Sitting in the right room at the right time: why order matters in trade negotiations

By Professor Abhinay Muthoo (Professor of Economics, University of Warwick) and Dr Sebastian Moritz (Manager Partner, TWS Partners Limited)

Now that the UK has left the EU, its focus is on striking Free Trade Agreements (FTAs) with countries (or blocs), including of course with the EU. It normally takes several years to strike such deals. Negotiation with a trading partner is a complex matter, in part due to the multiple issues at stake. The UK wants to secure FTAs in particular with its biggest trading partners which include the EU, the USA, China, Switzerland, Singapore and Japan.

With regard to the (ongoing) trade negotiations with the EU, with whom the UK currently trades around 50% of its total trade, there is a deadline looming, of 31st December 2020, to strike a deal, for otherwise trade with the EU will take place on WTO terms as of 1st January 2021 (until such a date in the future when a FTA with the EU is secured).

There is less pressure on time for securing FTAs with other, non-EU countries (or blocs).  That being said, the Department of International Trade (DIT) has a huge challenge in front of it of trying to strike numerous such deals and all over the coming few years. It is unprecedented.  It’s never been done before.  

Play the game or change the game!

If the last years of Brexit negotiations taught us one important lesson, it is not just to be an excellent negotiator, but it is even more pivotal to structurally change the game that is played.

During the divorce negotiations Withdrawal Agreement, the EU had the upper hand – and there is a reason for it: at the outset of the entire negotiation process, they succeeded to influence the structure - the rules - of the negotiation process, i.e. how the negotiations are actually conducted and what was on the agenda.  The EU managed to set the agenda by separating the Withdrawal Agreement from discussions regarding the future relationship, preventing the UK from leveraging points, such fishing rights, across the scope of both negotiations.  This move by the EU was essentially decisive to the final outcome.

Another move by the EU to influence the rules of the negotiation process was by installing Michel Barnier as lead negotiator with a very tight negotiation mandate – a strategy that is known by game theorists as a “delegation game” - Barnier was tasked to defend the agreed EU position and only get back to the 27 members once he has reached an agreement that would be ratified by the UK.  With his limited authority to make concessions and the inability of the UK to formulate a majority position across the House of Commons, Barnier was never seriously challenged to get back to the EU27 leaders to make them move on their position.  Another result of a strategic move at the outset of negotiation process.

Lesson learned for Trade Negotiations?

If the government now wants to deliver on their promise to strike very favourable trade agreements for the UK, a lot will depend on how well they are able to influence the structure – the rules - of the (negotiation) games before the negotiators actually get into the rooms in Brussels, Washington, Beijing and other capitals.  

A fundamental feature of the various bilateral, free trade negotiations is that they are linked (i.e., inter-dependent) in the following critical way. The outcome of any one such negotiation can impact on some of the key features of the negotiation with another country. For example, an FTA struck with the US can potentially increase UK’s bargaining power during its negotiations with China. This could arise because the UK - having secured an FTA with the US - is thus less impatient to strike an FTA with China, which, in turn, increases its bargaining power in the free trade negotiations with China.  Furthermore, the specific details of the FTA with the US might, in turn, impact on the nature of what the UK wants to get out of a FTA with China.

Order Matters

These interlinkages of the multiple, bilateral free trade negotiations implies that the order - or sequencing – in which the UK undertakes the various free trade negotiations is of huge strategic importance, for the UK.  And the Department of International Trade ought to give this matter some consideration, and factor it in its negotiating strategy, on which country (or bloc) to negotiate with when.  A position that is reached in one negotiation can provide some further leverage and therefore threat points in another negotiation with another country. A simple example: a deal with New Zealand on lamb makes the lead negotiator for the EU trade agreement less depended on lamb imports from Ireland and therefore provides additional leverage – although it might seem counter-intuitive to spend time and effort with one of the UK’s smaller trading partners first. Similarly, agreements with Chile and South Africa potentially provide threat points in negotiations with other wine exporting countries.

Thinking strategically

The order becomes even more critical when it comes to high-stake free trade negotiations between the UK and their biggest trading partners.  Should the DIT negotiate with the US before it does with China or vice-versa? What about the order of negotiating between Japan and the US? There will no doubt be other considerations, such as political, but the key point here is that the above noted strategic factor is an important one to also take on board – and only a sound strategic analysis, which is by its very nature a game-theoretical analysis, can provide guidance as to whom to negotiate with and in what order.

An enormous task lies ahead of the UK Government and its Department of International Trade (DIT) to deliver on the promises made. The last years taught us some lessons, and let’s hope the UK learned them. The outcome of a negotiation is often not decided in the negotiation room but outside of it.

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