UK Trade Policy after Brexit

(Based on a talk given on 15 April 2021)

Summary:

A trade policy based around tariff reduction with distant markets and freeports is outdated in a world of regulated trade predominantly carried out within global and particularly regional supply chains. While trade agreements can help to strengthen relationships the UK should focus first on regulatory stability in goods, domestic reform to immigration, and innovation in services to remove trade barriers where possible.

 Introduction

Geography is one of the few things we can’t change. There was always a chance it would snow on the day the pub reopened after covid lockdown. Our vaccine supplies have been intrinsically linked with those of Europe. And our relations with Europe have been the main factor in UK trade and international relations for 2000 years.

Never the only factor. Fondly did we look west to new lands of freedom from Europe, and that is beyond Ireland. Thus was the US our next most important relationship.

Around 70% of UK trade is with Europe or North America. That is both fundamental and globally unsurprising looking at other economies.

What will happen to that I will discuss, but first let’s set the context for what trade looks like in the 21st century. Because we have to understand that to see why distance still matters to trade, and tariffs largely do not. That having been done we turn to our trade with the rest of the world before coming back to our neighbourhood.

To be absolutely clear nothing here is an argument for being a member or not of the EU. That is a political decision, in which we choose to be part of an organisation setting rules, and are in turn subject to the institutions. We can choose not to be part of setting the rules, that we may still be a party to, but then we won’t be subject to the institutions and can opt out of things we don’t like. But that may come at a cost.

The question of membership has been entangled with that on trade but that shouldn’t be the case. These are separate choices. We can choose Europe and not the EU. Neither precludes global activity, but mostly that will be secondary to the neighbourhood in either event.

As every sensible leader knows.

21st century trade – global value chains

It is worth spending some time to examine the nature of modern trade. Most importantly, it is no longer the act of making a product like a car entirely from domestic components, or growing some vegetables, and selling them to another country. That happens of course, but it is the distinct minority of trade. We are in the era of technology and services enabled supply chains.

To a degree this is increasingly understood, when we talk about 30,000 components going into a car, or topically when we hear about ingredients for vaccines from the EU to the UK and vice versa. But not sufficiently by enough people, particularly those making decisions or reporting trade in the media.

We need to think differently about modern trade, to see the multinational picking content from around the world to produce their offer of good or service to the consumer. The widget maker who is supplying an engine maker supplying the car manufacturer. The entire ecosystem around Formula One cars, the premier league, or leading universities, all of which are huge sources of income for the UK. The audit and quality systems that go alongside systems of production. Even the agriculture producers reliant on technology to optimise whatever they are growing, which have led to the Netherlands becoming the world’s second largest exporter of agricultural products.

In short, an entire world of intermediate goods and services combined into new products sold as good or services. A hugely complex system, possibly too much, run insofar as anyone is running it by the supply chain managers in supermarket chains and their counterparts.

Much of this change, for a greater proportion of trade used to be about selling finished products, has happened since 1990. It reflects intense technology development, cheap travel of people and data, and open economies. China has risen at the same time, but this didn’t just happen because of China, though they did place themselves well to take advantage in particularly through massive production facilities.

From supertankers in Suez to vaccine wars this change has profound consequences, not least for the nation state. We’re only just learning what many are, but arguably it includes a sense of domestic dislocation in many developed countries that contributed to votes in 2016.

One of the most profound things that has changed with global trade is the lack of political control over the economy. Governments can help in general by ensuring a skilled population, good infrastructure, probably some state aid for new facilities, assistance for key companies. Even if that isn’t strictly in line with the rules. Encouraging predictable rules and regulations such as business tax will also be important.

But none of this will guarantee success in the modern economy, or indeed that a local factory which is part of a supply chain will stay open. We don’t know what will do that, for all the talk of reshoring or resilience, and areas once dominated by manufacturing are thus now seen as left behind in many countries.

We do know that Free Trade Agreements which primarily reduce taxes on imported goods, tariffs, seem to belong to a different world. Supply chains have been encouraged by already low tariffs on industrial goods, and of course their absence in services. Which is a shame for a government that has made them a priority.

It is also important to know that those container laden ships mask the fact that a greater proportion of those supply chains are actually regional, that companies know the risks of relying on uncertain transport over long distance for key production. Indeed, global production does not in fact mean the end of domestic manufacturing, which in most developed countries has been declining in employment rather than output.

There’s a final vital point to all of this modern global trade activity. As consumers we receive the benefit of greater choice and lower prices than ever before. Supply chains and technology mean we can get more or less whatever we want delivered the next day. That might just work against a thriving high street or local factory though.  

