Monday, 6 March 2017

Brexit: trouble with trade


For years we Brexiteers have been saying the EU is an iron curtain where trade is concerned and that the single market is a protectionist racket. It is. Remainers are confirming this by the day by showing us all the different ways it will be harder to trade with the EU once we have left. 

In this, we find we are not alone. Canada’s free trade accord with the European Union has failed to remove many of the barriers to shipping red meat to Europe. “We do not have what we would call commercially viable access to the European market,” said Ron Davidson, head of international trade for the Canadian Meat Council.
Under the Comprehensive Economic and Trade Agreement (CETA), Canada is allowed duty-free exports of 81,011 tonnes of pork, but three obstacles stand in the way. The EU wants trichinella-free product and Canada is not officially recognized as free of the worms, which can be transferred from pork to people in raw or undercooked meat. (It is hoped a trichinella-free standard could be developed according to guidelines set out by the World Organization for Animal Health.)
The EU also requires its own health mark on boxes of meat over a tamper proof belt at the time of manufacture in the processing plant. The boxes go into a cooler and the serial numbers on the health mark must be in sequence. That would create a lot of additional handling logistics for Canadian companies who ship to many other markets outside of Europe. Canadian meat processors also express problems with equivalency inspection requirements with the EU. “We supposedly do have equivalence in the meat inspection systems. If it is a real equivalence, the Canadian Food Inspection Agency stamp should be sufficient,” Davidson said.
Meanwhile, European meat suppliers have wide open access to Canadian markets. The day that CETA goes into effect, the 26.5 percent tariff comes off so the European Union is going to have a huge opening of the Canadian market for beef and veal,” he said. “The agreement is not balanced. We would just like to be able to take advantage of the quota we’ve got.”
As the article notes, on a more technical matter, a stumbling block is the use of antimicrobial treatments to remove pathogens like E. coli. Because Europe would not be buying entire carcasses, Canada would be left with items like trim used for grinding meat. Those are exported to the United States, where there is a zero tolerance policy for E. coli. That means the entire carcass is treated with antimicrobials in Canadian packing plants to avoid the risk of losing the U.S. market. “If we turn off interventions, the risk of having an incident at the U.S. border goes up,” Davidson said.

There are a few issues to note here, notably the absence of a global standard on trichinella and e-coli, which means different cultural paranoias lead to different controls. The US is fearful of e-coli whereas the EU, despite having a notification rate of 0.07 cases per 100,000 population (at peak), unfairly keeps barriers intact. This was mainly due to an increased number of trichinellosis cases reported by Romania and Bulgaria that had, as in previous years, the highest notification rates (1.11 and 0.83 cases per 100 000, respectively) and accounted for 88% of confirmed cases reported in the EU/EEA.

This means that Canada is forced to choose between markets or run two separate production lines which can prove prohibitive. This is why, when our main market for exports is the EU, we are not going to be able to diverge from EU standards. If we deviate or relax our standards on imports in any way then the EU will view our own exports as a higher risk, leading to more frequent inspections and more delays at the ports.

Here we can extrapolate some broader points. We are told by the likes of John Redwood and Peter Lilley that we can trade on the same basis with the EU even if we leave the EU unilaterally - when we can see that even with a comprehensive trade deal, there are still considerable non-tariff barriers and regulatory obstacles.

It also means that if we have to choose between regulatory superpowers it will necessarily be the one with which we trade the most - and being that the USA is notoriously protectionist and presently highly unpredictable, we're going to want to stick to EU standards.

Given that standards are central to any trade deal we are going to have to ensure that any further deals we make do not compromise the integrity off those we already have. Consequently, sweeping gesture deals must be viewed with extreme caution.

All this kinda shafts both sides of the Brexit debate. On the one hand we have Brexiteers telling us that we are free to trade with the rest of the world, when clearly it is not so simple, and on the other hand we have the remainers telling us that we have all these free trade deals via the EU which are entirely beneficial, when in fact they are hugely asymmetrical, they cause a number of social problems (in Africa especially) and lock us into buying European produce at inflated prices.

On balance it is better to remain part of the single market and choose deals on a national basis to augment EU trade rather that substitute it. By leaving the single market we are putting ourselves in the same tier as Canada as a third country where even a comprehensive deal is nowhere close to adequate.

