Brexit

Hard Brexiteers are being mugged by reality on trade

BY Ben Kelly | thescepticisle   /  6 July 2018

A rigid ideology is impervious to facts or common sense and the hard Brexiteers exemplify this perfectly. All the facts thrown at them about the consequences of a ‘no deal Brexit’, the inadequacy of a CETA style Brexit and the perils of regulatory divergence from our most important market, fall on deaf ears.

As the Cabinet have it out at Chequers, one of the central arguments will be over whether we sign up to regulatory ‘alignment’ and to what extent we will be free to diverge from the EU regulatory regime in the future. The further we diverge, the more trade barriers there will be for our exports into the European market, increasing the costs and red tape for British businesses. This, according to hard Brexiteers, will be made up for by signing deals with countries around the world, with the USA being the main target.

Regulatory alignment with the European Union, our most important trading partner by far, may hamper our efforts to negotiate a bumper trade deal with the USA and this is one of the main reasons hard Brexiteers champion divergence. The thing is, it makes no sense to choose to increase trade barriers with the EU for modest trade facilitation with the USA. There is no logic to it at all.

The US regulatory regime is very different to ours and we need to maintain compliance with our most important trading partners in Europe. Canada, for example, maintains alignment with the USA – which restricts their market access to Europe, but they prioritise compliance with their closer and more important market, just as we must.

A frequent reply I receive to this is that our exporters can ‘simply’ comply with US standards when they export to the USA and with EU standards when they export to the EU. Simples. Actually, no, it isn’t that simple. The benefit of the Single Market is that our regulations are harmonised with other EU Member States. Thus, it can be assumed that goods exported from the UK conform to the relevant standards and therefore do not need to be inspected, assessed and tested. The further we diverge, the higher the inspection rate, meaning delays at the border.

Moreover, if we accept imports that don’t meet EU standards then we will likely face more border checks for our exports to prevent said imports entering the EU market. Chlorinated chickens are the product discussed the most here, bizarrely becoming an imagined major prize of Brexit. If we accept imports of chlorinated chicken then, yes, consumers will now have the choice to buy chicken from the USA. However, our poultry exports will face increased inspection rates as the EU moves to prevent its ecosystem being contaminated by chlorinated chicken. So, as we benefit from cheaper imports of agricultural goods we will face decreased market access to our most important trading partner. The disadvantages outweigh the advantages.

A comprehensive trade agreement with the USA is simply not going to happen. Nothing in our negotiations with the EU should hinge on this. We ought to put it to the back of our minds. Our regulatory regime is incompatible with the US and it would be ludicrous to completely change our own to match theirs. Again, Canada would not completely pivot its regulatory culture to match the EU because that would be madness.

There is a reason why TTIP failed. It’s extremely difficult to work towards convergence and mutual recognition when the two regimes are so different and well established. If we attempt to negotiate our own agreement we will be up against a regulatory super power with strong protectionist instincts, they will not budge an inch and will expect the UK to be the one that budges to comply with its own standards.

In the end, it is in our best interest to remain in alignment with the EU. Far from hampering our trade, complying with stringent EU standards will maximise our access to markets across the globe. Countries all over the world are adopting global standards, many of which are heavily influenced by the EU, which is a major player in the global network that formulates standards where much regulation at a national level is derived from.

The US is largely stubborn about changing its own regulatory codes and adopting global standards. It has a huge home market to sustain it and it has been resistant to international efforts to harmonise regulation, this is not about to get better under Donald Trump. A President adopting a “America First” policy is not someone that is going to be good to do business with. He is not going to be an ally in any attempt we make to advance the cause of multilateral trade or kickstart the WTO. He is not going to be concerned with opening up the US market in the name of free trade. This shyster will want to fleece us.

The idea that we will be treated favourably by our “friend” is a bad joke. With an infant trade policy and a newly hired team of negotiators, do Brexiteers really think it’s a great idea to have our first attempt at negotiating our own trade deal to be with the world’s largest economy, which has a team of highly experienced and ruthless negotiators, who know we are gagging for a deal? They would only need three negotiators. One to slide their terms towards us, another to bend us over and the other to…

Ultimately, we may end up with a Free Trade Agreement with the USA that allows us to save face and strengthens relations through a symbolic gesture, but it will not be deep or comprehensive. It will be far more basic than what is currently being discussed and it will not greatly increase trade between us. Sam Lowe of the Centre for European Reform, and of the UK Trade Forum, has proposed a ‘very optimistic’ estimate of a 0.35% increase in UK GDP in the long run from a good trade deal with the USA. Worth doing perhaps, but small beans and certainly not worth jeopardising trade with the EU over.

The fact is that there’s a limit to what Free Trade Agreements can achieve, they are relatively basic frameworks for trade and they are often under utilised by businesses. Without harmonisation of rules, joint regulatory architecture managed at a supranational level and a robust institutional framework there is little else to do but lower tariffs, which reduces costs somewhat but leaves technical barriers unaddressed.

The UK would be better off focussing its trade policy in pursuing agreements with countries already in the process of converging with the EU and becoming an advocate of multilateral trade at a WTO level. Our best bet for getting a major agreement with the US will be aiming to participate when/if TTIP is revived in the future. Trumpism won’t last forever. Another crucial element will be linking our trade and aid policy and working closely with developing countries to help them work towards adopting global standards and enter the international trading system.

The first step of Brexit Britain’s trade policy must be securing a close relationship with our most important partner, the EU, which will remain our most important trading partner after we leave.