential treatment of exports.

As Simon Evenett remarks in a recent opinion piece for ICTSD: “What matters more for British living standards is the terms that London sets for access to and operation in UK markets than the terms it wrings from others during a dash for foreign trade deals.” You don’t need a trade agreement to cut import barriers.

If the UK decides to go ahead with a trade agreements program — that’s still my bet — it would be a good idea (as Simon Lester recommends) to keep the agreements as simple as possible; no fancy deals on ‘behind the border’ regulations, no complex rules of origin, no new elaborate intellectual property or investment rules. They should be old-fashioned zero-duty, zero-quota deals that, even if they do no more than substitute for WTO market-access schedules and signal the UK’s firm policy intentions, will likely deliver 80 percent of the (modest) benefits of a more elaborate deal for 20 percent of the effort.

But wait! There is an even simpler and more effective trade option available to the UK that takes almost no time and no technical expertise. All it takes is a blue pencil. Although this future sounds like fairy-land, it is a real place that is surprisingly close by. The UK’s average applied tariff on all goods is just 5%. That is, an average margin of preference for home produce over imports about one-third the size of the movement in the exchange rate of the Pound over the first weeks of July. The benefits of current protection slim and fragile. Then, two-thirds of industrial goods and two-fifths of farm goods imported into the UK already face zero duties.

Some industries in the UK will certainly demand continued border protection after Brexit. It may turn out that the UK government will need the pressure of new trade agreements to help it push through tariff cuts at home. But at times of historic change, such as Brexit, governments often have more “elbow room” to deal with opportunities and threats. I hope that proves true for the government of Theresa May, because the UK is tantalizingly close to restoring its historic role as a great free-trading mercantile power. Also, with either Mrs Clinton or Mr Trump in the White House for the next few years, the world may be looking for that light on another hill.

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