This is the last of four articles in a series explaining trade agreements and why they are important. You can find the first article covering the Principles of Free Trade Agreements here and the second article covering the General Agreement on Tariffs and Trade (GATT) and World Trade Organisation (WTO) here. and the third, exploring the successes and failures of past trade agreements, here.
Those politicians who are enthusiastic about Brexit are always talking about the UK having great opportunities for trade after leaving the EU. They say we’ll be able to negotiate great free trade agreements of our own. Those who oppose Brexit – and many who are on the fence – dismiss those potential opportunities, at least for the short term, and say that the loss of EU trade would more than outweigh any new benefits.
Who’s right?
In previous chapters of this series , we’ve explained the principles and legal framework behind Free Trade Agreements, and looked at some of the benefits and downsides of ones that have been negotiated in the past. In this final section, I’m going to talk about the reality of the opportunities for the UK to grow its trade and its economy through new Free Trade Agreements struck as an independent country.
But first, it’s important to consider that 80% of the UK economy is services. Only 20% is manufacturing, agriculture and other commodities.
Free Trade Agreements don’t, as a rule, bring any direct benefit to the services sector. So, even if new Trade Agreements could increase total British exports by 10%, that’s only a 2% benefit to the overall economy. So…
Why don’t Trade Agreements cover services?
Well, generally it’s because services don’t have import duties like physical goods – and what the services sector cares about is regulations more than taxes. Regulations are necessary for manufactured and agricultural products too, of course, but for services, they’re fundamental.
It’s easy to see why. Doctors and Lawyers need to be qualified. Without regulations, there’d be quacks. Accountants and Bankers need to be constrained to act professionally within the laws of the country. Without regulations, there’d be fraud. And so it goes on.
Every country has its own regulations for every type of service. Some countries share similar or even identical standards for some sectors, but mostly they’ve got a number of key differences.
Of course, that makes it very easy for countries to protect their services sectors. A British accountancy firm can’t provide its services for a company in another country unless it uses staff qualified to meet that country’s regulations, and quite possibly unless it can deliver the services in-country – in which case it’s no longer an exported service.
Some Free Trade Agreements do indeed include some service sectors, but there has never yet been a single one that solely and specifically covers services.
That isn’t to say that services aren’t exported – around 40% of British exports are services. Most don’t need trade agreements but instead rely on sales to countries with similar regulations. In the case of the UK, many commonwealth countries have the same language and common or close legal systems.
Whilst the single biggest country for UK services exports is the USA, the biggest export market for UK services as a whole, though, is the EU. The proportions for services imports are similar – the EU as a whole is the biggest, but the USA is the biggest single country.
What are all these “services”?
The largest sector, accounting for about 30%, is what’s usefully (or not) termed “Other business services”. That’s professional and management consulting, research and development and technical and business services.
The second-largest sector is Financial services – and arguably it’s the biggest single-definition sector. A large proportion of those exports go to the EU using “passporting” rights – and, as we keep hearing, those are the services at the biggest risk because of Brexit.
The third sector – and growing all the time – is Travel. How does that figure as an export or import? Well, if you go on holiday to the USA, the money that you spend there is treated as an import to the UK. When an American comes and spends money in the UK, that’s an export. The UK’s biggest import market for travel is Spain, because more Britons go on holiday there than anywhere else.
In the case of professional and financial services, Trade Agreements can help exports and imports by including preferential elimination of regulations. In the case of travel, that can be increased by removing or easing visa restrictions.
That topic leads to a very relevant connection between services and commodities in new Trade Agreements. Developing countries who have more qualified and trained professionals than domestic jobs often seek to include people when negotiating FTAs with developed countries. So, for example, it’s absolutely certain that India will make the relaxation of visa rules and immigration limits a precondition of any new Free Trade Agreement with the UK.
The UK hasn’t had to negotiate its own trade deals for nearly 50 years, and the only British experts are those who have worked on negotiating EU trade agreements. Shortage of skilled negotiators is just one of the problems – with so many countries in the world, where should the UK start?
Pretty obviously, there are two angles – one, what does the UK produce that it could sell more of to other countries if trade barriers were eliminated, and two, what imports would benefit the UK economy if they were cheaper.
