Will Brexit Be about
Free Trade or Protectionism?
The motivations for the UK leaving the EU were complex and
varied, and many issues played a role. In the area of trade policy,
it is difficult to discern a single view among those supporting
Brexit. Some Leave proponents have hinted at protectionism, whereas
others were strong free traders.
On the protectionist side, UK Independence Party (UKIP) leader
Nigel Farage noted that leaving the EU would offer greater
protection against China’s dumping of steel. He also
complained about EU procurement laws, stating: “Whether we
are building a warship or whatever it is, under EU rules we have to
tender this out to German companies and French companies as
well.”2 On the free trade
side, by contrast, economist Patrick Minford, a member of the
Economists for Brexit group, argued for cutting import tariffs to
zero immediately after the vote.3
So how will this conflict between supporters of the vote to
leave the EU be resolved? There is a tradition of free trade within
the UK. The repeal of the Corn Laws in 1846 is still held out as
one of the great examples of unilateral free trade. In today’s
political climate, pure free trade of this sort is difficult to
achieve. Nonetheless, hopefully the post-EU leaders of the UK will
draw on the views of their ancestors, and try to keep the UK as a
champion of free trade. When there are choices to be made as to
whether to be protectionist or not, the UK should err on the side
of openness and liberalization.
Negotiating New Trade
Treaties
These days, however, free trade is largely an international
issue. Governments negotiate mutual reductions in trade barriers,
with international agreements to enforce their commitments.
But there are many models for these negotiations, with different
countries taking different views about what a trade agreement
should involve. The UK has a blank slate in front of it and thus
has many options available.4 The
two most important questions for future UK trade agreements are:
(1) With whom should the UK negotiate? And (2) what should it
negotiate about?
Whom to Negotiate
With
As noted, the UK will be negotiating a new relationship with the
EU and with other European neighbors. This is not in doubt. There
are questions, though, about how the UK should select other trade
negotiating partners.
To maximize the value of its initial trade negotiations, the UK
should think about several factors: (1) Which countries have the
most to offer in terms of a substantial economic relationship; (2)
with which countries would the negotiations be the smoothest; and
(3) which countries would involve the least external controversy in
a trade negotiation.
To achieve the greatest economic gains, the UK should look for
fairly large economies as negotiating partners, so as to maximize
the impact of its initial negotiations.
To ensure a speedy and smooth negotiation, the UK should look
for countries with whom it shares cultural ties and/or political
values. Trade negotiations often get bogged down in various
disagreements. Having a good overall relationship can help minimize
this.
And to minimize controversy, the UK should avoid, at least for
its initial trade negotiations, trade agreements with large
developing countries, whose cheap labor is seen by some as a
threat. This is a political reality, rather than a rational
economic assessment.
With this guidance in mind, and weighing and balancing all of
these factors, the best candidates for the initial trade
negotiations would be Australia, Canada, New Zealand, and the
United States; and perhaps developed countries such as South Korea
and Japan. These countries maximize the potential value of an
international economic agreements; the agreement could be done
relatively quickly, and they would minimize any controversy. Of
these countries, Australia and New Zealand are likely to be the
ones most open to fully liberalized trade. Some of the others might
resist full liberalization, but the size of their markets makes
them important nonetheless.
With regard to developing countries, one possible exception to
their initial exclusion would be a North Atlantic trade agreement
that included Mexico in addition to Canada and the United States.
But as a general matter, if the UK wants to complete trade
agreements quickly and without controversy, large developing
countries may have to wait a bit. China and India, for example,
offer great possibilities. Unfortunately, negotiations with these
countries will lead to objections from a range of
groups.5
What to Negotiate
About
Perhaps the most important question for the UK in deciding on a
new trade agreement policy is what to negotiate about. Ongoing
trade negotiations such as the Trans Pacific Partnership (TPP), the
Comprehensive Economic and Trade Agreement (CETA) between Canada
and the EU, and the Transatlantic Trade and Investment Partnership
(TTIP) have dragged on for years. The UK should try to avoid a
process that takes five years or more. A quick agreement done in
one or two years would be preferable.
To achieve this, the UK should consider a streamlined approach
to negotiating trade agreements that focuses on core trade
liberalization issues and leaves out the more complex and
controversial regulatory and governance issues that have led to
delays in other trade negotiations.
