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Buccaneering: Can Post-Brexit UK FTAs Secure the Booty?

Buccaneering: Can Post-Brexit UK FTAs Secure the Booty?

One often mentioned benefit of Brexit is that the UK will be able to rally a crew and set sail from Londontuga to strike bold new trade deals with distant and exotic lands. Freed from the landlubbers of the European Union, Free Trade Britannia could rule the waves once more.

“Load the chain-shot, negotiators. We’ll blast their tariff masts to smithereens!”

“Load the chain-shot, negotiators. We’ll blast their tariff masts to smithereens!”

In this post, I unpack this claim to shed some light on what those promising a glorious FTA filled future are arguing. This is a controversial area and not one where my opinion is the only one. As always I encourage you to read as widely as possible and contrast my musings with those of smarter and better dressed experts.


Where do things stand now?

As you, my well informed and tastefully dressed reader would be aware, the United Kingdom is currently part of the European Union Single Market and thus negotiates its Free Trade Agreements as part of that bloc.

In practice, this means the 28 Members of the European Union agree on a negotiating position and then send the European Commission in to negotiate on their behalf. The Commission undertakes the negotiations, briefing the Member States on progress and consulting them on any decision points along the way.

Note: I’m told the extent of EU Commission information sharing and consultation can vary considerably between topics, lead negotiators and days of the week. There are also trade relevant areas, most commonly in Services, where the Commission does not have ‘competency’ and the EU Members must play a larger role.

What does this mean in practice?

For the UK, this approach to trade negotiations has a number of implications. Understanding these is fundamental to understanding the arrrr-gument for buccaneering (I’m very sorry).

No I’m not.

No I’m not.

Implication 1: Market Size

The EU 28, as a bloc, have a combined GDP of ~$17 trillion and over 500 million consumers. This means that when the European Union offers another country improved access to its market, they are dangling a very tasty morsel.

Even a slight advantage when selling into the EU can make a big difference because there are just so damn many Europeans with (comparatively) significant disposable income.

The EU can therefore leverage this market size to its advantage in an FTA negotiation, offering fewer and smaller concessions to secure something it wants than a smaller economy would have to.

On the other hand, the sheer size of the European Union means it can be a scary place to give market access to. As an FTA partner, the place is so darn large and diverse that someone, somewhere, is going to be a serious producer of whatever it is you are considering liberalizing.

I have no idea what Romania makes, but I bet it’s a threat to my market.

I have no idea what Romania makes, but I bet it’s a threat to my market.

UK Buccaneering Angle:

Going it alone would mean the UK, when negotiating, can only offer the prospect of access to its own market. In most cases, this will be a disadvantage. 5% lower tariffs into the UK is simply worth less as an offering than 5% lower tariffs into the EU 28.

This is not to say the UK wouldn’t have anything to offer. The UK is a large, wealthy and populous economy and depending on its future relationship with the EU, could continue to be an English speaking and comfortable beachhead into that larger market.

Implication 2: Collective Positions

Negotiating as a bloc means the EU has to conduct a complex internal negotiation before it speaks a single word to the other side.

“Good morning!” ”I’m afraid Finland, shrouded in eternal darkness, is blocking consensus on this being ‘morning’ and Germany demands at least a 30% productivity increase before I am allowed to qualify it as ‘good.’”

“Good morning!”
”I’m afraid Finland, shrouded in eternal darkness, is blocking consensus on this being ‘morning’ and Germany demands at least a 30% productivity increase before I am allowed to qualify it as ‘good.’”

All negotiating positions are compromises between competing interests within a country, but the EU position is a compromise between the compromises of 28 countries. In practice, this means a few things.

First, the ‘offensive interests’ - what the EU is trying to secure from the other side, have to offer something of value to all 28 EU Members. This inevitably means the EU can’t push for everything any given Member would like to see and is likely to be pushing for a range of things specific Members couldn’t care less about.

Second, the ‘defensive interests’ - what the EU has been told not to give up, reflect the sensitivities of 28 EU Members, instead of just one country. This means the EU negotiators are unable to make concessions (and thus, gain negotiating coin) in far more places than any individual EU Member.

UK Buccaneering Angle

This is perhaps the most common argument used to suggest a post-Brexit UK will immediately kick open the doors of lucrative markets and feast on the gooey preferential market access within.

My prediction of what the average Department of International Trade employee will look like after the UK attempts its promised 71 odd simultaneous negotiations.

My prediction of what the average Department of International Trade employee will look like after the UK attempts its promised 71 odd simultaneous negotiations.

