July 26, 2017
Unexpected electoral results on both sides of the Atlantic have led to significant changes in the politics of international trade. As the U.S. steps back from global leadership on trade issues, the UK wants to be seen as a free trade champion. But does the Government have the political will to end protectionist policies in order to build opportunities for the modern and competitive sectors of the UK economy? FTI Consulting assesses the opportunities and disruption.
On 23 January, President Trump fulfilled one of his key election promises and withdrew the United States from the Trans Pacific Partnership (TPP). A regional free trade agreement (FTA) more than a decade in the making, covering 40 percent of the world’s economy, had been killed by the President within three days of his inauguration.
This moment marked an enormous shift in the politics of international trade. The newly elected President from the free-market championing Republican Party had just turned his back on a deal supported by the U.S. Chamber of Commerce and most major American business groups.
U.S. industry had every reason to support the TPP. The drawn out negotiations had seen the Americans play the strongest hand, securing major gains for U.S. industries and a structure based on U.S. preferences. The TPP broke new ground in a range of areas beneficial to American industry and it was the first regional FTA to offer significant concessions for the U.S.-dominated digital and technology sectors.
Despite the abundant evidence of economic and geo-political gains for the U.S., President Trump had every reason to believe quitting the TPP would be a popular move. He had just won an election in which both major party nominees had pilloried TPP and a range of already ratified agreements. Although Congress didn’t get to vote on Trump’s TPP move, very few voices in the U.S. political establishment have been raised to defend the agreement. Tellingly, only 14 Senators voted against the confirmation of Robert Lighthizer, a long standing free trade opponent, and President Trump’s nominee as U.S. Trade Representative.
But even as the U.S. was stepping down from its traditional role as a global champion of trade liberalisation, on the other side of the Atlantic a very different attitude to free trade was gaining traction.
Since the UK’s powers to negotiate FTAs were ceded to the European Union, the UK has not played a significant role in the politics or policy of international trade. The Brexit referendum, however, has redefined the UK’s status in global trade negotiations and elevated free trade as a domestic political issue.
In direct contrast with the bi-partisan anti-trade rhetoric of the U.S. presidential election, the Brexit referendum saw both sides at pains to emphasise the importance of free trade to the UK economy.
The Remain camp emphasised the importance of the single market to the UK economy. The integration of industrial supply chains, specialisation of service industries, tariff-free purchase of European goods and access to a vast consumer market were promoted as important benefits of EU membership which would be put in jeopardy by voting to leave.
On the other side of the debate, Leave campaigners made much of their intention to end free movement and the jurisdiction of EU courts, but none of the major groups sought to make an argument for economic isolation from the EU through raising barriers to trade. Leave campaigners instead argued it was possible to maintain free trade with the EU while the UK gained the freedom to negotiate new deals around the globe.
The nature of the UK’s post-Brexit trading relationship with the EU remains to be seen, but the Government has been quick to turn its attention to new FTA opportunities around the globe.
New markets offer enormous opportunities for modern and competitive sectors of the UK economy, but these opportunities will only be realised if the UK has the political will to make hard calls about its less efficient industries. Sectors which have been sheltered by the EU for decades will need to be opened up to external competition if the UK is to hope to gain access to new markets for its most competitive sectors.
The UK’s newly found enthusiasm for trade deals will eventually come into conflict with its desire to shelter UK farmers from competition. Since the 1970s a number of the countries the UK is seeking to target for trade deals have significantly reduced subsidies for farmers and other forms of agricultural protection. Farmers in the UK, however, have been sheltered by the EU’s Common Agricultural Policy (CAP) and receive subsidies worth around £3billion per annum. Farmers collect this largess principally for owning land, rather than doing anything productive with it.
Australia and New Zealand are often cited as early FTA targets for the UK. These countries have undertaken massive reforms to their agricultural sectors since the 1980s. Reform has delivered highly efficient agricultural producers focused on export opportunities. Better access to British consumers will be at the heart of the FTA negotiating strategies for Australia and New Zealand. Both countries have decades of experience opening up new markets and their farmers will have high expectations for any deal with the UK.
U.S. trade negotiators will also push aggressively for more open access to the UK. Those who believe a quick and painless U.S.-UK bi-lateral FTA can be delivered should be closely following the U.S.-led NAFTA renegotiations. Reform of Canada’s protectionist ‘supply management’ system, which shields the inefficient dairy sector from external competition, has been high on the list of public demands from the White House. The British dairy industry cannot expect their protection from external competitors to survive unscathed if the U.S. and the UK are determined to reach a meaningful agreement.
