Brexit

A good UK-EU trade deal is good for the world

BY Shanker Singham   /  6 September 2016

Theresa May is under great pressure at the G-20 to ensure that the Brexit process is properly handled with minimal disruption to the UK-EU relationship. The Japanese foreign ministry has helpfully drafted a message to both the EU and UK, stating what it needs out of the negotiation. Countries around the world are realizing and expressing the costs of a badly-handled Brexit negotiation with the EU by either party, and its potential harm to the global economy.

There is less understanding of the benefits and opportunities to these countries that Brexit creates. In many areas Britain, operating outside the European Union can actually be a better ally for the free trade ideas that the Japanese inter-pleader raises. For example, having a separate and unique British voice in the WTO’s Trade in Services Agreement negotiations could give those negotiations a much needed boost. This would, in fact supplement the EU’s own negotiations in the TISA, and help it achieve its external objectives.

In addition, some of the ongoing trade negotiations, including ones that Japan is a part of, are on increasingly rocky ground (such as the Trans-Pacific Partnership which is increasingly looking like becoming a victim of US partisan politics in the build up to the US election). The Brexit moment allows the UK to act as a catalyst to unblock some of these agreements.   

However, the Japanese note does expose a fissure in the approach of outsiders to the UK’s arrangements with the EU and the UK’s own and particular interests. There is much to laud in the Japanese memo when it comes to ensuring that Brexit does not lead to a rise in protectionism in the UK or in the EU. But there is an additional strand which seems to want the same regulatory system in both regions. This might very well suit Japanese manufacturers and service providers at first, but if that regulatory system is in fact anti-competitive it would harm them going forward, and would additionally harm UK and European consumers in both the short and long run.

Many countries’ exporters would like to see the same rules applying in the UK and the EU. This certainly simplifies the manufacturing process, but there is a cost that increases the further the regulatory system is from an optimized one in terms of open trade, competition on the merits and property rights protection. While the harms of this would be visited on the British and European people who labour under these anti-competitive rules, it is not true to suggest that Japanese or other country producers are not affected by them. Economic interactions are non-zero sum in nature, and so if the regulatory system is distortive or damaging to competition, Japanese and other country producers will simply sell less in Europe and the UK than they would if the market was pro-competitively regulated. It is extremely short-sighted to assume that the only damage as a result of Brexit would be from different regulatory systems between the UK and Europe.   

One of the reasons that countries like Japan and others were so anxious for the UK to remain in the EU was that it was widely recognized that the British voice in the EU was often the lone pro-free trade voice, a voice that argued against rising protectionism within the EU bloc. Without the UK, it is certainly true that much European statism and dirigisme will go unchallenged. This undoubtedly will affect the EU’s trading partners. Like the UK, they will also have to ensure that their interests are protected in the block itself.  Given this it is not surprising that certain countries like Japan are arguing for the best possible agreement between the UK and the EU.

The Legatum Special Trade Commission has also called for the best possible agreement between the EU and UK. But there is a mythology that has emerged about the landing zone for such a negotiation. Talking about hard and soft Brexits, or EEA, Norway or Swiss options, misses the fundamental point of a trade negotiation. What the UK must do is identify its key interests, what those industries and firms need to be able to do in the EU markets, and then negotiate for the preservation or expansion of those rights. Since 83% of UK exports at this time are services, clearly services liberalization will be a major goal of UK negotiators. In order to deliver this deal, the UK will have to have other potential deals in the pipeline ready to be launched at or very soon after the withdrawal agreement from the EU is signed, and the new arrangements put in place. Without these other deals in the pipeline, it will be harder to get a good deal from the EU.  

What is often forgotten in these discussions is that industries from continental Europe need access to the UK market as well. In a world of competing global supply chains, there is a premium on lowering inefficiency, and leveraging the wealth creating potential of a minimum of regulatory “sand in the gears” of these supply chains. There is simply too much at stake for the UK, the EU and the rest of the world for this process to be handled badly.

Ultimately the UK will make its own decisions based on its own interests.  Those interests require it to be a central node in a network of trading relationships and trade agreements. In doing so, it can be a catalyst for global growth, and a powerful voice in the corridors of the G-20, the WTO, and other multilateral arenas for free trade and competitive markets. Such a voice has been too long missing in these councils, and is necessary if the world is not to slip back into recession, or to be condemned to sluggish growth for the foreseeable future.