Fox on Free Trade – addressing the imbalance

On 29th September, Liam Fox made a speech in Manchester Town Hall setting out his (and the government’s we assume) attitude to free trade. And very laudable it all was too, referring back to Adam Smith and to liberal economic belief that free trade is the great driver of wealth and progress in the world.

But it wasn’t all wine and roses, and therein lies the rub for the Government, in extricating ourselves from the EU with the least possible economic risk (there is never a point where risk is zero -in any action there is always a risk factor).

It is a sad fact, however, that the proliferation of protectionist measures has often been by the very countries who should be the most ardent supporters of free trade.

The most recent WTO reports show an acceleration of protectionist trends since the 2008 recession – with the G20 being amongst the biggest culprits.

The USA for example, tends to look to inwards on trade before it looks outwards – and in fact did great detriment to the Lomé IV agreement which gave preferential treatment to the former colonies of the European powers on agriculture, allowing them one sided market access to Europe. It was the USA that petitioned the WTO to bring the Lomé agreement to an end, making all trade deals reciprocal under Most Favoured Nation Rules.

The EU though is equally protectionist in its own ways. The Common Agricultural Policy was designed purely to rig the market on agriculture in favour of home producers, by artificially pumping revenue into the sector, while maintaining high tariff walls to outside competitors.

So when Liam Fox then goes on to maintain that out trade with the EU will be

‘at least as free as it is now’.

he shows a great deal of optimism – especially as he is in favour of a short ‘Hard’ Brexit with no Single Market attachments.

In this he is talking about tariff barriers – and that he believes that we will not face tariff barriers to the EU if we leave because the trade imbalance we have with the EU will ensure that we get a free trade deal with the Single Market.

An unbalanced relationship

Where we have an issue is with the politics of Brexit, rather than the principle framework for relationships. None of the above is impossible, but the relationship is still some what imbalanced by the WTO, and how it regards trade blocks as against independent trading nations  – and most pertinently, the exemption from Most Favoured Nation Status.

MFN is a rule that is designed to open markets in a manner that is continually driving down the cost of import tariffs. If a trading nation charges a certain tariff on a particular sector, then it must charge the same tariff to all WTO members. Now that’s fairly simple – because it means that the playing field is always level.

Except it doesn’t.

The biggest players wrote the rules to protect themselves. The USA (NAFTA), the EU, EFTA – they all enjoy an exemption from the MFN status. Trade blocs are internally exempt from the MFN rule, so that they can remove tariff barriers internally while keeping a tariff barrier to the outside world. That part is easy enough to understand in that there would be no point of ‘Free Trade’ blocs if that were not possible.

But it also advantages trade blocks in another way. When a bloc does a free trade deal with another state, it is protected in that deal from MFN – it does not have to reduce its tariffs to all WTO members to match that.

But for the UK, this presents a small problem, and it is that which creates asymmetry between the EU and UK post Brexit if no specific deal is in place.

Let’s take the car industry. EU common tariff is 10% on finished cars, twice that on commercial vehicles and pickups. So when we come to look at our free trading outlook to the world we we surely wish to move to a much lower general tariff – around the average of say 3%. But the EU is a WTO member, so therefore we must charge it the same as we charge every other member – 3%, while it may still charge us 10% – the common external tariff. This might also be an issue in agriculture, another significant sector.

Free trade agreements

So to continue on this line of ‘They export to us more than we to them’ is shown to be total folly. We cannot liberalise without that asymmetry cutting in, something that none of the main campaigns mentioned, and Liam Fox seems not have mentioned either since the result. Journalists seem not to ask him about it – am I missing the point somewhere?

The problem with free trade agreements is that they can take a long time to negotiate. Article 50 is still only 2 years. Now of course it would be relatively straightforward in administrative terms, to negotiate a free trade agreement with the EU in manufactured goods. All the regulatory convergence is in place, we would just agree to continue on that path. As product regulation is lifting to a global level, this wouldn’t be a problem to us. But politically, I still think we face an uphill task in that the EU has a single agenda – completing the political union.

Signing a full free trade deal with the UK might be economically in the EU’s best interest, but the pain of not signing one is spread around the 27 fairly unequally. And what does that do to the project? Would the EU be willing to set a precedent in offering us an FTA, or extending Art 50 to ensure one was reached? It is not always the case that all participants act in their own economic best interests, or what we perceive those interests to be. They can be trumped by other more political issues. Therefore getting agreement could still be difficult.  Uncertainty is bad for business, disentangling  that which has been in place for 40 years, is not an overnight task.

This was why I supported the initial stage of joining EFTA and then utilising the EEA agreement as an interim arrangement while we looked to create a free trade agreement with the EU that jettisoned the last of the political baggage of the single market. It creates time, away from art 50. (Art 50 was designed to look like a fair exit, but act as a disincentive – it’s one of the great political con tricks of our age. Despite this, because it’s in the treaty we must use it).

It is one possible solution of many that are now appearing from researchers, after the Brexit vote. But it was this, the Flexcit, model that I campaigned on during the referendum. The principle I believe, remains sound – in that Brexit won’t be an event, but a process. Whether Flexcit becomes the basis for that process or not remains to be seen – new ideas will challenge it, and one might devise a better or more workable solution. Even Flexcit itself is not stationary and undergoes constant development and revision. But whatever happens, the simple message of ‘It will hurt them more than it hurts us’ should be thrown out with the campaign slogans, and we should start to deal with the detail of the world of trade as it is, not as we would like it to be.

 

Postscript:

Mr Brexit runs with a very similar theme today on the ‘Brexit Blog’. Well worth a read.

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