There should be a few easy wins. Many smaller countries who already have trade agreements with the EU will be willing to sign new ones on the same terms with the UK. Larger countries, though, are likely to want to grasp the opportunity to start from scratch – especially since the UK is starting from a position of weakness.
Size matters. Large rich countries are always going to be better markets than small poor ones.
But, especially since trade deals take so long to negotiate, it’s worth looking to future demographic changes. Countries with growing populations and developing economies are arguably more important than older, developed, countries where populations are declining. So Malaysia, Egypt and Nigeria could be viewed as more important than Japan, South Korea and Thailand.
Priorities for Free Trade Agreements
First, though, probably everyone agrees that the UK needs to prioritise its existing major markets – the USA always gets mentioned, and indeed it’s huge, but the EU market is much bigger – and UK producers stand to lose really badly, with a potentially massive hit to the economy, if the country cannot negotiate and maintain terms similar to those already enjoyed. Hopefully that should be possible and easy – frankly, if it’s not, one would have to get really worried about what can be agreed with other countries.
Never mind what the extreme Brexiteers say – however dismissive one may be of what “experts” claim, it really would be impossible to replace our trade with Europe with other countries, and we’re in a relatively weak negotiating position – the balance of trade may be negative, but actually the UK has far more to lose from “no deal” than the EU. The British government knew that too, back in 2016. I found a research paper they’d commissioned setting out a negotiating strategy, and specifically warning against triggering Article 50 so early and without a Plan and an agreed transition strategy. The government, as we know, ignored those warnings.
Anyway, we are where we are. Let’s get back to looking at other opportunities for Free Trade Agreements that the UK will need to pursue.
Where next after Europe for Free Trade Agreements?
The first, and theoretically the easiest, step is to seek to “roll over” agreements with all the 69 countries that the EU already has Free Trade Agreements with on the same terms. That process has already started, and according to the DIT, as of the date of this recording agreements have been signed with countries representing 63% of UK trade under EU agreements. The statistic may be misleading, as other reports say that this is less than half the actual value of exports and imports. Certainly there’s no agreement yet with some important countries like Canada, Turkey and Japan. It is quite probable that those countries – and others – will want to negotiate from scratch rather than simply novate the same terms as they’ve agreed with the EU.
Constraining factors for Trade Agreements
Looking elsewhere, another factor is physical distance between markets.
Research has been proved that makes a big difference – the further away, the more difficult trade becomes.
Obviously that means that Europe has to be a priority, but equally a country like Ghana could generate more exports than Cambodia, simply because of distance. Why? Well, historically it would have been because of shipping times and costs, and, in the case of food and other agricultural products, product deterioration. Nowadays that is changing, as technology such as 3D printing evolves, products have shorter lifespans and those and other factors lead to a tendency to manufacturing in or nearer to destination markets.
Physical distance matters for services too, though there’s less published evidence. It’s difficult to work across time zones, but companies that establish overseas bases to provide local sales and support, as I’ve regularly recommended here on Grow through International Expansion, can overcome those issues and also resolve some other regulatory issues by delivering an adequate proportion of local content.
Language is important too. Obviously, it’s easier to work with other countries that have English as a business language. Again, studies are thin on the ground, but it’s easy to see that Spanish companies are more successful in selling both goods and services to Latin America than, say, British or German ones, and one has to conclude that’s largely down to language and culture.
Trade agreements are, by definition, give and take scenarios. Both countries have to make concessions.
For the UK to get another country to agree to remove some of its barriers to trade will require that the UK dismantles some of its own. In the case of manufactured goods, that means removing tariffs on imports, so they’ll become cheaper, and possibly removing or liberalising some of the regulations that apply to them. That will mean that any domestic – UK – manufacturer of similar products will face new or stronger competition, whilst at the same time getting the opportunity of increasing exports of its own goods to the other country.
Usually, while such agreements are being negotiated, the media only reports the opportunities and risks for the most visible goods – things like cars and consumer electronics. However, I predict that the greatest impact could be felt by the smallest businesses. Any relaxation of regulations by the UK would be unlikely to benefit UK manufacturers, who’d still have to meet the most demanding regulations of their other export markets.