All trade is regulated

While technology has enabled a dramatic change to global trade, there has been a domestic change in developed countries just as important over a slightly longer timescale. That is the rise of the regulated state, to the extent that virtually every product and service is subject to various government rules about its supply.

Modern trade must navigate these regulations, which might come on anything from safe electrical products, holes in pen lids to rules for opening a bank. To do business internationally you have to follow the rules, at least in most trades (though to note there are legal exceptions such as defence, bought by governments, as well as illegal trade).

The regulations differ between countries. An importer of electrical equipment in the EU can self-declare their product to be safe, whereas in the US it would have to be tested by an independent and approved third party. Chemicals in EU products must comply with stringent REACH regulations, while US laws are far more lax. We could go on, from the UK to US, EU to Australia, and increasingly emerging economies like China, India, Brazil, all with their own approaches.

These differing regulations are a large part of the non-tariff barriers to trade, so diverse and complex that we struggle to measure them. So important as we see from the UK and EU continuing with tariff free trade but introducing new regulatory checks from January 1.

Tariffs are an easy concept to grasp, and to put in the media. They just don’t mean much any more in most goods. For example take the headlines we may soon here about a trade deal with Australia meaning wine will be cheaper. Yes, it would remove the tariff of around 13 pence per litre. But not the ￡3.50 of duties and VAT on a ￡7.50 bottle of wine, or the forms that need to be filled in, the labels to be prepared with certain information, any product testing, and so on. It is no wonder that large businesses find that easier than smaller ones.

There is a services equivalent to tariffs, which is the right for UK companies to establish and receive the same treatment in other markets as a national. Like zero tariffs that is definitely worth having, and like zero tariffs it is rather limited in effect.

The bulk of problems in services trade are not about whether you can in theory establish in another country, but what rules and regulations you have to meet in order to do so. Again it will be easier in the case of major multinationals who can set up subsidiaries and partner organisations.

Modern international trade as you may be gathering is not at all simple. What we would really like from a trade perspective is to ensure that all UK products and services that meet our rules can be sold anywhere in the world. But that involves institutions determining whether those rules are in fact equal, and we didn’t want that in Europe.

What this leaves is to try to negotiate away regulatory problems individually. In some cases there are voluntary global standards, which helps, and in which the UK through British Standards play a strong part. In others there is a kind of wild west of a lack of rules, think a lot of what happens online, which we’re quite good at benefitting from. Mostly these rules and regulations were introduced for good reasons like health and safety, then influenced by incumbents to suit themselves. This is not going to be easy.

It is also worth adding that where there are regulatory norms they are often set by the EU, through what has been known as the Brussels Effect. This is the concept that many companies need to meet the highest regulatory level in a large market, usually the one in the EU, and then lobby other governments to change their own rules accordingly. Or they impose it through their supply chains. It is one reason the UK may end up following EU regulations even after leaving.

So that’s much of modern trade, value chains global and regional, and differing regulations – although the UK is quite good at the areas where that isn’t the case like online services and defence sales. Now let us look at the extent to which the UK government’s trade policy reflects this reality.

The rest of the world – the UK’s gap year

It doesn’t take a great deal of analysis to see the answer to the question of whether the UK government is seriously considering regional chains of production and regulation in trade policy. No. You can start from the ministerial statements that put tariffs first, the departure from European regulatory agencies without considering the consequences, the priority given to Free Trade Agreements of no great economic value such as with Australia and New Zealand.

There are no particularly easy answers as to what countries should do facing global trade trends outlines. We currently see the EU focus on enforcement and new industrial policy, while the US seems under President Biden to be mostly focusing on returning the factory jobs of 1950s Detroit. Neither of which at first sight seem guaranteed to succeed.

The UK government’s main approach seems to take inspiration from their student days and embark on a gap year to south east Asia, Australia and New Zealand. The priorities are the two previously mentioned trade agreements, plus joining the Comprehensive and Progressive Trans Pacific Partnership or CPTPP. Now there are good reasons to do these, but they aren’t particularly trade related.

In the case of Australia and New Zealand we are in some mixture making up for 1973, when our joining the EEC harmed their agriculture exports, practicing trade agreements, encouraging an anglosphere, building alliances, and as a gateway to joining the CPTPP. From a UK point of view there are few obvious problems identified in these markets beyond them being a very long way away, from their point of view there is a chance to lock in preferential terms for the aforementioned agricultural products.

The CPTPP might be a different matter as a group of so far seven countries, potentially eleven if all founder members ratify, and potentially more in the future. There are some obvious trade barriers which could be eased, though mostly in one of the countries yet to ratify, Malaysia, as we have or will have existing agreements in place with the seven.