Although agriculture makes up just 0.7% of the UK’s GDP, reforms in the sector will face trenchant opposition from vested interests. The Government has guaranteed it will maintain CAP level subsidies through to 2022 and the National Farmers Union (NFU) has shown that it will oppose any reduction in its industry’s taxpayer-funded support.
The determination of the NFU was on display following a recent speech by former Environment Secretary Owen Patterson. Patterson made the orthodox argument that subsidy reduction and exposure to greater competition would lead to positive changes in the industry and lower costs for UK consumers. The NFU’s response was to suggest that liberalisation would drive farmers to commit suicide.
Political pressure to maintain agricultural subsidies and trade barriers are likely to follow the same path pursued by protectionist interests the world over. Those determined to maintain the status-quo will argue that barriers are needed to maintain food safety, animal welfare, bio-security and environmental sustainability. Most modern FTAs address all of these concerns and allow for genuine domestic regulation to maintain standards and prevent cruelty, but raising these threats is an effective way to generate media attention and public opposition to agricultural trade.
There are some positive signs that the Government appreciates the need for genuine competition in the agricultural sector. The appointment of Michael Gove, an experienced Minister with a track record of reform, to the post of Environment Secretary is a promising start. But any politician in this portfolio may be tempted to choose the easy options – either by maintaining the status-quo or replacing the CAP with some home-grown, but equally convoluted system of protectionism. While this approach may mollify farmers and environmental groups, it would limit the kind of gains the UK might hope to get from future FTAs and keep food prices high for UK consumers.
As he mulls how to reform the agricultural sector, Mr Gove should be working closely with his colleagues in the Department for International Trade. The Government must avoid the temptation to shield politically influential, but uncompetitive industries at the expense of new FTA opportunities for modern, world-leading industries like the digital sector.
The UK’s tech sector attracted £6.8billion in private sector investment in 2016, more than double the level of any other European country. A recent Tufts University/Mastercard study of digital economic evolution found the UK is a standout nation, well positioned to deliver further innovation and growth. By any measure of size, employment or potential, the UK’s digital sector is a global leader. It is incumbent on the Government to help deliver the regulatory environment and international trade opportunities that will allow the sector to grow.
At conferences like the G20 Digital Economy meetings, most EU member states have been far from enthusiastic about maintaining the lightly regulated environment of cross-border digital commerce that the internet facilitates. The UK has tended to use its voice at these international events to stand up to countries that have sought greater state control of the digital economy such as Russia, China, Saudi Arabia and France.
Prior to the Trump administration, the U.S. has done most of the heavy lifting to deliver an open trading environment for companies in the digital and technology companies. Years of effort by the US digital sector saw the Obama administration publish the ‘Digital 2 Dozen’, a series of trade goals which it successfully incorporated into the final text of the TPP. As well as limiting customs duties on digital products, these provisions would have tackled modern digital protectionist policies such as data localisation requirements and barriers to cross-border data flows between the TPP 12. Given the scale of the TPP, these provisions would have set a new global standard for trade liberalisation in the digital economy had the deal been ratified.
A number of TPP signatories including Japan, Australia and New Zealand are attempting to revive the TPP without the U.S.. But even if these nations succeed in delivering the “Pacific Ocean’s 11”, there is no guarantee that the forward-thinking digital provisions negotiated by the Americans will survive without the U.S. in the deal.
To ensure the UK digital sector can continue to thrive and expand post Brexit, the Government needs to pick up where the U.S. left off and vigorously oppose digital protectionism. The Digital 2 Dozen and the final text of the Trans Pacific Partnership are excellent places for the UK’s trade negotiators to start.
It is vital that the Government understands the opportunities that drive the UK’s digital sector and the kinds of modern protectionism that could halt its growth in new markets. Industries which have developed in a lightly regulated environment are particularly vulnerable to being shut down or locked out of markets by protectionism posing as general regulation. Tackling data localisation requirements, forced technology transfers and restrictions on cross-border data flows should be central goals in all UK bi-lateral or regional FTA negotiations.
The UK’s desire to be seen as an independent champion of free trade is a welcome development, particularly as the U.S. begins to embrace mercantilist policies. If the UK’s post-Brexit trading ambitions are more than just rhetoric, the Government will have to realise that meaningful trade deals create disruption as well as opportunity. The Government is aware of how strong the modern digital and service sectors of the UK economy are and the huge trade potential they have. But to realise these benefits the UK will need to open itself up to genuine competition in sheltered industries and agriculture should be the first target for reform.