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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