Trade

Brexit is a golden opportunity to reshape the way the world trades

BY Shanker Singham | ShankerASingham   /  22 May 2018

I believe that wealth can be created or destroyed. I believe it is more difficult to create than it is to destroy. And I believe that competition is the greatest force mankind has ever known to create it.

It is competition, a free people competing based on the quality of their ideas and their capacity for hard work, and not on cronyism or their ability to get a law or regulation passed that hurts their competitors; it is competition that has lifted billions out of poverty, created innovative ideas and turned them into companies that employ hundreds of thousands of people. It is cronyism, protectionism and over-regulation that had enervated mankind’s spirit, destroying wealth and pushing people deeper and deeper into poverty.

The UK, by voting to leave the EU has made itself a global regulatory battleground in this struggle between cronyism, and competition.

Our new, independent trade policy should be built on four fundamental pillars which reflect what we can do unilaterally, bilaterally, in plurilateral agreements and in the WTO. Part of the bilateral agenda is an agreement between the UK and US while we are also negotiating an agreement between the EU and UK. We will be negotiating and will be able to sign deals in the implementation period which will begin when we leave the EU in March, 2019, just under a year from now. It is critical that our negotiations with the US and the EU are concurrent, or else there is a risk that the UK will be forced into the regulatory orbit of the EU in some fashion and there will be no serious trade deals in the future.

If that occurs a significant opportunity will be lost.

If the US and UK can agree a free trade agreement that pulls the UK out of the EU’s regulatory rotational orbit, then this will be enormously beneficial to global supply chains. Such an agreement is very much in the interests of the world as well as the UK. The UK and US face the same threat from China market distortions.  China distortions have created an over capacity of supply in the steel sector.  Our collective inability to deal with these distortions has caused people rightly to question the whole concept of trade liberalisation and its capacity to lift people out of poverty and create wealth. Hence we are embarked on a program of ever-greater regulation and an ever weakened private sector. We must reverse this process and we can.

First, a deal with the US is eminently achievable. A deal with the UK, a country at a similar socio-economic level so there can be no race to the bottom or offshored US jobs, a country where there is a balanced trade relationship is the ideal candidate for the US’s bilateral agenda.

Second, the possibility of moving a significant European power from the prescriptive and increasingly anti-competitive rule book approach of EU regulation to a more outcome, effects based system which is based on the common approaches of the UK and US to law and economics could be a significant win in this war of ideas.

Third, we are all affected by anti-competitive market distortions in China and other places, and by the actions of state-owned enterprises. The UK and US can strike an agreement which had been the hope in the TTIP – a 21st century set of disciplines that could be applied to third parties.

The US is much more likely to get the kind of deal it wishes to negotiate that lessens distortions and eliminates red tape and unnecessary bureaucracy with the UK than with the EU, because the EU’s regulatory approach is so different from the US’s. The fact that the UK will be negotiating with the US and EU at the same time will help the UK reach a better deal with the EU. It might even kickstart the failed TTIP discussions by encouraging the EU to be more compliant and reasonable – less of an outlier in its global regulatory approach.

The first two elements of our strategy should be drawn from the bilateral pillar and are the agreement with the EU and the agreement with the US.  The need for a high quality, comprehensive and liberalizing agreement with the EU is obvious. It must contain zero tariffs between the parties (as now), a maximum of regulatory recognition (building on the WTO frameworks and OECD thinking on the subject of regulatory recognition and good regulatory practice including efforts to move both parties towards pro-competitive regulation).

But the US agreement is as important. The UK and US have shared geo-strategic and geo-political interests in sectors like defense, financial services, and pharmaceuticals where our industries form part of an integrated whole. Broadening that market and becoming a rule setter for the world not a rule taker will be most important.

Together, the UK and US can push back on the tide that threatens to swamp the wealth creation efforts that have lifted so many out of poverty in the post war period. Given the direction of travel of the EU’s regulatory system towards ever more anti-competitive, prescriptive regulation, such a goal will not be achievable with the EU.

The third key element in our strategy, drawn from the third plurilateral pillar should be accession to the TPP. The TPP is one of the most advanced free trade agreements in the world. It is much more liberalising in many ways than CETA for example. UK accession should be the first step – there are many areas where we can build on and improve TPP, particularly in the areas of particular interest to the UK such as intellectual property and regulatory coherence, and good regulatory practice.

The fourth element, drawn from the multilateral pillar or strand is working decisively in the WTO. This would include speaking as an independent nation from day one of Brexit in groups like the plurilateral working group on e-commerce which has just been established. We will also want to work in the built in agenda on services, and to revive the TiSA negotiations.

The fifth element drawn from the first pillar is improving our own regulatory system, and lowering tariffs where we can. While this is generally not seen as trade policy per se, it is crucial that we take full advantage as this is where many of the gains can be derived.

We can lower tariffs on agricultural products which we don’t produce and where we don’t produce directly competitive products, thus lowering food prices and helping rural farmers in developing countries. Improving our own regulatory system does not mean a “race to the bottom” or massive deregulation. It means better regulation which does not damage competition.

We have a unique opportunity to use our independent trade policy to promote wealth creation, to lift people around the world out of poverty and to make real a world of opportunity and hope.  For too long, the UK has languished, unable to play the full part the world has needed to push for the kind of world where competition is the organizing principle. No longer. But we will need to be moving concurrently forward in our negotiations with the US, TPP accession and other countries in order to have a successful trade strategy.

In the battle for the heart of the world’s operating system – the global regulatory system, if you will – the UK has become the battlefield. If we take advantage of this unfrozen moment to have the world’s fifth largest economy and second biggest exporter of services pushing hard for competition based regulatory and trade policy, we can make help roll back the tide of anti-competitive laws and regulation around the world, and create wealth where previously it has been destroyed.

Shanker Singham is Director of the International Trade and Competition Unit at the Institute of Economic Affairs