How should UK Trade Policy respond to global developments?

Trade policy is in flux, moving from previous norms of trade liberalisation and relatively strong institutions, to fragmentation and great power competition. There are obvious tensions between US, EU, and China, and various associated policy challenges in particular on net zero and supply chains. Middle powers such as the UK whose economies depend on trade are under pressure to respond. While there’s no obvious path to success, domestic clarity and stability seem essential foundations.

Brexit and resulting domestic political turmoil have however left the UK poorly positioned to cope. Leaving the EU could and did have two opposite meanings in this context, either supporting global free trade, or retreating towards greater domestic control, a contradiction in part explaining the lack of readiness. Subsequent events starting with the election of President Trump and then the EU’s desire to unilaterally set global regulation rendered either version more difficult.

UK trade policy debate in turn became insular. A Labour Party preparing for government held a conference with scarcely a mention across many fringe events of such issues as EU carbon border adjustment, US Inflation Reduction Act subsidies, or a WTO rule set diminishing in importance. Current government policy has been largely to treat global developments as secondary to signing 2000s style Free Trade Agreements and proclaiming that free trade is a good thing the UK can lead.

Some better news for the UK among the Brexit troubles has been that many exports are not particularly affected by FTAs or fragmentation. Many services continue largely as before, such as education, finance and insurance, and sale of broadcast rights to the English Premier League. Rolls Royce engines and McLaren sports cars are global products, and we might all need more Scotch Whisky given so much bad news, though this premium product relies on strong intellectual property provisions. Notwithstanding the claims, globalisation in general is far from dead, and post-Brexit barriers affected goods more than the services in which the UK has comparative advantage.

Perhaps there is a plausible UK economy that becomes ever more services oriented, that can therefore largely ignore global trade politics, but it is hard to see this as publicly acceptable or economically optimal. A successful economy should be a broad one, attracting new investments and growing existing business across goods and services, while economic and food security would seem to demand balancing imports with domestic production, all while considering wider issues of a multi-functional trade policy like the net-zero transition, consumer protection, and labour rights.

Assuming a UK government that wanted to reorient to the world, any solution should start with the most obvious learning of recent years, geography matters. Any case for investment in new productive capacity must be helped by access to nearby markets. Without reopening political questions, there is much that can be done to reduce business transaction costs whether participating in regional rules of origin to support regional supply chain participation, aligning with regulations to reduce entry barriers and compliance costs, and easing the movement of people crucial to services.

Every trade policy action has implications, though. Aligning with regional regulations also means de facto accepting the EU’s position as a unilateral global regulator on areas like climate change. Though probably inevitable since so many UK firms will be following the Carbon Border Adjustment Mechanism, deforestation and corporate reporting regulations to name but three, being a follower will be uncomfortable even if there is some scope for variance. Worse however is to dither then follow, creating unnecessary uncertainty. There will anyway be harder choices, for example whether the UK should follow EU subsidy investigations into Chinese electric vehicles, the sort of question which may well form part of negotiations.

Then there is the US question, Brussels and Washington are trying to work together except on issues of clear disagreement like digital and food regulation. Some have suggested the UK should seek entry to the Trade and Technology Council, but that’s not likely to be available. Joining specific initiatives such as on steel and aluminium may be available, and if so the UK will probably want to join. While prioritising our own region, the UK must also retain strong US ties, which fortunately is the view of US business based here. Of course, a President Trump take two probably destabilises such efforts and global trade further, all the more reason for strong regional ties.

UK belief in free trade runs deeper than in the EU or US, which we have in common with other middle powers a number of whom are also CPTPP members. Though that agreement is outdated on modern issues like net-zero, and could indeed hamper UK responses to them, working with other members such as Japan, Singapore and New Zealand seeking to protect world trade rules makes sense. As a first step, the UK should commit to membership of the interim replacement for the WTO dispute settlement appellate body, the MPIA, having not done so previously presumably seeking favour from the US. Building further dialogues of middle powers could help, and give the US and EU something they want to access.

Subsidies for the industries of the US, EU, and China would seem to provide an existential challenge to UK manufacturing, but that is to overdramatise. Much of the money spent will go to national champions who will often use it ineffectively, and the UK has always had some public funds available for which the trick is to use it wisely as per Nissan in the 1980s. Unfortunately, it is more likely we will overpay for incumbents, but there needs to be a focus on seeking new greenfield investments or growing challengers, supported by stable regulation and enhanced regional market access.

Government and opposition alike have talked of new trade, whether digital or Artificial Intelligence, as a chance for the UK to be a leader. Rarely have they given a convincing case as to how this could be the case, or why we should be so superior to others. Buzzword bingo is no substitute for substantive policy, which is that the UK has strengths, particularly as so often in academia, research, and development of services, and should look to work with these while influencing the regulations others will set for example through our strong position in European and international standards.

No UK administration can escape the politics of relations with China, too large and integrated into world trade to be ignored, but with the US trying as a matter of policy to change that, and China itself becoming more restrictive. France, Germany and the UK would seem to have the same view of this challenge, to keep seeking trade and investment links while also having to pull back at times due to national security, China’s own rules, or US pressure. Particularly as the UK is likely to remain a heavy goods importer with a population demanding high levels of quality, our economy will not benefit from removing China as a potential supplier, but we must also avoid any over-dependence. In general, governments should not control supply chains, but need to increase awareness of them.

There is much more a UK government has to consider, from trade with developing countries to a level playing field for domestic farmers. Much of this is less about economics and more about values, all part of the multi-functional trade policy that is now a reality for all developed countries. This would be quite a change after a UK government which has largely ignored global realities for the last seven years, and seen problems mount up as a result. Yet, solutions won’t come immediately either.

There seems to be a tension in modern politics, certainly in trade, between the populist simplist wrong solution and the complex incremental slow one. There isn’t going to be an easy path for any UK government, and Labour if they do come into power will need a proper plan to address this. Set against global turmoil and the past seven years, predictability, values that include relatively free trade, and regionalism will be a reasonable place to start.