But again in terms of supply chains and regulations CPTPP appears to do little for us since it is unlikely that the UK will be part of manufacturing chains based around south-east Asia and the Pacific, and regulatory barriers are only partially addressed particularly in services. It might help develop some new trade relationships, and in this way trade deals are never without value, even if that is some way short of the excitable lines we see from government friendly media.

CPTPP is a priority for other reasons. Many of those in the UK promoting the CPTPP thought it would be a gateway to a US trade deal in moving us away from EU regulatory norms. It isn’t entirely clear to what extent this is true in areas like food, it might be more so in intellectual property and technical standards, and this has to be tested in UK accession negotiations.

Others have the belief that the UK has to be in a club of countries, and if it isn’t the EU then it should be CPTPP. Indeed, if we were to look at potential allies in world trade we probably should turn to countries like Japan, Canada, New Zealand, and Chile.

This view is in fact shared by key allies. Japan in particular supports UK accession to CPTPP as a sign that we continue to take global trade rules seriously and are not planning to abandon them after Brexit. In the same sort of way that we see the new US administration emphasise NATO as well as the EU, as that captures the UK. Our allies had concerns that Brexit was less Global Britain and more nationalism, and didn’t want it to go further. Perhaps they were wrong to be worried, but Brexit was a shock and a worry.

So CPTPP ensures we stay honest, and if they have to pretend to be impressed by global Britain, that’s a small price to pay. But when speaking to serious officials in Australia, the US, or Japan, they know the UK’s trade story is going to be predominantly about Europe and North America.

Europe and US – the real choices

Trade isn’t a binary choice between local and global markets. Get good in local markets and looks to expand globally. Or bring a product from distant markets and look to take it to other local markets. University students and tourists can come from anywhere. People watch the English Premier League around the world.

But there are good reasons why there is such a thing as the gravity effect in trade, that we do more business with our neighbours, as virtually all the serious studies show. We can travel more easily and often to them – even in Covid times. We can get to know them better, and therefore how to sell to them. Difficulties can be resolved more easily. Transportation of goods should be cheaper and more reliable. Culture is closer, even if languages differ.

Major companies largely focus and manage their production regionally, whether that is carmakers or pharmaceutical manufacturers. Thus there will be a Europe or Europe and Middle East division. Not typically a UK and New Zealand one.

Now we hear often that Europe is declining and the east is rising. Typically if you look at the figures most of that is actually China, but there has been strong growth in the likes of South Korea and Vietnam. But that doesn’t mean Europe ceases to be a large market, indeed a market that we know quite well and accounts for around 50% of our trade. By contrast we don’t know China so well, and if want to compete there so does the rest of the world.

Typically our first alternative to Europe is as noted to look west next to North America. Our trade figures there have always been strong, around 20% of the total now, meaning we have a depth of relationships that we simply don’t have elsewhere. Another market reducing in size relative to China, though we tend to hear that less than we do about Europe.

The EU and US are going to remain our base markets, for so many of these reasons. In trade terms the two have many differences, and that means choices. For having left the EU regulatory system there are those who would have us get closer to that of the US and allow their food access to the UK. That wouldn’t as it happens make it any easier for UK food to be exported to the US, but we should not make trade just a story of exports.

Major US multinationals would actually rather we had a close relationship with the EU than a trade deal with the US, as they see the UK as part of European not North American supply chains. But if we choose for political reasons not to get closer to the EU then it is likely we will seek greater closeness to the US. That is likely to be a story of the next few years of UK trade policy.

As with many things Brexit it will play out in microcosm with Northern Ireland, which follows EU rules. So no chlorinated chicken there, and heavier checks on GB food if we allow US food here. That might be enough to swing the balance towards Europe, but all is still to play for.

The way forward

The UK government approach we can see, but what about an alternative? How should we bring this analysis of markets, regulations and value chains together with the UK economy as it currently stands, about which so far little has been said in this talk or indeed in much of the Brexit debate?

We certainly have strengths, in many areas of services, some complex manufacturing particularly enabled by services, defence, plenty of skills and so on. We participate in European and global supply chains, for example through Rolls Royce engines, Airbus wings and city banks. We also succeeded in replicating most existing EU trade agreements, though in Europe the distant nature of our EU relationship has a knock on effect with Turkey, Switzerland and Norway in particular, who are so strongly linked to EU trade, thus we have downgraded.

With such strengths the UK economy is not immediately about to fall off a cliff, even if it faces challenges. We also are not about to imminently rejoin the EU, single market or customs union, and most of us are less keen than Brexit enthusiasts to keep fighting the 2016 referendum. We want to move on, but do so in a sensible fashion that helps the UK economy. Let’s map out what they could look like.

