Unresolved Brexit contradictions constrain UK trade policy

Introduction

Six months after leaving the EU’s Customs Union and Single Market, and five years after the referendum to leave the EU, the UK’s trade policy is fully operational. Yet there is something rather provisional and unsatisfactory about its operation to date, and not just in terms of judging outcomes.

It can at times feel like UK trade policy is a simulation. Otherwise the prioritisation given to tariff reduction, extended through the flagship policy of freeports, would be both dated and inappropriate for the world’s second largest service exporter. The claims of leading the world in free trade would be ridiculous from an administration that has put up trade barriers more than any modern predecessor. The denial of potentially adverse impacts, say to farmers as a result of unconditional Australian imports, an obvious store of future trouble.

The need for Brexit to be a success dominates and distorts UK trade policy. It requires regular success stories, of new agreements or tough talk. The content is largely secondary at best, except where that in turn shows Global Britain outside the EU thriving.

The classic example is the volume of trade agreements. The fact virtually all were replicas of EU agreements, in some cases downgrades, is less important than their existence. The failure of new agreements with the EU and Australia to obviously advance UK interests is similarly deemed less important than their happening. The lack of significant progress in areas of UK strength like services, or the chance to break new ground in environmental trade, similarly appear due to the need for quick successes.

Yet the real world intrudes, and contradictions grow as it does. As we would expect UK-EU trade appears to be reduced by the new barriers, as yet without compensation elsewhere. Businesses want to protect EU trade before exploring global opportunities. Stakeholders demand action to protect farmers or animal welfare. These fit poorly into the success narrative.

Ultimately given the political importance of one iconic Nissan car plant and their threat to depart, this has meant an EU trade deal and not breaching the Northern Ireland protocol. The government however feels unable to admit this.

The changing global trade landscape provides similar challenge. China is both a very large potential market and investor, and treated with grave suspicion by many UK MPs. Balancing both to demonstrate global Britain is difficult. The US is moving away from FTAs towards protectionism and cooperation over China. This has shifted UK focus to joining CPTPP, but the political and economic impact is less than a US FTA would have delivered.

The priority to claim Brexit success while ignoring the contradictions within leaves little space for innovative policy development and honest stakeholder conversations. Slowly such trade policy issues start to be discussed in Parliament and the media, though still too often superficially, and too often through a lens of being for or against Brexit.

Thus as we return to the framework we first established in 2018 to assess UK readiness we find progress remains frustrating. While Brexit continues to dominate there has been far too little substantial engagement with the trade realities of 2021, and what trade policy should mean to a country like the UK.

Consensus

When looking at countries with successful trade policy we typically see this reflecting a broad range of support across the political aisle, allowing the government to engage externally with confidence. In the UK we see little of this regarding any aspect of trade policy.

Without agreement the government has fallen back on a basic approach of signing Free Trade Agreements removing tariffs to demonstrate success. However this has already seen criticism from those in various sectors including financial services and fishing who felt the EU agreement did not help them, and farmers now object to the full lifting of tariffs in the Australia FTA. Across business the confidence in government activity appears to be falling.

The absence of consensus can be traced to the continuing divide over trade relations with the EU, as pronounced as at any time in the last five years. Roughly half the population are generally resistant, the other half would want to see closer ties or membership. Government is in the first camp ideologically, fearing reversal, but in the second economically when a crucial interest is at stake without admitting as much. That is a difficult basis on which to build consensus.

There is little alternate debate. The Scottish government published a very good trade strategy, but has little influence and may be signalling more the priorities of an independent Scotland if that were ever to happen. The opposition Labour Party question without much by way of strategy, and prefer not to mention Brexit.

If there is one positive, the UK remains comparatively trade friendly in public debate. This at some point ought to be the basis for a trade strategy enjoying wider support.

Clarity

Most established players in trade negotiations have clear and detailed goals laid out in some form of trade strategy. The UK government’s broad aim of showing the success of Brexit is proving insufficient without a detailed trade strategy.

The prioritisation of tariff free trade, often seemingly in an homage to the UK’s glory days of the 19^th century, has unsurprisingly led to significant new non-tariff barriers with the EU in particular, in the rather different trading times of today. The full removal of agricultural tariffs in an Australian deal, without apparent conditions, is proving controversial not least as it is hard to see the benefits in return. Joining the CPTPP seems more attractive as a structure containing a number of countries relatively committed to free trade over what would be a limited economic gain.

