Trade deals, their importance and the time taken to reach agreement
This paper is based on multiple sources:
https://www.weforum.org/agenda/2016/07/how-long-do-trade-deals-take-after-brexit/
http://www.cbi.org.uk/business-issues/uk-and-the-european-union/eu-business-facts/10-facts-about-eu-trade-deals-pdf/
http://www.telegraph.co.uk/news/2016/05/26/the-truth-about-britains-trade-outside-the-european-union/
https://www.theguardian.com/small-business-network/2016/apr/26/brexit-effect-on-trade-deals
http://faculty.haas.berkeley.edu/arose/MR2Vox.pdf
In April 2016 President Barack Obama warned it could take the United Kingdom up to 10 years to negotiate trade deals with the US and that it would be at the “back of the queue” if it left the European Union. If Britain does finally Brexit, it will need to renegotiate deals with the EU and its trading partners, including the USA, amounting to more than 50 countries. As an example of how long these things take, Canada took seven years to strike its agreement with the EU and the USA seems to have pulled out of TTPI. Rumour is that Trump is not keen on trade deals and especially not keen on anything that takes years to negotiate.
On average it takes around two to four years to negotiate and implement a trade deal with the USA.
The CBI favours the EU and trade deals, but, despite its partisan position, it has published some facts about EU trade that would be hard to dispute. The single market has 500 million consumers. The EU facilitates trade further afield with EU trade deals providing preferential access to global markets, from South Africa to South Korea. The EU gives UK business preferential market access to over 50 countries outside of the EU. The EU gives the UK access to more markets than Switzerland, Canada or Australia, who have 38, 15 and 15 trade deals respectively. The EU eliminated tariffs with South Korea almost four times quicker than Australia’s deal. Nevertheless, it took the EU five years to reach the deal with South Korea. One of the major factors is that all 28 member states have to agree any deal. By comparison, however, the Switzerland-China trade deal gives China immediate access to Swiss markets but Switzerland has to wait 15 years for access to Chinese markets. The CBI is very much in favour of trade deals and very much in favour of the EU.
Peter Lilley is a Conservative politician. As we know, views on Brexit were not really along party lines, so his party allegiance should not detract from some information he offers. Unlike the the rest of his fellow MPS, he actually has some experience with trade deals. Lilley suggests that when politicians debate issues of which they have no experience they seize on any plausible argument which supports their case, even arguments that are the reverse of the truth. I think that now no one would find that hard to believe.
Lilley puts the opposite position of the CBI, arguing the importance of trade deals is grossly exaggerated. He suggests that countries succeed, with or without trade deals, if they produce goods and services other countries want. Tariffs between developed countries now average low single figures, small beer compared with recent movements in exchange rates. The most worthwhile trade agreements are with fast-growing developing countries which still have high tariffs. As I noted in another article here, the average EU tariff is just 1%.
The question Lilley raises is ‘Is our net £10 billion contribution to the EU a price worth paying for tariff-free access to the EU market?’ If we left the EU with no trade deal – inconceivable given the tariff-free zone from Iceland to Turkey – our exports would face EU tariffs averaging just 2.4 per cent. But our net contribution to the EU budget is equivalent to a 7 per cent tariff. Lilley states that paying 7 cent to avoid 2.4 per cent costs is miss-selling that dwarfs the PPI scandal!
Does EU membership help us negotiate free trade deals with the rest of the world? Tariff-free access to the fast growing, protected markets of Asia, Africa and Latin America would be worthwhile. Unfortunately, EU membership prevents us negotiating free trade deals – and the EU has negotiated few deals for us: none with China, India, Australia, Brazil. Does the EU’s size mean it gets better deals than we could alone? This is the reverse of the truth. Lilley states the more countries involved in a trade deal the harder, slower and worse the result.
All 28 EU members have a veto on their negotiations which is why EU deals take so long and exclude so much. Bilateral deals are simpler, quicker and more comprehensive. Hence Chile has deals covering countries with collective GDP five times the EU’s deals. Even Iceland – population less than Croydon – has a trade agreement with China – as does Switzerland.
The reality is, every country has access to the Single Market – with or without tariffs. British exports to the EU have grown less rapidly since the Single Market than they did before, less than our partners’ and much less than non-EU countries’ exports! Maybe that is partly because we suffer EU regulations on 100 per cent of our companies whereas non-EU firms need only comply with EU regulations on activities carried out within the EU.
Lilley concludes that the UK can retain free trade with the EU without paying our current entry fee which costs more than the tariffs we avoid.
Lesley Batchelor is the Director General at the Institute of Export and has been involved in shaping policy and decision making at the highest level. She is active on various advisory panels on exports, SME support and the all-party manufacturing group.
Batchelor postulates the following. The change will not be instantaneous: UK exporters will be charged import duties on the goods they sell into the EU, just as they do to any country that is a member of a trading bloc. This, in turn, will increase the price of their products in that market. These duties are on top of the local VAT charged between states and impact on the final price charged. The EU covers this through our subscription, much like a membership to Costco works – where the benefits increase the more you use it. To this end, a trading bloc is slightly different to a trade agreement. A trade bloc is a group of countries that agree to reduce trade barriers between themselves. There are 13 trade blocs around the world today designed to increase regional trade and create economic growth – the EU for example. More than 300 agreements have been reported to the World Trade Organisation (WTO) and the number of free trade agreements have increased significantly over the last decade.
