The United Kingdom is doing two things in trade policy terms. First, we are leaving the European Union. Second, we are embracing the rest of the world. We must do both of these things well. I fully acknowledge that this will not be an easy journey, but the fact that it is difficult does not mean it is impossible.
The global trading system is in crisis. We have had no serious global round for 23 years, about a third of the lifetime of the post-war economic architecture. In 1997, you would have been quite optimistic – looking out at future services’ liberalisation, having just concluded a basic telecoms agreement, with financial and energy services up next, including disciplines on domestic regulation and competition. But the subsequent 20 years yielded virtually nothing in terms of concrete liberalisation. This is one of the reasons that global trade plateaued in 2015 according to the Global Trade Alert of the University of St. Gallen, and why regulatory protectionism has massively increased since the financial crisis.
Let me start by setting out three objectives that I believe our trade policy must satisfy: i) Improving our own domestic economy – the ability to improve our own domestic regulatory and trading environment; ii) Improving our trade relationships with the world – close trading relationship with EU countries is pivotal, but so are closer trading relationships with countries in the rest of the world; iii) Playing our part – as a major trading nation we should play a role in improving global economic governance by contributing to structural reform and the elimination of barriers and distortions.
The challenge is to define what trade policy would achieve such goals and how we can maximise the benefits while minimising the disruptions. For business, the critical question is what you want the world to look like, not just the EU-UK part of the supply chain. The entrenched incumbent forces of business and managers of the UK-EU supply chain will not want much change. But government must speak not only for incumbents, but also for small businesses, for future businesses, and for consumers. I believe we need to build this trade policy on four pillars which must be built concurrently.
First, we can do a lot unilaterally. Britain needs the autonomy to be able to improve its regulatory and trading environment, given that the EU is no longer a force for global liberalisation. We have only to look at the possibility of REACH-style regulation all around the world: the General Data Protection Regulation, financial services regulation and the Brussels effect, where firms choose the most stringent regulations to comply with for ease. In agriculture, the ferocious interpretation of the precautionary principle has thwarted new technologies, and prevented non-EU firms from reaching the EU market, including the UK. This is wealth-destructive, and increases prices for consumers.
Regulatory autonomy does not mean massive deregulation. It means better regulation – the kind that delivers benefits for consumers, and firms, and is not unduly burdensome and costly. It also means being free to reduce our own tariffs where it makes sense in order to give consumers the benefit of cheaper products and more choice. This is particularly important for the poorest among us.
Second, we need to have a close relationship with the EU – a comprehensive free trade agreement that will cover goods and services, and will also cover regulatory issues including recognition. It is not a binary choice here as it is often portrayed. I believe that the EU and UK can and will come to such an agreement.
Why do I believe this is possible? Because both the UK and EU-27 will have identical regulation, and there is too much aligned interest for this not to happen. We are not negotiating in a vacuum. There are existing frameworks in the WTO and the OECD where countries have basically agreed that regulation should be the least anti-competitive and least trade-distortive, consistent with the regulatory goal, and that differences in regulation should not defeat recognition if regulatory goals are aligned.
Furthermore, the EU’s opening bid (we cannot recognise you unless you have identical rules) is only an opening bid. Their opening bids are always well beyond their bottom line. Our ability to do bilateral deals with other countries will strengthen our hand in negotiating with the EU. This is why an agreement with the United States is so important.
While naturally much of the focus has been on our relationship with the EU, whatever we do with the EU will materially affect what we can do with the rest of the world. So third, we must be able to accede to large platform agreements which are truly liberalising such as the Trans-Pacific Partnership (TPP). And we must be able to do so within a reasonable time frame.
If we lock into the EU’s regulatory system, other countries will not be able to do deals with us. However, this is not a binary choice between the EU and the rest of the world. We must minimise the trade costs of divergence from the EU’s regulatory system, while allowing ourselves the regulatory autonomy necessary to convince others that we can in fact diverge from EU norms so that they will be able to do deals with us. If we cannot offer this, we will just present like a mini version of the EU, with all its defensive baggage and complication. A reasonable time frame means we must be able to not only negotiate, but also sign deals in the implementation period. Other countries must believe we can offer liberalisation in the future; and the future is quite close.
We must consider trade policy, not just in commercial terms, but in geo-strategic and geopolitical terms. In the global battle between state-led capitalism and a market-led one, the UK could be a key player. Hence, the fourth pillar of this trade policy is that we need to operate decisively in the World Trade Organisation (WTO), to galvanise the stalled trading agenda, and to improve economic conditions around the world.
As the world’s second largest exporter of services and one of the world’s largest foreign investors and sites of foreign investment, the UK with an independent trade policy will make a difference in WTO councils. If you had to invent a country to galvanise those stalled processes, this is the one you would invent. My discussions with other countries’ trade negotiators suggest that there is great appetite for anything that might break the logjam. The rest of the world expect the UK to play an important role in the WTO to reduce barriers, and would be surprised and disappointed if we did not.
British firms will benefit massively from a reduction of these barriers. Our service providers will be able to open offices and trade in countries where this is not currently possible, and our manufacturers will be able to sell more in previously difficult markets. All of this means we cannot be in the (or indeed a) Customs Union or the Single Market. We must have control of our tariff schedules and control of our regulatory system. But we can have a comprehensive trade agreement with the EU, and be able to have deals with others, work decisively for change in the WTO, and improve our own domestic environment. I believe that our country is capable of harnessing its many talents in the private and public sectors and delivering a successful result. I am confident that we will succeed, and I am confident that a bright future lies before us.
Shanker Singham is the Director of the International Trade and Competition Unit at the Institute of Economic Affairs. This article first appeared in Bright Blue’s latest Centre Write magazine Global giant?