There have been welcome moves to ease some of the UK’s aggressive hostility towards inward labour, more of which would be welcome. This could usefully come as part of further consideration of the UK’s major services strength, for while open data provisions are welcome they surely cannot be the limit of ambition. But while the UK may have the teams in place, as yet there is little policy space for such innovation.

Transparency

The UK government continues to make small steps towards greater transparency over trade policy. Publication of objectives ahead of negotiations has been welcome, as has a commitment to parliamentary debates after signing of a deal. A restructured system of advisory groups has been set up primarily for business input.

However this remains some way short of transparency best practice. Business, devolved governments and MPs have all complained of a government that appears to go through the motions. Failing to disclose a forecast GDP growth figure for CPTPP presumably because it was too low showed more concern with the Brexit success story than meaningful engagement.

The concerns about the Australia trade deal have been amplified by apparent secrecy, as predicted. The same could perhaps be said of a decision to remove safeguards on steel that was then overturned. This current government seems unlikely to change tack, but the necessity of doing so will become ever more obvious.

Fairness

Trade and development was always a strength of the UK government, but little has been said on the subject since 2016. Existing unilateral preferences schemes and trade deals with developing countries were replicated, though with some delay in a couple of cases. Of more recent concern has been the preference erosion resulting from the Australia deal.

In this context fairness is also about a trade policy that works for smaller as well as the largest companies, and here progress is also rather shallow. New UK FTAs have a small business chapter, but without any meaningful commitments. At present this looks like an opportunity missed.

Future Focus

Modern trade policy should move beyond sterile debates on agricultural tariffs into the new economy, though in the US and EU that is also including strong elements of protectionism. The UK should have been well positioned to take advantage of its blank slate, by for example finding new ways to approach digital and services policy, or by linking preferential tariffs to climate change or animal welfare. It has so far not done so.

This is exemplified by the decision to join neither of the New Zealand led plurilaterals, the Digital Economy Partnership Agreement nor Agreement on Climate Change, Trade and Sustainability. Regulatory cooperation is another area of particular concern, given opting out of European regulatory bodies may lead to a loss of participation in European industrial supply chains. Vague chapters in FTAs are no substitute for innovative trade policy, but again the need to show quick success seemed more important than longer term thinking.

Implementation

Concerns were previously expressed that the UK would fail to meet an ambitious programme of replicating trade agreements given short deadlines, but in the end with thanks to Brexit extensions they proved unfounded. There was some inevitable loss of market access with close EU-related markets, and a few variations elsewhere, but this was a success for diligent trade policy officials across government.

More difficulties lie ahead, not least as Australia, New Zealand, and accession to CPTPP represent the low hanging fruit of Free Trade Agreements. The US is no longer sure it wants to pursue them and talks are thus on hold. The chances of quick success with India or other countries looks low. There will be renegotiations with Canada, Mexico, and South Korea, though without high hopes for significant additions.

In the mean-time political pressures are likely to rise. New barriers to UK services exports may become more obvious after covid restrictions end. Protectionist demands are rising. There is a strong lobby opposing increasing trade and investment ties with China. Maintaining momentum is likely to prove difficult.

Conclusion

It is hard to reach any other conclusion about UK trade policy than it urgently needs a coherent and detailed strategy beyond making Brexit a success. Without this it is unclear for what purpose trade agreements such as that with Australia are pursued, and issues like services are barely being addressed. Such a strategy would have to be underpinned by a true commitment to transparency, as business and other organisations have repeatedly demanded since 2017.

However this cannot happen until the government, to use a phrase they often use of others, get over Brexit. Global Britain cannot replace lost EU trade. The government has tacitly accepted this in the case of Nissan, but doesn’t wish to admit as much. It even less wants business to say so openly, precluding on both sides an open conversation.

Only when this changes, and when the UK-EU relationship is normalised, can a UK trade strategy truly emerge. That does not necessarily mean a closer relationship, but a stable one. Right now that may look rather distant, but at some point it will happen. Until then, though, UK trade policy is going to remain overshadowed and oddly virtual, being a sideshow to the real issue.

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Further reading:

https://ecipe.org/publications/assessing-uk-trade-policy-readiness/

March 2019 – Assessing UK Trade Policy progress – https://ecipe.org/blog/assessing-uk-trade-policy-progress/

July 2020 – Ambition on Unstable Foundations: The UK Trade Policy Readiness Assessment 2020 https://ecipe.org/publications/uk-trade-policy-readiness-assessment-2020/