Wednesday, 11 April 2018

To be a global Britain we must think beyond the confines of bilateralism

Sorry to be boring but I'm writing about trade again. It is a somewhat futile endeavour since the remainers have got their own little bubble going on, continually reinforcing their miserablist narratives and as for Brexiters, well, they couldn't be less interested. They have their own narratives too.

The remain side is working itself into a lather, continually recycling the TTIP debate in anticipation of an US-UK deal while Brexiters are poised to do little more than wail about Brexit betrayal and how things would have been so wonderful had we adopted the lunatic ideas of Patrick Minford. the remainer wonks are busy telling us what we can't do and Brexiters are not even on this planet which means very little thought is going into what we can do - and what is worth doing.

To give credit where credit is due, the Brexiters are least promoting ideas even if they are batshit crazy but as yet I've not seen anything that addresses the real world problems created by Brexit or anything that even begins to compensate.

One theme this blog continues to push is to question the wisdom of seeking out preferential trade agreements - or FTAs as we insist on calling them. I have always suspected the power of PTA's was overstated but just recently I've come to understand exactly why.

As it happens, much of the criticisms of PTAs can be traced to pioneering works by Jacob Viner, a Canadian economist who studied the diversionary effect of PTAs. This is not a new discovery. The basic theory holds that preferential trade deals divert trade from the cost efficient to the preference holder - where production can shift to higher cost partners. Being that the preference holder has a trade advantage, there is no incentive to bring prices much further down than the non-preference competition and instead they will pocket the tariff difference as profit.

The short of it being that preferential trade agreements not only create an unlevel playing field, they undermine mutlilateral efforts. What we find is that "free trade agreements" go against the spirit of free trade and do not necessarily bring down prices. Over the long term, by entrenching inefficiency PTAs could even have the opposite effect. Consequently we should not be seeking "free trade" for its own sake. Every deal must be meticulously analysed and monitored.

Being that this much probably has sunk in with the libertarian free trade crowd, their answer is unilateral trade liberalisation whereby we remove all of our trade defences irrespective of the fallout. What that leads to is UK business trying to compete with heavily subsidised produce or which makes us a dumping ground for surpluses and destroys those industries we have a cultural or strategic need to preserve. Unilateralism in most instances is never a good idea.

When it comes to nuisance tariffs (under 2%) I have some sympathy with the view that we should unilaterally zero them but given the fabric of interwoven agreements we already make use of, tariffs are increasingly a non-issue except for where complex supply chains are concerned.

What distorts the debate is when Brexiters pluck out tariffs at random from the general system of preferences as examples of where we face "crippling" tariffs but on the whole the impact of negotiating away tariffs of under 2% is scarcely worth measuring and difficult to detect.

Where tariffs remain higher is usually in commodities and agriculture, where tariffs are usually there for intensely political reasons and if at this point we still have them then they won't be negotiated away soon. While the logic of some tariffs may seem absurd, there is nearly always a reason.

This is where we should be looking to multilateral solutions rather than entrenching the folly of PTAs. The WTO Agreement on Trade in Civil Aircraft is one such instrument. It eliminates import duties on all aircraft, other than military aircraft, as well as on all other products covered by the agreement — civil aircraft engines and their parts and components, all components and sub-assemblies of civil aircraft, and flight simulators and their parts and components.

This strategy, however, is lost on Brexiters who seem keen to race off and do "bumper deals" because that is how they think it is done. There are few signs of intelligent life on the Brexit benches and we find that as much as Johnson and Rees-Mogg know nothing of the discipline, they don't want to know either.

We are told they have won us the right to make deals during the transition but any activity in that regard will be the replication of deals we already have via the EU. This is presented as a high drama by the FT and the wonkocracy of Twitter, but in actually it's a good deal more mundane than we might imagine. Some of the EU's PTA's will have no noticeable impact on the UK either way and Whitehall, I suspect, already has an idea of the ten or so key ones we cannot survive without. 

Moving on from there really all depends on what we can offer, which won't be much in the way of tariff reductions or regulatory easing not least because the final EU agreement will rule that out. We are then left with only a few commercial strategies - many of which were always possible even as EU members. What matters is how we choose our alliances and wield our soft power in the many international forums making the best use of our right of initiative. 

On that score, I am reserving judgement as to how well the UK will perform. We may have drongo MPs but I am seeing glimmers of competence in Whitehall that make me think that not all is lost. The FT yesterday informs us that the UK’s £13.9bn aid budget is set for its biggest overhaul in years, with plans to use development spending to push British exporters and pension funds to invest in poorer parts of Africa and Asia. 
Penny Mordaunt, the International Development secretary, said her department would experience a “big shift”. It has faced political pressure to justify its growing budget at a time when other ministries face sizeable cuts. Under the new strategy, aid money will be used to help African companies raise debt in local currencies through the City of London, and to facilitate British companies selling and directly investing in less familiar markets. Dfid’s aim is to facilitate pension funds’ investment in emerging countries, by helping to smooth regulations and to make companies creditworthy.
This is a hugely positive development. This blog has argued from the beginning that DfiD should be refocused on projects which enhance our trade policy. There is a lot of potential in international development to forge new markets for the UK. If they are thinking along these lines then there is hope for us yet. 

My previous thinking was that Britain could do more to enhance the ability of LDCs to export produce but what we find is the private sector is doing the heavy lifting in trade facilitation because there are clear commercial advantages in it which don't actually require governmental intervention. There are also promising signals from UNCTAD that Africa of its own accord is starting to get its act together and doesn't need the West to save them. 

This is one instance where Whitehall thinking is ahead of the curve in focusing on services while the Brexit debate is still bogged down in waffle about chlorinated poultry. I confess to being sucked down that same rabbit hole having lavished far too much attention on trade in goods.

The reason for that being, I suppose, is that leaving the single market attacks the foundation of our main trade in goods, creating new and wholly unnecessary barriers to trade. When the only game in town right now is the question of what our future EU relationship looks like, it stands to reason that we would have to go over the basics time and again. 

What our future trade policy looks like really all depends on how well we can service a foreign policy and that hinges on our participation in the single market and sustaining an active role in financing trade development. Though M. Barnier has said we can still change our minds on the matter of the single market I believe it would take a seismic shift on domestic politics for our present trajectory to change. 

Being that the case we will be in a considerably weaker position and faced with a great deal of domestic regulatory chaos, where we will watch helplessly as key industries hit the rocks and many of our flagships see a bleed of investment. It will take many years to normalise our new arrangement and trade will suffer. We always knew becoming an independent country would hurt us - but the ignorance of the Tory right will make us pay ten times more than we ever had to. Correcting the mistake of EU membership will now take a generation.  

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