Of course, where we’re hearing about the threats of reduced regulation comes with food – in this case, in the form of American chlorinated chicken and hormone-fed beef. I’m sure neither of those are ideal, but I’ve spent a lot of time in the USA so I’ve definitely eaten both, and I’m still here to tell the tale.
Eliminating subsidies
What may turn out to be a much bigger issue related to food in the case of a Free Trade Agreement is that, by definition, subsidies are supposed to be eliminated. As I hope you’ll remember, I covered this in Part 1 of this series. In truth, they probably never are – for example, the EU has struck lots of free trade agreements whilst continuing with the Common Agricultural Policy. However, the EU is and will remain the biggest single market in the world, so it’s always been negotiating from a position of great strength.
That’s not the case with the UK – so when it comes to negotiating with the USA, for example, it’s perhaps inevitable that the country will have to cave in, at least a little, from pressure from the other side to remove subsidies.
One result of Brexit will be that the Common Agricultural Policy will cease to apply in the UK. Farmers will certainly pressurise the government to provide matching subsidies, and indeed that’s already been verbally “nodded through” by ministers. However, when it comes to negotiating trade deals, there’ll inevitably be less resistance from the UK to dropping agricultural subsidies, assuming some new ones are introduced, than there would have been from the EU.
Indeed, the existence of the CAP has been one of the main reasons why the EU and USA have never concluded the trade agreement that they’ve been negotiating since 2013, the so-called TTIP – Transatlantic Trade and Investment Partnership.
The US will come to negotiations with the UK on a Free Trade Deal from a position of strength on manufactured goods and services too.
The refrain or mantra, “America First”, isn’t new, it’s ingrained into the soul of every American – and that’s not a criticism, I can’t help but respect the attitude. So expect pressure not only to dismantle tariff barriers and cut corporate taxes, but further facilitate what will be called FDI – Foreign Direct Investment – but will in reality be acquisition of British companies by American ones. What will the British get in return? Well, we’ll have to wait and see – but businesses need to watch like hawks and be ready both to grasp new opportunities and react to new risks to their businesses.
Why has the EU failed to strike a Trade Agreement with the USA?
A potential deal with the USA is so important that it’s worth us spending a few minutes understanding why negotiations between the US and the EU of the TTIP have failed so far.
Trade negotiations are generally conducted in secret, but details that leaked out created huge public concern across Europe.
The worries we’ve heard most have been the fear of a flood of imports of fracked gas, chlorinated chicken, hormone-fed beef, genetically-modified (GMO) crops, cosmetics made with chemicals banned in the EU.
Beyond that, but less debated, have been threats to public services and demands for extreme legal powers, that could be given to corporations to kill public interest laws.
We talked about the power of lobbyists when it comes to negotiating trade deals in the last episode. In the case of the EU and USA negotiations, that’s been massive and visible. Demonstrating the power of big business, in just the last six months of 2018, the EU negotiators have had private meetings with around 50 major companies and commercial lobbying organisations, but just 5 consumer and environmental groups.
What goes on behind those closed doors isn’t published, but we know that pharmaceutical companies are challenging European rules on generic medicines. The US Chamber of Commerce has demanded deregulation of public services and the banning of state monopolies such as health, replaced by what they call “market access” – that’s where the threat to the NHS comes from – and some dismantling of the GDPR data protection legislation.
The legal powers that they’re asking for would allow companies to take secretive action against governments that they think are obstructing them from making profits – something called the Investor-State Dispute Settlement (ISDS) mechanism.
Most commentators seem to agree that “doing a deal” with the US would result in reduced prices that would save UK families as much as £500 a year. But, as you can see, at a cost elsewhere.
Other countries don’t have the same power as the USA, of course, but the things they’re asking for give a flavour of the type of demands that come up in every trade agreement negotiation.
I hope that you’ve found this episode, and this series, both informative and thought-provoking. I’ve tried to cover all the major aspects, but inevitably some things must have been omitted. I’ve tried to be objective and unbiased, but it’s not easy.
To grow its economy and create wealth for its citizens and residents, every country needs to trade internationally, and Free Trade Agreements, without doubt, help expand that trade. Opening up markets means liberalising and removing some of the restrictions and protections that most people don’t even realise that they have.
As we’ve seen, FTAs are not just a key to increasing exports and imports, they can bring deeper change too.
Watch the video intro for this series here
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