Where we can criticise the EU is that fortress Europe is so difficult to gain entry to that we are now seeing trade diverted away from Europe and many of the agreements we see on tariffs are simply not worth the paper they are written on. Fortress Europe is becoming impregnable to its own detriment. The EU may look like the trade hegemon for the moment, but could well be digging its own grave.

While there are many laudable ambitions such as the circular economy, which are probably worth it in the long run, they require a tranche of new regulations, adding to the tiers of regulations which most struggle to see the immediate benefits of. Idealistic regulatory initiatives during a global trade crunch are not really what industry is crying out for.

The question though is whether Britain outside of the EU can act fast enough to replace the trade it loses in the interim. That is an open question and given the time limits we have placed on ourselves it seems unlikely. There are a number of radical policy adjustments we could make (probably with agricultural subsidy) but this is likely to have unpopular consequences on the domestic front and may even lead to retaliatory legislative action from the EU. Some justifiably fear a race to the bottom.

We could have done ourselves a big favour by staying in the single market and bought ourselves the time to develop a more sophisticated trade policy and given ourselves the space to relearn the art of trade. Instead, the Tories are unwittingly about to put us through a course of shock therapy. It's going to hurt.

Over the long term though, (and Brexit is for the long haul), we may very well see a fundamental shift in attitudes to the EU around the globe, not least from Canada as producers realise how badly they're being screwed by CETA. For sure, they have a wet lettuce PM for the moment but when the pendulum swings back, we could well see Canada pulling the plug. Similarly, we could see some pushback from Africa.

It seems to me that the pushme-pullyou politics of trade are best resolved by way of seeking global standards and multilateral solutions, using the Trade Facilitation Agreement to help Africa overcome EU barriers. We can do that from outside the single market since we will still be broadly working inside the EU regulatory regime but have put ourselves in a weaker position by leaving the single market. We could have surreptitiously extended the single market and weakened EU control over it.

That though is an opportunity squandered by the Tories and now we are faced with making the best of a bad job. We had better hope that whatever the Tories cook up for a free trade agreement is manifestly better than CETA. I do not have high hopes.

What we can say is that the UK will have to speak to all of those nations where we currently have trade agreements via the EU. There is at least a framework where there is scope to enhance those agreements. It's not all doom and gloom. Some of the EUs regulatory barriers are at the behest of one or two Member States and EU agreements have restrictions that we ordinarily we would not seek. There is scope to liberalise those agreements in exchange for greater access for UK services. We are going to have to get a move on though. Again there are caveats about not compromising EU trade.

Ultimately though, the UK, with its considerable expertise in food safety would do well to focus efforts on Codex initiatives to bring about new standards in order to eliminate trade barriers with a view to making bilateral deals a thing of the past. In that respect it would be a mistake to throw our lot in with the USA which is notorious for sabotaging multilateral efforts.

In more ways that one Brexit is going to hurt more than it ever needed to due to a woefully simplistic understanding of trade but that is to be expected when the UK has effectively given up its domestic capacity. I view that as a consequence of EU membership. EU trade exclusivity was a bridge too far.

The damage done will be from pulling further out than we ever needed to for advantages which don't really exist. It just means it will take longer to establish new trade and we will have to re-order the economy to compensate for the trade we will never regain. In that there are opportunities where we just have to trust that a first world economy like the UK can step up to the plate. It won't be easy but I think we can.

Whichever way this goes we must be cautious of anyone offering up simplistic solutions and making big promises. Nothing is clear cut - especially not those assertions that EU membership is necessarily good for trade. Certainty in the EU is a myth and EU trade deals are not always what they appear. We still have the city of London in our favour and since India is in the market for a multilateral agreement on services, there is a whole universe of other avenues to explore.

India made proposals for a Trade Facilitation Agreement for Services that it submitted to the WTO on February 23. The text has provisions relating to facilitating trade in services and development as well as institutional provisions. This could be more pertinent to the UK than any deal with the USA and it would benefit from having the UK as a champion.

So long as the UK does not walk away from a deal with the EU then we can make Brexit work. We will just have to think about trade in a different way and move beyond the quasi-colonial fantasies of the Tory right. If, however, Mrs May gives in to the idea that "no deal is better than a bad deal" then Britain stands to be substantially poorer for a very long time. Walking away from the EU without a deal is simply not an option.

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