The argument runs that without the sensitivities of other EU Members restricting its hand and their demands guiding its requests the UK would have far more to trade away and could focus its efforts on securing exclusively what it cares about. More negotiating coin plus fewer demands equals better outcomes. Science!

Maybe.

It’s possible to get carried away with this argument or to overstate the value of trading away other EU Member sensitivities.

Consider the orange.

A commonly heard argument is that the EU has high tariffs on oranges because of protectionism in a few select Members. A post-Brexit UK could trade away market access in oranges for something it wants.

Look at it. So smug behind its tariff walls. Your time will come, my difficult to peel friend. Oh yes, your time will come.

Look at it. So smug behind its tariff walls. Your time will come, my difficult to peel friend. Oh yes, your time will come.

Couple of problems.

First, maintaining high tariffs on something the UK doesn’t produce but other EU Members did in order to later trade it away in FTAs requires a great deal of political discipline. The temptation for a government, especially a pro-Brexit one, to immediately slash such tariffs to demonstrate a ‘Brexit-benefit’ will be strong.

Second, the UK’s future negotiating partners aren’t stupid. The advantage of improved access is in its exclusivity, and a protectionist measure with no actual industry behind it is going to be the first thing the UK offers to reduce in every single FTA it negotiates. UK trade ministers will probably be leaving improved orange market access as tips in restaurants.

43 pounds and a country specific orange tariff quota, the soup kitchen is saved!

43 pounds and a country specific orange tariff quota, the soup kitchen is saved!

Third, while the EU maintained high WTO Most-Favoured-Nation tariffs on products like oranges, it reduced or eliminated them for developing countries through its Everything But Arms, GSP and GSP+ programs as well as its Economic Partnership Agreements. The UK strongly supported such preferences as a development tool and any liberalization will reduce their value to the developing countries they’re supposed to be helping.

Implication 3: Regulatory and Systemic Alignment

This one is a little complicated.

The European Union tends to set up its systems, agreements and procedures in a distinct way reflecting a philosophy of governance distinct from that of the other major global powers like the US and China.

When negotiating agreements, the EU will fight to proliferate its own approach and can struggle to make concessions when these require compromising that approach to accommodate or align with the approach of its counterparts.

Fascinating. I hope this regulatory alignment section never ends.

Fascinating. I hope this regulatory alignment section never ends.

UK Buccaneering Angle

Free from the European Union, the UK would certainly have more freedom to align with the regulatory approaches of others, which could generate negotiating coin or overcome impasses the EU might have faced when negotiating as a bloc.

The problems are twofold.

First, The UK while a substantial economy, is simply not large enough to exude the kind of regulatory gravitational pull the EU, US or China does. This means the UK will probably end up having to align with at least one of these spheres anyway.

Second, the UK was in large part responsible for developing much of the existing EU regulatory architecture, especially in areas like finance. Moreover, the geographic proximity of the European Union means many UK businesses are going to have to remain aligned with EU rules anyway.

So can the UK buccaneer or not?

It can certainly try, but some expectations management may be in order.

Expectation: Movie 1 Reality: Movies 2-5

Expectation: Movie 1
Reality: Movies 2-5

The EU already has or is in the process of negotiating agreements with almost everyone the UK has indicated it wants to negotiate with. Therefore, to be successful buccaneer an independent UK trade policy will have to do a combination of two things:

  1. Sign agreements with those the EU can’t or won’t sign with; or

  2. Sign agreements which deliver more for the UK than an EU 28 FTA does or might;

New Frontiers, Distant Lands

The EU signs a lot of agreements. Like, a lot.

The EU is now mostly financed by DG Trade frequent flier miles.

The EU is now mostly financed by DG Trade frequent flier miles.

There’s some possibility of going where the EU isn’t, but it’s generally not as easy as it looks. Major economies held up as potential prize partners like the US, India and China are (for different reasons) some of the most difficult in the world to negotiate an ambitious Free Trade Agreement with.

These are also three partners with massive markets where the comparatively smaller size of the UK compared to the EU 28 will be most keenly felt.

Trade Punk - Harder, Better, Stronger, Faster

Could the UK just negotiate better agreements for themselves than what the EU has or would deliver?

Let’s rephrase that question in light of everything we’ve discussed above:

Are there outcomes an independent UK could deliver by having more focused demands, trading away EU 27 sensitivities and being more flexible in terms of regulatory systems that the EU with its vastly greater market power could not?

Probably some.

Will they be worth leaving the Single Market for?

Eightball.jpg
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