The starting point should be to move away from obscurely justified notions of regulatory sovereignty particularly in areas where there is no known value in divergence. That could start with membership of Europe wide bodies such as the European Aviation Safety Authority, the decision to leave which in the name of sovereignty which had to be a low point for the UK government in Brexit, out of many. Aviation safety is not an issue of sovereignty.

Retaining our place in regional supply chains means moving away from the idea of nimble regulation across the board, which companies don’t actually want, towards predictability and global norms. In the area of food and drink it would also help considerably in reducing barriers between Great Britain and Northern Ireland.

Trade and regulatory barriers particularly affect small and medium enterprises, who have fewer sales on which to offset higher compliance costs, and are also more likely to look to nearby markets. Regulatory alignment will help them in particular. Government should also give special priority to tackling their problems in other markets, rather than spend so much effort lobbying for multinationals. This it has to be said includes the many skilled self-employed who are used to working without hindrance across Europe.

As a services superpower in trade terms, the second largest exporter in the world, we probably have more scope for regulatory divergence. But before taking it, carefully, there is one step that almost all trade specialists, including some of the most passionate Brexiteers, agree will do more for UK services trade than any other.

Abolish the Home Office. The department that makes it as difficult and expensive as possible for foreigners, spending money and signing contracts here, to visit, including at times those invited to trade meetings arranged by other parts of government.

If abolition isn’t possible, as it sadly probably isn’t, at the very least lower costs and reduce horrendous bureaucracy. Sign deals to make it easier for the UK self-employed to work in Europe. Combine that with mutual recognition agreements on as much as possible from data to professional qualifications and financial services.

There is a longer shot the UK could consider in services. Traditional trade agreements address trade in services badly, failing to reflect the highly complex regulatory landscape in talk of modes and national treatment. Perhaps we could try a new approach, one that says UK companies and the self-employed are fully able to provide services with partner countries, and vice versa, which we could seek to agree with any country willing.

It might be too ambitious, not least given our strength in services makes it daunting for others to open their markets, but we can but ask. That should start with New Zealand, which is why we should have waited in that negotiation until we had such a clear ask. We could also in return sign up to their digital services agreement with Singapore. That would be using some of the new regulatory flexibility.

Another area where global trade rules have failed to develop sufficiently comes around climate change, antibiotic usage in animals, and animal welfare. It isn’t right that we are unsure as to whether WTO members can take action to restrict imports which are produced to lower levels of protection than are in place domestically, which risks offshoring global problems and undercutting domestic production unfairly. The UK should take advantage of our new regulatory flexibility here to put in place such measures. But once in place no special protections from competition should be given to UK farmers.

There is tension on this issue at the WTO, but it should be clear which side we are on. This should not prevent us doing our very best to support the global rules of the WTO, skipping the government’s excitable talk of leadership given we are one of many, but being a supporter, which is realistic. To be fair to the government they have joined the group of supportive WTO members known as the Ottawa Group.

We need to focus on rebuilding European trade ties, not just the EU, because these are our nearest markets. Rejoining cross European regulatory agencies will help, but we must also boost our lobbying and trade diplomacy efforts, because we have exporters suffering problems now, and there will be EU plans which affect our future trading performance. Five years of insulting EU Member States has left us isolated in our own neighbourhood, which can never be healthy.

As discussed Free Trade Agreements have as much value in cementing relationships and establishing rules than economically, but should be a second order priority, not least until we have much clearer asks in services. Freeports are simply an anachronism from the days when tariffs mattered, and I don’t think returning to the days of large factories is realistic as President Biden appears to want.

His view on FTAs is sceptical, however a UK-US trade deal may yet happen in 2023, even though moving away from EU regulation towards that of the US in food is an absurd notion pushed by lobbyists for US agrifood interests who stand to benefit, with no identifiable benefit for the UK. Personally I would rather focus on areas of agreement with the US like services than fight a battle over chicken hygiene.

Care with preferential import arrangements from agricultural superpowers such as the US should allow us to maintain meaningful import preferences for goods from developing countries, which must be part of our story.

In an ideal world none of this would preclude strengthening our trade ties with China, India, South America and elsewhere. We will inevitably lose some trade with Europe due to higher barriers, and should make efforts to offset this. There will also be some economic adjustment as a consequence of all this, which we need to consider carefully rather than simply chasing FTAs of limited value.

Conclusion

Much of this plan sounds optimistic as things currently stand. We have a government fixated on Free Trade Agreements and not regulation, on glamour trips to India not reforming the Home Office.

There is a potential path for future UK trade policy outside the EU, because we don’t need to be part of a bloc to survive. But we need to be smarter than we have been so far, to understand the world as it is, because there are no presents in this world, nor are there easy answers.

We’ll learn, but it might take time.