FTI Consulting International Trade Bulletin – 14th October

FTI’s Key Headlines

On Brexit, who will have their sausage and eat it?

Like a bad penny, Brexit returns to the top of the trade agenda, and the Northern Ireland Protocol is, once again, the bone of contention. In reality, this is an issue that has never really gone away; merely kicked into the long grass by a succession of time-limited exemptions to customs checks on goods entering Northern Ireland from Great Britain as part of the deal agreed with the EU in December last year.

Though stylised as a sausage war – and the practical effect for Northern Irish consumers is scarcity on supermarket shelves – at its heart, this isn’t a dispute about the ease with which goods flow. It’s an argument over ideological principles about the rule of law. For example, the UK insists that the European Court of Justice can have no oversight role regarding the management of an internal UK border, while the EU can’t divorce the jurisdiction of the ECJ from the frontiers of its Single Market.

As patience for further exemptions wears thin, a long term solution looks as intractable as ever. Moreover, with the UK threatening unilateral action, the EU questions – not unreasonably – whether Downing Street can be trusted to negotiate in good faith, considering it is now backtracking on an agreement it signed less than a year ago. Claims by adviser-turned-agitator Dominic Cummings that No.10 never intended to honour the deal are hardly helping.

Yesterday the EU offered the olive branch of eliminating some 80% of border bureaucracy. However, as long as Global Britain remains resolutely outside of the Single Market and the EU continues to uphold its integrity with Northern Ireland as a constituent part, then the clash of principles will remain. Both sides now seemingly have to hope that negotiators can craft a compromise that promises all things to all sides. But, unfortunately, Brexit has never been a byword for diplomatic nuance.

Truss turns on trans-Altlantic trade

New Foreign Secretary Liz Truss has quickly embraced her new brief by pouring cold water on hopes of a swift trade deal with the US. At the  Conservative Party  Conference last week, Truss warned that a swift trans-Atlantic deal was not the “be all and end all” in terms of relations with Washington – an abrupt turnaround for the previously bullish former Trade Secretary.

Admitting what she previously could not, Truss suggested that a UK-US deal will have to await a more sympathetic occupant of the White House, albeit with a message to the Americans that “we’re ready when you are ready.” However, the PM’s admission that the US is not doing free trade deals right now implies we might already be waiting on the next Presidential election.

Naturally, Truss’ sudden pessimism stands in contrast to the voice of her successor at the Department for International Trade. Anne-Marie Trevelyan told conference that the UK was on course to strike a deal with the US and predicted 2024 as a ‘realistic’ completion date. Perhaps blind optimism is a core competence for post-Brexit Trade Secretaries, whose primary responsibility is to wave the flag for Global Britain.

Moreover, the extent to which Trevelyan will be allowed to tread her own path on the trade agenda remains to be seen. Truss’s promotion reflects her recent rise to darling of the party membership, leading to inevitable rumours of a future leadership bid. She is unlikely to surrender her moniker of ‘free-trader-in-chief’ and will undoubtedly see that as a natural path for a Tory Foreign Secretary to continue to tread. Watch out for an internecine war in Whitehall for supremacy over trade policy between FCDO and DIT.

Global Britain gassed by global energy markets

As the worldwide energy crunch continues – and with the UK seemingly more fragile to the (gaseous) winds of economic instability than most – UK ministers this week publicly turned on each other over the best way forward. Business Secretary Kwasi Kwarteng on Sunday suggested that the Government is planning on subsidizing energy intensive industries, an eyebrow-raising commitment swiftly rebutted by the Treasury, who went as far as to suggest that Kwarteng was making up policy on the fly.

The conflict is the manifestation of two competing political currents. On one side, No.10 is concerned about the effect that suspended or reduced industrial activity will have on its newly won blue collar voters. On the other hand, the Treasury is worried about spiraling costs and the growing impression that this is a Government still drunk on Covid-inspired intervention, ready to step in with its chequebook whenever and wherever market failure threatens to materialise.

Either way, the UK looks set for a painful reckoning. Rising energy prices, whilst exacerbated by the UK’s failure to maintain sufficient gas storage facilities, are a result of rocketing global demand that is not going to subside anytime soon. Shortages of coal in China have seen the country sucking up supplies usually destined for European markets. Gas is thus going to remain in short supply and at record prices throughout the winter. Subsidies for industry only threaten to further distort the market, driving up prices for consumers. Yet, while closed factories might reduce consumption, subsequent supply chain disruptions will be damaging for No.10, pouring fuel on fire of already fragile consumer confidence.

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