To get a sense of this, consider various chapters in the CETA.
There are chapters on technical barriers to trade and sanitary and
phytosanitary measures, which mostly duplicate what already exists
at the WTO. There is a chapter on investment, even though
investment barriers between Canada and the EU are limited. And the
investor state dispute settlement mechanism engenders great
controversy, without clear evidence that it actually encourages
investment. There is a competition policy chapter that achieves
very little. There is a chapter on intellectual property, even
though the benefits of intellectual property protections that go
further than what already exists are questionable, and including
such chapters in trade agreements has been controversial. And there
are chapters on sustainable development, labor, and the environment
that stray far beyond trade liberalization.
Instead of the broad global economic governance agreements that
have become the norm in the trade negotiating world, the UK should
negotiate trade agreements that focus on trade liberalization. They
should cover tariff reductions, services liberalization, and
opening procurement markets. There should also be a placeholder for
negotiating future mutual recognition agreements for trade in
specific goods and services.
With regard to tariffs, the UK should be bold and propose zero
tariffs on all products. Trade negotiations can get bogged down in
balancing out the demands from each side for continued tariff
protection and in determining how long phase-out periods should be.
However, the simplest and most beneficial tariff policy is to
remove all tariffs as quickly as possible. Certain trading partners
may resist, but UK trade negotiators should take zero tariffs as
the starting point. If the UK is willing to eliminate all of its
tariffs, it sends the right message about its seriousness in the
negotiations and will, hopefully, lead to trading partners
reciprocating with zero tariffs of their own.
Services are traded differently than goods, and the barriers
tend to be regulatory in nature. That makes services negotiations
inherently more controversial than simple tariff lowering. With
services trade, the UK should focus on particular areas that are
less sensitive. As an example of a controversial sector, the TTIP
negotiations have been undermined by concerns that the UK’s
National Health Service could be subject to challenge by U.S.
healthcare companies. The UK should make clear at the outset that
regulations and policies such as this are not going to be covered
by a trade negotiation (although domestic reform of the National
Health Service would be welcome). It needs to establish general
principles and specific rules that leave no doubt about this.
A cross-cutting area, which covers both trade in goods and
services, is government procurement. Many trade agreements in the
past have been successful in opening procurement markets to
competition from foreign providers. The UK should also push hard in
these negotiations to open its market and those of its trading
partners.
Beyond these core issues, there is the potential for mutual
recognition of domestic regulations related to product standards
and services qualifications, under which goods and services that
satisfy the regulations of one country are deemed to satisfy those
of other countries as well. But trying to negotiate these issues
comprehensively has proved extremely controversial in the TTIP
context, and is unlikely to have greater success in UK trade
negotiations. Instead, the agreements should merely refer to the
possibility of future discussions on specific products and
services, and leave this issue for a later date.
By keeping trade negotiations simple and focused in the ways
described above, the UK can push quickly for significant trade
liberalization, without the process getting bogged down, either
during the negotiations or subsequently with the domestic
ratification.
A Chance to Remedy Trade
Remedies
One final area where the UK has an opportunity to be bold is
trade remedies, which covers antidumping, countervailing duties,
and safeguards. Ideally, the UK would use these measures in a very
limited manner, or even not at all, as part of its domestic trade
regime. But practically speaking, these trade measures are a core
part of today’s trade policy world, and it is unlikely the UK will
abandon them.
However, what is possible is that, for its trade relations with
close trading partners, the UK might consider a mutual decision not
to apply trade remedies. There is precedent for this in various
free trade agreements, such as the Australia-New Zealand Closer
Economic Relations agreement, in which Australia and New Zealand
agreed not to apply antidumping duties against each
other.6 Anti-dumping laws are a
particular problem in trade relations, and have been criticized for
their lack of economic justification.7 The negotiation of new UK trade agreements
provides an opportunity for reform, as allegations of
“dumping” often focus on competition with cheap labor
in developing countries. With trading partners who are at similar
development levels, it may be possible to escape the usual
arguments about fear of low-priced products.
With regard to the potential trading partners mentioned above,
the United States is the least likely to agree to such a proposal.
