What role can the UK carve out for itself in global trade policy after leaving the EU? It will be able to speak with an “independent” and “distinctive” voice, will relentlessly push the case for free trade and multilateralism, and will strive to ensure that everyone is able to access the benefits of trade. That, in essence, is the case the UK Secretary for International Trade, Dr. Liam Fox, put to his audience at Geneva’s Graduate Institute on the occasion of a recent visit (21 June). His address came a day after the EU Withdrawal Bill cleared both houses of parliament, and a few weeks before the UK Parliament is to vote on a Trade Bill and on a Customs Bill.
The UK’s efforts to position itself in the global trading system come at a time of unprecedented instability in that system. The immediate symptom of this is the trade war – the cycle of tariffs and retaliation – currently unfolding between the US and other major trade partners. But that itself is only the tip of a large iceberg. Underlying current tensions are the effects of creeping protectionism since the global financial crisis, the lack of serious engagement by developed and developing countries alike with the WTO, and a popular disenchantment with trade that itself reflects the inability of governments to address the disruptive effects of trade and technological progress.
If we add to these the complexities involved in the UK and EU negotiating the terms of a future partnership, how can the UK go about finding its own voice in this cacophonous context?
1. Gravity still matters
Sensible approaches to modelling trade recognise the importance of economic size and distance in influencing trade flows. Distance is not only physical. It is also institutional. Greater levels of institutional integration facilitate trade. This is true even – indeed, especially – if trade becomes progressively dominated by high-value added goods and intangibles (such as knowledge-intensive services). This explains why most models predict that it will be difficult for the UK to offset the costs of losing current access to the EU’s single market by signing free trade agreements with the rest of the world (an optimistic assumption in and of itself). But there are also more subtle implications:
- First, a loss of integration the EU will affect the UK’s global supply chains. This is particularly true of knowledge-intensive services. For example, losing access to skills because of restrictions on the movement of people with the EU acts as an implicit tax on all the UK’s exports. As our work on the architecture sector suggests, this applies even to sectors that export primarily to non-EU markets.
- Secondly, preserving deep integration with the EU places constraints on how far the UK is able to pursue deep integration with the rest of the world independently of the EU.
All of this mean that in order to make the most of its new place in global trade, the UK may need to be to more relaxed about some of its self-imposed “red lines”, notably on free movement, and also on questions of institutional cooperation. Another is that the UK, long one of the EU’s liberalising voices, both externally and internally, will need to focus a substantial amount of its diplomacy in engaging with the pro-liberalising, outward-looking forces within the EU (see next point).
2. Distinctive voice, but how persuasive?
One of the ironies of Brexit is how far removed from reality is the perception of the EU as a monolithic bloc imposing its will on a recalcitrant UK. In fact, the UK has been a key driver of EU policy, in areas such as services liberalisation, and in trade policy. In that sense, the EU was a “multiplier” of UK influence. Outside the EU, the UK will have a more distinctive voice, but the central question is whether it will carry more weight compared to when it was perhaps less distinctive, but influential behind-the-scenes. The difficulties the UK has had in gaining any headway with the US on trade, despite the oft-alluded to “special relationship” are suggestive of the answer.
Again, this underscores the need for the UK to work closely with the EU. Leaving on good terms, with a deep agreement in place, will help.
3. It’s the micro-economy, genius.
Most of the public discourse on the UK’s role in global trade has been couched in terms of high-level policy issues, such as the architecture of trade agreements, whether with the EU or other partners. But in the last 15-20 years there has been an explosion of research into the relationship between firm-level factors and international trade. One of the key insights is that producers that are more efficient and productive “self-select” into exporting, and that this stimulates further productivity gains and expansion.
If that is the case, then becoming a leader in trade will require more than negotiating lots of trade agreements. It will, first of all, require putting in place a domestic reform agenda that addresses constraints on efficiencies and productivity. That is an agenda that goes well beyond the remit of trade departments. In the case of knowledge-intensive industries, it requires policies that stimulate clusters and linkages, innovation and labour market mobility. In agriculture, there is an opportunity for the UK, once it has left the EU, to identify how policy can be directed away from intervention in product markets and more to addressing forms of market failure.
The insight into the linkage between productivity and the decision to export also has implications for regional policy. If more productive firms and sectors are not evenly distributed, then we would expect that greater openness to trade will increase regional disparities as more productive firms expand, and less productive ones shrink or exit the market. These uneven effects explain in part the backlash against trade that Dr. Fox alluded to, and not addressing them will create political resistance to the UK’s trade ambitions.
In short, the UK can stake out its ground in the leadership of global trade. To do so, it will need to shed dogma for pragmatism, and it will need to take a deep look at unfinished business at home.