Trade agreements outline how the agreement will work in practice and exactly what the agreement is – whether it is goods or goods and services, a basic preferential trade agreement, free trade or a customs union. In the meantime, we will revert back to the next level of agreement which is the WTO and that’s 161 countries with which to find agreement. Thus, it appears that Batchelor favours the CBI view on trade agreements.
Catherine Barnard is professor of European Union Law at the University of Cambridge. She advised the government over the balance of competences review, which is an audit of what the EU does and how it affects the UK.
Barnard makes the following points. The outcome on trade depends much on what is put into place if the UK were to leave the EU. If the UK were to do a Norway – join the European Economic Area (EEA) – then the UK would still benefit from free movement of goods. However, it would not be able to benefit from the 50 free trade agreements (FTAs) which the EU enjoys. That said, all EEA states are also members of the European Free Trade Association which has 25 free trade agreements with 36 countries.
Were the UK to go down the Swiss route (managing its relationship with the EU through a series of bilateral agreements), this is likely to include an agreement on the free movement of goods with EU states. The UK would, however, be free to conclude its own bilateral trade agreements with “third countries” – non-EU states. This freedom has to be weighed against the reduced influence the UK would have as a smaller player, a point emphasised forcibly by US president Barack Obama.
Were the UK to go down the route of looking for an FTA with the EU (sometimes referred to as the Canada model), there would be free movement of goods between the UK and the EU. However, the Canada deal took over five years to negotiate. The UK’s bargaining power would be weaker: the UK sells about 50% of its goods to the EU, while the EU sells about 6% of its goods to the UK.
If no deal is reached, then the WTO rules apply. This means that the EU can apply a tariff to UK goods, provided the tariff is no higher than those imposed on goods imported into the EU from other non-member states. It is estimated that tariffs would be imposed on 90% of the UK’s goods exports to the EU by value, meaning many exporters will become less price competitive.
Barnard outlines the options pretty much as I have in my Brexit guides. Her last point, almost certainly true in regard to the 90% figure, ignores the fact that the average EU tariff is just 1%, the UK can also impose (and reduce) tariffs and the trade deficit with the EU is £80 billion. If the EU wants to cut trade and stop selling its goods to the UK it would result in huge job losses. Even tariffs may do the same. Given the changes in the mood of various electorates, which EU politicians would favour this course?
Mike Cherry is National Chairman of the Federation of Small Businesses and former FSB policy director.
Cherry argues the following. Now is a good time for any small business which exports or imports to have a crystal ball. Because the truth is, no-one can really predict how trade will be affected if the UK does leave the EU. We do know that the EU is the most important export destination for small firms. The EU market is often considered the easy option because it’s close by, there are no tariffs and there is one set of product rules and standards.
For all that, there is a clear appetite to export further afield: 32% of FSB members currently either export or import. The US is their second biggest export destination after the EU. The trans-Atlantic Trade and Investment Partnership (TTIP) has huge potential to benefit smaller firms seeking to increase or start selling their goods and services to American customers.
This is the deal that has gone flat with the EU but could be resurrected for the UK-EU.
In event of an EU exit, exporters will want to know how the UK will negotiate a trade deal with the EU and what this deal will look like, as well as how it will approach other trade deals around the globe. If the UK does end up going it alone on trade deals, the FSB would push for each set of negotiations to have a focused strategy on smaller firms. Small businesses have huge potential to export, both within the EU and further afield. Only by supporting these businesses to achieve their potential will the government succeed in closing the UK’s long-standing trade gap.
Let’s now look at one of the most famous ongoing trade negotiations in the world. The Doha Development Round or Doha Development Agenda (DDA) is the latest trade-negotiation round of the World Trade Organization (WTO) which commenced in November 2001. Its objective was to lower trade barriers around the world and to facilitate increased global trade. Progress in negotiations stalled after the breakdown of the July 2008 negotiations over disagreements concerning agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies. The most significant differences are between developed nations led by the European Union (EU), the United States (USA), and Japan and the major developing countries led and represented mainly by India, Brazil, China, and South Africa. There is also considerable contention against and between the EU and the USA over their maintenance of agricultural subsidies—seen to operate effectively as trade barriers.
Since the breakdown of negotiations in 2008, there have been repeated attempts to revive the talks, so far without success. The future of the Doha Round remains uncertain.
There is widespread agreement among economists that trade liberalization is best conducted at the multilateral level. Indeed, facilitating multilateral negotiations is one of the primary objectives of the World Trade Organization (WTO), as it was with its predecessor the General Agreement on Tariffs and Trade (GATT). By way of contrast, regional trade agreements (RTAs) may create some trade, but they also
have the potential to harmfully divert it.
Still, the global approach to multilateral trade liberalization seems moribund. The Doha round sponsored by the WTO has no end in sight. The duration of GATT/WTO trade liberalization rounds – the length
of time between the start of negotiations and their completion – has grown consistently with the number of participants. The 23 participants of the first (Geneva) round of GATT negotiations took only six months to conclude a deal that reduced 45,000 tariffs. But there are now over 150 members of the WTO, a number that makes negotiations considerably more difficult.
Not surprisingly negotiations are more protracted when there are more countries (eg EU) at the negotiation table, and when the countries are not from the same region. Negotiations between more open and richer countries are finished more quickly.
This would place the UK in a very strong position given its world position and productivity. I have discussed this in another paper on the site.