However, as noted, Australia and New Zealand have already agreed to
this between themselves. And Japan was traditionally only a limited
user of trade remedies (although it has increased its use in recent
years). Thus, there is a chance that if the UK proposed the
elimination of one or more trade remedies, some of these countries
might agree.
Conclusion
The UK faces some difficult tasks in terms of formulating a new
trade policy. First of all, it needs to hire trade negotiators.
While there are some UK government officials who have expertise in
this area, this type of work has been largely farmed out to
European officials for decades. The UK needs to start from scratch
to a great extent, which could slow down its progress.
But it will put a team in place eventually, and that team will
be faced with many difficult choices. In this short paper, I have
tried to kick off the debate by suggesting some general ideas for
how the UK might approach the negotiation of trade treaties in a
manner that draws on its tradition of free trade. In the coming
months and years, after the UK sorts out its trade relationship
with the EU and takes back competence over trade
policy,8 the specific details will
continue to be fleshed out.
NOTES
1. For some discussions of this process, see Alan
Matthews, “WTO Dimensions of a UK ‘Brexit’ and
Agricultural Trade,” CAP Reform, January 5, 2016,
http://capreform.eu/wto-dimensions-of-a-uk-brexit-and-agricultural-trade/;
Peter Ungphakorn, “Nothing Simple about UK Regaining WTO
Status Post-Brexit,” Trade β Blog, June 7,
2016, https://tradebetablog.wordpress.com/2016/06/07/uk-wto-brexit/,
and Katrin Fernekeß, Solveiga Palevičienė and Manu
Thadikkaran, “The Future of the United Kingdom in Europe:
Exit Scenarios and Their Implications on Trade Relations,”
Graduate Institute Geneva’s Centre for Trade and Economic
Integration, January 7, 2014, http://graduateinstitute.ch/files/live/sites/iheid/files/sites/ctei/shared/CTEI/Law%20Clinic/Memoranda%202013/Group%20A_The%20Future%20of%20the%20United%20Kingdom%20in%20Europe.pdf
2. Greg Heffer, “Farage: Remaining in the EU
Is a Death Sentence for Britain’s Steel Industry,”
Daily Express, March 31, 2016,
http://www.express.co.uk/news/politics/657124/Tata-steel-crisis-Nigel-Farage-Brexit-EU-referendum-David-Cameron;
and UK Independence Party, “Farage Calls on Welsh First
Minister to Defy the EU to Save Welsh Steel ahead of Major Debate
in Cardiff,” http://www.ukip.org/farage_calls_on_welsh_first_minister_to_defy_the_eu_to_save_welsh_steel_ahead_of_major_debate_in_cardiff.
3. Phillip Inman, “What Would British Business
Be Like after Brexit?” Guardian, June 18, 2016,
https://www.theguardian.com/business/2016/jun/18/british-business-after-brexit.
4. With certain trade arrangements between the UK
and EU, such as a customs union, the UK’s options for agreements
with other countries would be constrained.
5. One of the goals expressed by some of the Leave
campaigners was to take protective action against Chinese steel
imports: “Mr Farage said leaving the EU would … offer
greater protection against China’s dumping of cheap steel on
international markets.” Heffer, “Farage: Remaining in
the EU Is a Death Sentence for Britain’s Steel
Industry.”
6. See Tania Voon, “Eliminating Trade Remedies
from the WTO: Lessons from Regional Trade Agreements,”
International and Comparative Law Quarterly 59 (July
2010):625. See also, Sweden, Kommerskollegium “Eliminating
Anti-Dumping Measures in Regional Trade Agreements: The European
Union Example,” 2013, http://www.kommers.se/Documents/dokumentarkiv/publikationer/2013/rapporter/report-eliminating-anti-dumping-measures_webb.pdf.
7. See, e.g., Daniel Ikenson, “Protection Made
to Order: Domestic Industry’s Capture and Reconfiguration of
U.S. Antidumping Policy,” Cato Institute Trade Policy
Analysis no. 44 (December 2010).
8. There are questions about when it can actually
start negotiating trade agreements. See, Simon Lester, “When
Can the UK Negotiate Its Own Trade Agreements?”
International Economic Law and Policy Blog, World
Trade Law, June 27, 2016, http://worldtradelaw.typepad.com/ielpblog/2016/06/when-can-the-uk-negotiate-its-own-trade-agreements.html.
