Brexit

Opinion: Britain’s perilous trade path post Brexit

The British government’s ‘glorious visions’ about becoming a global champion of free trade are simply not grounded in reality, writes Guy de Jonquières.

 

Listen to Theresa May, the Prime Minister, and pro-Brexit members of her cabinet such as Boris Johnson, foreign secretary, and the talk is all of glorious visions of Britain becoming a global champion of free trade after it leaves the European Union, finally liberated to strike ambitious new trade deals with partners all over the world.

 

Reality, however, is rather different. So much so that it is tempting to conclude that the government and Brexit enthusiasts either know very little about the world of international trade policy or, perish the thought, are deliberately seeking to conceal unpalatable facts from the public.

 

For a start, it is hard to square the government’s eulogies of free trade with its scramble to withdraw from the world’s largest free trade area. Though the terms of Britain’s future trade arrangements with the EU have yet to be determined, they cannot be better than the unimpeded access to the single market that the country currently enjoys and may well be far worse. There is a non-trivial risk that British businesses will end up facing much higher trade barriers on the other side of the Channel, while UK tariffs on imports from the EU raise prices paid by consumers.

 

Brexit enthusiasts counter that the UK will be able to make good any loss of business with the EU by expanding its trade with other partners. Simple arithmetic shows that claim to verge on fantasy. The five BRICS countries, often held up by Brexiteers as shining examples of high-growth opportunities, together account for just eight per cent of UK exports. All the Commonwealth countries – also supposedly markets just waiting to be exploited – account for a further 9.5 per cent.

 

Add in the US, which buys a fifth of UK exports, and all those markets combined amount to 37.5 per cent of what Britain sells abroad every year. That is far short of the 44 per cent of its exports that go to the EU. Unless the latter shrank after Brexit – highly likely if trade barriers rise – truly herculean efforts would be needed to close the gap.

 

In addition, Britain stands to lose the preferential access to markets including Switzerland, South Korea, Chile, Mexico and Turkey that it currently enjoys by virtue of the EU’s free trade agreements with those countries. The UK will also miss out on the benefits of the EU’s recently completed deal with Canada and one that it aims to reach with Japan this year. Unless countries with FTAs with the EU agree to extend them to Britain after Brexit, which is far from certain, it will need to negotiate new ones with each of them from scratch.

 

Position of weakness

 

That would be a daunting task in any circumstances. It is doubly so in Britain’s case. First, it has no experienced trade negotiators, having last concluded a trade deal of its own before it joined the European Community 45 years ago. And second, in a business where size and economic clout matter, it has very limited negotiating leverage: as the world’s sixth largest economy, with a market that is already relatively open but soon to lose its preferential access to the EU, it just isn’t that high a priority for other countries.

 

For the British government, however, lining up trade agreements after the UK leaves the EU matters a lot politically, as a signal to voters and to the rest of the world that Brexit is working. Unfortunately, that may incline prospective negotiating partners to view it as a supplicant, desperate to do deals with almost anyone at almost any price. That would condemn the UK to negotiating from a position of weakness, of which others would doubtless seek to take advantage.

 

Furthermore, the government seems decidedly optimistic about the economic and commercial gains to be had from deals with many of the countries on its priority list. First in line is the US where, to the delight of Brexiteers, President Donald Trump has expressed strong interest in doing an FTA with the UK. However, they should be wary of pinning too many hopes on Mr Trump and his team.

 

He has proclaimed an “America First” approach to trade deals that will aim to eliminate bilateral US deficits with trading partners. That suggests that the UK’s sizeable bilateral surplus will be in Washington’s cross hairs. Meanwhile, Wilbur Ross, Mr Trump’s protectionist-minded nominee as commerce secretary, has called Brexit a “god-given opportunity” to steal Britain’s trade, while Robert Lighthizer, the Special Trade Representative-designate, has made a lucrative career as a trade lawyer out of getting the US government to raise import barriers.

 

Mr Trump has also recently taken aim at the World Trade Organisation, threatening to disregard its disputes rulings if they find against the US. Making good on that threat could seriously weaken the organisation and undermine the global trade system. That is hardly comforting news for Brexiteers, who argue that Britain can safely rely on WTO rules to protect its trade interests after Brexit.

