Britain’s historic opportunity to trade

September 21, 2016

British Trade Ministers must be the envy of all Trade Ministers.

In theory, they have a clean sheet of paper to write a new policy unencumbered by their predecessors’ baggage.  There is nothing to undo or modify.  They need not spend precious ministerial time negotiating with interest groups seeking to protect existing trade policies against the national good.

They are also fortunate to represent one of the more liberal-minded countries in Europe with a relatively open economy.

At first, however, they have to deal with two threshold issues: one is what to do about Europe and the other is the UK’s schedule of goods and services commitments in the World Trade Organisation (WTO).

The EU’s real position is unlikely to be revealed at least until the UK submits its Article 50 notification.  This gives the EU leverage over the UK to ensure it moves sooner rather than later as the UK can do little else until this occurs.  The EU has made its preference for an early notification, some time in 2016, clear.

At the outset, the British Government would do well to reject suggestions for a UK-EU customs union.  Under a customs union, Brussels would still control the UK’s trade policy.  The UK’s tariffs would be set at the same level as the EU’s and subsequent adjustments would be made by Brussels. The UK would also be denied the opportunity to negotiate free trade agreements with other countries, while continuing to carry the costs of the EU’s protectionist baggage.

Loss of tariff free access to the EU common market would for a time have costs.  Their extent, however, would depend on the type of arrangement the UK makes initially with the EU, including a potential free trade agreement (FTA), and subsequently with other trade partners. Outside of the EU single market and its relatively high common external tariff, the UK would be able to cut tariffs. Lower tariffs would free UK consumers to buy foreign goods from outside the EU more cheaply.  Cheaper imports from non-EU countries would mitigate the loss of welfare from leaving the common market.

As for the WTO, while legally a member in its own right, the UK will need to reach multilateral agreement on its post-Brexit schedules of goods and services commitments.  These newly agreed schedules would also be the starting points for negotiating FTAs.

The WTO has clear rules that allow its Members to form customs unions, even if this requires changes to their scheduled commitments.  The WTO doesn’t, however, have rules on how to deal with a Member that leaves a customs union.  It has never needed any.  For this reason, it’s unclear how the UK will be dealt with by the WTO post-Brexit.

Two schools of thought exist.  One proposes a minimalist solution: the UK simply adopts the EU’s commitments and schedules them as its own.  The “delete and replace” approach simply deletes EU and replaces it with UK.  This could be the simplest approach to dealing with tariffs, but it would also require a negotiation with the EU and WTO Members over how the EU and UK would share their import quotas and caps on agricultural subsidies.

The other possibility is more complicated.  WTO Members might insist that the UK cannot inherit the EU schedule but must negotiate new market access commitments with the other 163 members.    Protracted negotiations would be likely, though the UK could expedite these by accepting higher levels of commitments than it has today under the EU schedules – meaning it would need to open its economy further than it is at present.

Under “delete and replace”, the British Government could soon contemplate an extensive list of potential free trade partners. While there have been reports that the European Commission could impose fines on the UK simply for talking to other nations ahead of a formal Brexit, in my experience all FTAs involve extensive preliminary discussions which fall well short of the formal negotiations that would breach the UK’s existing treaty obligations with the EU.

The more immediate concern is that the UK is bereft of experienced negotiators having not done its own trade negotiations for 43 years. The trade department has begun to recruit a new staff for this work.  Any trade agreement, however, is labour intensive so the UK can expect to be constrained for some time.

For geopolitical reasons, a free trade agreement with the US should top the trade minister’s list.  Unfortunately, both US presidential candidates are competing over who is the more protectionist. Starting a negotiation early is not an option.

Instead, the British Government could take up offers extended already by Australia and New Zealand to commence talking about a trade agreement as soon as the UK is ready.  These free trade agreements would provide substantial benefits to UK consumers, mainly through cheaper agricultural products. They would also provide invaluable training in the art of negotiating trade agreements.

Tactically, given their strong liberal traditions, the UK should aim to achieve high-quality trade agreements with Australia and New Zealand.  The UK should use these early agreements to set the standard which future partners will be expected to emulate.  At a time of rising protectionism, a network of free trade agreement negotiated by the UK should be a model of international good practice.

Theresa May’s Government has an historic opportunity to shape the trade policy of a major economy and reinvigorate the waning liberal trade agenda.

Dr Geoff Raby is Head of Trade Policy at Policy Exchange and former Australian Ambassador to China and the World Trade Organisation. Dr Raby will be writing on a regular basis for Policy Exchange about the UK’s trade strategy post-Brexit.

Join our mailing list