Thursday, 27 April 2017

Don't expect miracles from free trade agreements

There is a certain degree of naivety among those in the Brexit camp when to comes to trade. The objective of a trade agreement is to remove regulatory barriers and tariffs and in more comprehensive deals find specific areas of cooperation through working groups. As to how useful that is depends on a number of factors. It is a mistake to adopt a "if you build it they will come" mentality.

Utilisation is by no means guaranteed. For starters there are natural patterns in trade and though I am sceptical that it's a universal rule, geography matters and will continue to do so for the foreseeable future. This though is not a determining factor. Certainly cultural commonalities will leader to higher volumes of trade not least because there isn't a language barrier. This is why the Brexiteers tend to favour Anglospheric post-Brexit trade strategies.

Distance and size however, has a good deal of bearing on it. Australia may well be a developed westernised country but it is on the other side of the planet, expensive to reach and with a population being about a third of our own, not a very large market by contrast with the EU.

Then there is the question of whether partner nations are able to supply what we are seeking to buy. For minerals, ores and meats Australia and New Zealand are producing at capacity in order to meet Chinese demand and may find they are unable to accommodate UK orders. A new supply chain has to be established which has up front costs and initial bureaucratic hurdles. Since the volumes of trade could very well be unaffected by a more liberal trade agreement it might well be that they see no advantage in further opening their markets to our products and services.

I am of course speaking broadly just to illustrate the concept but these are the kinds of considerations that trade offices on both sides will be churning over. While their politicians might very well make positive noises and may have genuinely good intentions, when it is tasked to the trade officials they might find there isn't the scope to go further on what is already a fairly liberal arrangement. As much as there are economic considerations there are also political dimensions whereby the voter base (or donors to politicians) will not take kindly to facing fresh competitive.

Some of the more tawdry Brexit inclined publications will often make a big noise over the freak tariffs designed to protect particular product but on average tariffs are historically low. More to the point, they are stable fixed cost factored into pricing. It is the unpredictable variable costs of trade that are of more concern to exporters.

Then we have behind the border costs and obstacles. These can be service charges or product registration fees through to the costs incurred from poor infrastructure, delays, corruption, and depending on the type of export, climate is an issue. Perishable goods require expensive refrigeration facilities in warmer climates. Trust is also an issue. We could have a free trade deal with Nigeria but the lack of secure means of payments is very often a concern and also the ability to return goods is a consideration for buyers.

Then of course there are disparities between regulatory cultures which prove to be problematic. This is why even the EU does not have a comprehensive agreement with the USA. It has a number of cooperation agreements and smaller sectoral deals but the holy grail of harmonisation remains elusive. Any deal the UK secures will be superficial and the regulatory barriers will continue to be a deterrent to exporters.

Further to this, not every nation acts in good faith. While on paper a trade agreement might remove certain barriers they can very easily invent new ones and the next major topic in trade circles will be stealth non-tariff barriers. The ones that are there, put there deliberately, but very difficult to prove.

As with most areas of policy we see big ambitions, plenty of promises but when it comes down to it, like the obsession with deregulation, we find that progress is slow and the gains are marginal. When it comes down to it trade agreements are of varying worth, dependent on many variables (not forgetting exchange rates) and the presence of an agreement does not necessarily bring about more trade. This is why we must be cautious of any statistical estimates on how much trade deals are potentially worth. The real world very often does not cooperate with the theoretical models.

As with anything it helps to have a particular strategy rather than darting off round the world looking to sign accords with anyone you fancy the look of. As a business to business and fintech economy we should be looking to create opportunities in those areas. Manufacturing is important but not our dominant concern. This is going to require an integrated foreign, trade and aid policy working in conjunction with each other for specific outcomes.

This is going to be a process of trial and error and, for a time to come, mostly error. Where trade is concerned we have lost our institutional memory and we are beginners at this. We will likely make a number of avoidable errors through inexperience and gullibility. In that respect remainers are already gearing up for their "I told you" so moment. This though suggests to me that FTAs are not the right approach. More than anything they chew up an enormous amount of diplomatic runtime (which we do not presently have) and they take a long time.

What is more likely to yield dividends for trade in goods is to raise initiatives for common global rules (and tariffs) for one sector at a time. It may be that we need to go more micro and just look for more achievable accords on particular product types. Bilateralism is increasingly a massive duplication of effort where every nation has a corps of bureaucrats trying to achieve different objectives with the same partners. The more lucrative partners get preference and their deals will influence our own. I take the view that if you cannot win at a game then play a different game.

We could waste a lot of time talking to every nation individually and it would do very little to enhance our position. We should instead, as a priority, ensure that those agreements with third countries via the EU are replicated with as little fuss as possible and look at means of streamlining the regulatory process and customs systems. The key is to increase the profitability of existing value chains rather than chancing new ones. New supply chains can be volatile and require investment.

For the time being though we should not lose sight of the fact that there is nothing we can accomplish in the short to medium term that would compensate for a major drop in EU trade. That is the absolute priority. It is imperative that we retain as many single market rights and privileges as possible even if we intend to diverge later down the line. The panglossian nonsense of Tory Brexiteers is no basis on which to bet the farm. We would be fools to throw away the most compressive trade arrangement we have based on vague aspirations not grounded in reality.

Brexit for me was always primarily about ending EU political control of UK. Sadly Brexiteers bought the myth that Brexit was also an economic solution. It isn't. Brexit does involve a hit to the economy and the best we can hope to achieve in the medium term is an economically neutral Brexit. Enhancing trade will take patience, knowledge and skill - all of which are presently in short supply in Westminster. We can be optimistic in the long term but for now caution should be the watch word.

Before we can make major inroads into global multilateralism we first need to establish ourselves and learn the ropes as an independent actor. For this we will need to build up our own knowledge base and acquire the right talent. We cannot expect to go haring off into the wild blue yonder and expect the world to fall at our feet. The world is not breathless in anticipation of our impending departure from the EU. Boris Johnson's "bumper deals" exist only in his imagination.

We should also keep in mind that we will remain aligned to the EU regulatory sphere probably for as long as the EU continues to exist. Over and above that there are several global treaties, conventions and rules that place limits on what we can do. Brexit is by no means a free licence to do as we please. There is a system in place we must navigate and there are no short cuts. If there were, everybody would be taking them. Progress on trade liberalisation stalled for good reason.

There is still every reason to believe Britain can make it as an independent state and by playing a different game to the EU we can use our agility to good effect. We can be a trade innovator and an experimenter, perhaps inspiring others to join us in the push for global solutions.

To do that, however, we will need to build up political capital. We will need to demonstrate our commitment to multilateralism at a time when when the world is seemingly retreating from globalisation. That will take investment and we must be mindful to send out the right signals. That starts with ensuring we take no foolhardy and aggressive moves in our approach to the EU. We will be judged by our actions, not our words.

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