 

The powerful US agricultural lobby will be in the front line of producer interests represented in any trade talks with the UK. The industry’s is expected to press demands that the UK open its market to products including genetically modified crops, hormone-treated beef and chlorine-soaked chicken. If the UK accepted them, it could both face resistance from public opinion and environmental groups and would put at risk British exports of those products to the EU, where they are restricted or banned.

 

The US pharmaceuticals and healthcare industries are also eagerly eyeing up Britain’s market. Though Mrs May has said that the country’s revered National Health Service would be off limits in any deal, pushing up drugs prices in foreign markets by compelling their governments to accept stricter intellectual property rules has long been a top priority for US companies.

 

China, India and the rest

 

China, which Mrs May plans to visit this year, is also one of the government’s great white hopes. However, far from showing willingness to liberalise trade, its government has recently been moving in the opposite direction, spurring foreign companies doing business there to cry foul. Meanwhile, slower growth and “indigenous innovation” policies that discriminate in favour of Chinese companies are dampening the country’s demand for imports.

 

The one prize that the UK could offer Beijing would be to grant its long-sought demand for Market Economy Status in dumping investigations. However, with Britain outside the EU, the value of such a concession to China would be much smaller. In other respects, China already enjoys most of the market access freedom it wants in the UK, giving the latter little obvious negotiating leverage.

 

India is another prime British target. Brexiteers like to point to the stalemate in the country’s eight-year long FTA negotiations with the EU to claim that Brussels cannot clinch trade deals quickly (even though it has completed about 50 of them). Yet one of the biggest stumbling blocks in the talks has been Britain’s insistence that India cut whiskey tariffs and liberalise its services market, along with its adamant rejection of India’s demand for a relaxation of short-term visa restrictions on IT specialists. With the UK heading for Brexit, optimism is now rising in both Brussels and Delhi that their talks will soon pick up speed.

 

The British government is also hopeful that old colonial ties and long-standing security alliances will enable them to strike quick deals with Australia and New Zealand. Yet even if that proves possible, the economic impact will be minimal. The two countries combined account for less than two per cent of total British exports – less than half Britain’s exports to Ireland.

 

Furthermore, both antipodean countries are highly efficient agriculture producers, and better access to Britain’s market for beef, lamb and dairy products will be at the top of their negotiating agenda. That is unlikely to go down well with Britain’s higher-cost livestock farmers, especially as they face deep cuts in subsidies – a big part of many of their incomes – and the risk of higher barriers after Brexit to their exports to the EU, by far their largest foreign market.

 

No strategy

 

Britain does not look well-equipped to tackle these challenges. In addition to a lack of trade negotiators – which it is scrambling to hire wherever it can – there is little evidence that its government yet either has a coherent negotiating strategy or, indeed, fully understands many of the basic rules and tactics of the trade negotiating game.

 

Trade policy experts say UK officials seem to be under the impression that a combination of buttering up foreign governments and counting on international goodwill will be enough to win them good trade deals. There seems to be little recognition, they say, that serious negotiations are a form of gladiatorial combat, in which every country fights fiercely for its national interests, or that meticulous battle plans and shrewd tactical manoeuvering are vital to success.

 

A former senior civil servant, with extensive experience of both the EU and trade policy, says that Whitehall has not yet grasped that effective trade negotiators need to study and understand in detail the motives, goals and constraints of those sitting across the table from them. Instead, he says, the attitude of many British trade officials seems inward-looking and largely preoccupied with their own interests and priorities, to the exclusion of those with whom they plan to negotiate.

 

Such a state of mind is starkly at odds with the government’s public rhetoric about  Brexit freeing a self-confident, economically outward-looking and expansive Britain to venture forth and forge rewarding new relationships with the world beyond the EU. It is also a perilous one in which to approach negotiations with some of the world’s toughest, canniest and most battle-hardened trade warriors, as Britain plans to do.

 

Guy de Jonquières is a senior fellow with the European Centre for International Political Economy, an associate with LSE IDEAS and a former World Trade Editor with the Financial Times. He tweets at @guydej1

 

 

 

Views expressed by external contributors to Borderlex are those of their authors only.

One Comment

  1. Completely agree with you, Guy, every word. “Ill equipped to tackle trade negotiations” ? would you believe that I have never had a call from any British official in London (or Brussels, or Geneva)? I do have contacts with DIT but I had to initiate them myself.

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