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Tuesday, September 22, 2020
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Home Brexit Watch Who needs an EU trade deal anyway?

Who needs an EU trade deal anyway?

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Economist Catherine McBride writes that a trade agreement with the EU is less important than often suggested. Many multinational firms will continue to supply from their existing facilities. Even with no deal, she argues, trusted trader schemes would meet the needs of most multi-nationals. This article was first published in Briefings for Britain on January 31, 2020, and is republished by kind permission.

WHILE on a Brexit panel last week, I was asked: ‘If you were in charge of the EU-UK trade negotiations, where would you start?’ The question took me by surprise and my answer was incoherent to say the least. What I wish I had said is this: ‘I am not sure that I would start, and here are my reasons.’

First, to do any kind of deal you need at least two willing parties. The EU has shown that it is not a willing party. For months EU officials have told us that there isn’t enough time to finish the negotiations by December; now they have said that they can’t even start until March. They are obviously not very interested, so why should the UK waste any more time on them?

Instead, the UK should paraphrase and follow the advice of Stephen Stills: ‘If you can’t do a trade deal with the countries you want, do a trade deal with the countries you can’. Right now many countries are eager to do a deal with us, including some of the UK’s biggest trading partners. So if I were in charge of the UK’s trade negotiations, I would not start with the EU; I would start with Japan, Australia, New Zealand, Singapore, Canada, the US and maybe even Turkey. Bilateral agreements are always quicker than multilateral deals primarily because there are fewer voices demanding protection for their pet industries.

Trade agreements are as much about protecting domestic industries as they are about facilitating trade. For this reason, we do not need aggressively to pursue an FTA with the EU. After 45 years of free trade within the EU, through the process of comparative advantage, most production has already moved to the most efficient EU provider. So within the EU, there just aren’t that many industries where the UK really competes with other EU countries. The UK lost the battle for the high-volume consumer car industry; the UK’s steel output has fallen by about the same amount that Italy’s has risen; meanwhile the UK’s financial service industry has expanded beyond anyone’s expectations in 1973, as have the fintech, biotech and many specialist engineering industries.

In the early 1970s the large American banks which set up offices in Europe did not see the UK as a natural home, despite the similar legal system and language. Some such as Citibank set up in Geneva, others such as Morgan Stanley set up in Paris. It was really only after the 1970s oil price hikes and the rise in petrodollars held outside the US’s jurisdiction that the City of London became the centre for international finance. This was primarily due to the US government trying to tax these offshore dollar holdings, known as eurodollars, while the City of London was happy to give them a transaction-tax-free home.

I believe the real reason the EU wants the UK to adopt the same regulations and level playing field even after Brexit is not fear of competition with the newly independent UK, but fear of competition with the rest of the world for the UK’s 65million affluent consumers. For the last 45 years these UK consumers have paid large financial penalties for buying things from outside the customs union instead of from its internally protected industries. But despite these penalties, over 50 per cent of UK imports now come from outside the EU bloc. And it is this competition, from outside the EU bloc, that the EU fears.

The second reason not to worry about getting an EU trade deal is that the importance of trade deals has been somewhat over-hyped. If trade deals are so important, why don’t we have one with the UK’s largest trading partner – the US? Inversely, why does the UK do so little trade with most EU member states even though we have a free trade agreement with all of them? The reality is that trade is predominately done by consumers and businesses, not governments. Outside defence contracts and some infrastructure purchases, it is the consumer who determines trade. Even more so if the trade is directly to the consumer or via the internet – both of which are almost impossible for a government to tax at the border.

Similarly, UK consumers needn’t worry about losing access to Parmesan or Chateau Margaux. You don’t need a trade deal to buy these products. They’re available in the US and Australia even though neither country has a trade deal with the EU and both countries have their own substantial dairy and wine industries.

So why do so many people believe that the UK must sign a new trade deal with the EU which would compel the UK to obey all EU regulations even if those regulations are not relevant to the UK’s large domestic market or its non-EU trade? Despite all the noise, a trade deal with the EU is not particularly valuable to the UK’s future. This is especially so if it resembles the present EU agreement – which really only covers goods – given that the UK’s economy is now 80 per cent services. Without a trade deal, tariffs would be added to UK exports to the EU, but outside agriculture and cars (and the UK is a net importer of both), EU tariffs are low.

The companies squealing the loudest for a trade deal with the EU seem to be large multinationals which, as their name suggests, are already doing business globally and are perfectly capable of filling in a customs form. In fact they probably have whole departments which do nothing but fill in customs forms. Since the introduction of the single market, many multinationals have found it both convenient and profitable to mass produce car parts, medicines or groceries in one factory and transport them around the EU without being stopped at a border. But both car parts and medicines have low or zero tariffs, and the whole point of mass production is that the same standard is sold in all markets, even outside the EU. So it is hard to believe that either the EU or the UK will be able to invent a non-tariff barrier, such as inferior quality, that would hamper this trade. Rather than a full-blown trade agreement, a trusted trader scheme may be enough to placate these demanding multinationals.

If the EU decides to put a 10 per cent tariff on cars assembled in the UK but sold in the EU, that is its prerogative. However, as cars are the UK’s largest import from the EU, this would become a massive own goal if the UK decided to reciprocate the tariff. It would be better if Brussels considered lowering its 10 per cent car import tariffs to all countries as well as the UK. An efficient industry does not need tariffs to protect it: Japan has had zero tariffs on cars for many years and yet its car manufacturers are still the world’s biggest.

The other group demanding a trade deal are UK’s farmers. This is also misguided, because the UK is a net importer of agricultural produce from the EU. Illogically, some UK farmers fear that a trade deal with Australia and New Zealand would drive them out of business. But as both countries are in the southern hemisphere, their seasons are the reverse of the UK’s, and consequently they would not be competing with UK farmers.

This is not the case for EU agriculture, and while the EU’s CAP payments have been welcomed by UK farmers, the additional supply from EU farms, many with lower costs, has kept UK farm revenues low. If the UK were to do a deal with Australia and New Zealand there is even a chance that the UK could export their agricultural products to the southern hemisphere in summer as well as import from them during the UK winter.

Too many UK farmers believe that without protection and subsidies their industry would disappear altogether. This need not be the case. In the 1980s the New Zealand government dropped all subsidies and protection to its farmers. While there was a short-term uproar, in the long run this has created a much more vibrant New Zealand agricultural sector. Farms which needed subsidies to produce lambs discovered that they could grow grapes instead and created the New Zealand wine industry. Other farmers discovered new products such as Chinese gooseberries, which they rebranded as kiwi fruit and marketed all around the world. Incredibly, New Zealand’s Anchor butter is still a farmers’ co-operative even though it produces 30 per cent of the world’s dairy exports. Anchor has definitely come a long way from Takanini. New Zealand farmers discovered that they were a lot more entrepreneurial than anyone had expected. The sector has not died without government subsidies – it has thrived. I am sure that UK farmers would be able to do the same if they put their minds to it.

Another reason for confidence in the UK’s future trade outside the EU is that the developing world is developing fast. There are already 3billion middle-class people in the world and it is estimated that by 2030 there will be more than 5billion. As people become wealthier, they eat more, have money to save and invest, and have more leisure time. So UK industries should be looking for export opportunities outside the EU, not demanding protection, subsidies or tying themselves to EU regulations and the mythical level playing field.

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Catherine McBride
Catherine McBride
Catherine McBride is an economist who established and ran the Brexit Coalition.

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