Whether it is the ability to “negotiate new lucrative deals” or “to catalyse a new phase of liberalisation of trade in services” (both takes from an article last week by Paul Marshall of Prosperity UK), or Liam Fox saying “for the first time in over 40 years the UK will have the chance to decide who we trade with and on what terms,” there is clearly excitement in some UK circles around the idea of Free Trade Agreements. Indeed it is becoming an ever more central part of the case for Brexit.
This excitement is frankly a bit baffling to longstanding trade experts.
Not that we don’t like Free Trade Agreements (FTAs) or think they are worthwhile. If you want to create the conditions for business growth then part of this has to include setting the rules by which they can trade internationally, with the aim of reducing barriers as far as possible. The World Trade Organisation does this only to a basic degree, you can do a lot more in bilateral agreements. Whether it is cutting tariffs, allowing services companies to operate in another market, removing unfair regulations, or streamlining customs processes, FTAs can make a difference to a business.
Free Trade Agreements are not, though, an economic game changer, or particularly quick to agree. The European Union has been negotiating an FTA with the South American “Mercosur” countries since 1999. We hear there may be a breakthrough soon. Then again we heard that earlier this year, and indeed in previous years. We should be able to move more quickly than the EU, but it is still rare to go from starting negotiations to implementing an agreement in less than three years. Meanwhile the economic growth from FTAs is most likely to be in the range of 0.05 per cent to 0.3 per cent of GDP, which is nice to have but not going to change the country overnight.
There are two reasons why FTAs are neither a game changer or particularly quick. The first that large parts of an FTA entail tackling a large number of small barriers, which inevitably takes time to negotiate, and may not be economically significant (but is great for the companies helped). The second is that as well as removing the barriers of the other party, they want to remove barriers in your market, which might cause you some difficulty.
“FTAs require considerable work, and will not deliver amazing economic results”Let’s start with tariffs. Years ago high tariffs were the main reason for doing trade deals. Those days are thankfully gone (though we keep a worried eye on President Donald Trump). While there are tariff peaks the average applied tariff in, for example, Australia, is 2.7 per cent for non-agricultural products. For the EU, and therefore by extension currently the UK, it is 4.2 per cent. Tariffs are usually higher on agricultural produce (11.1 per cent for the EU) but rather harder to remove, given that farmers tend to seek protection from foreign competition. Removing tariffs generally leads to economic growth. But in the case of a UK trade agreement with the United States that is likely to add less than 0.1 per cent to GDP.
What about services, the great hope of future UK trade deals? Here the barriers typically take the form of discriminatory treatment against foreign suppliers, including not allowing them to operate in the market at all. These restrictions are typically based around domestic regulations, and usually hard to negotiate away. The most infamous example is the historic Jones Act in the US restricting non-US vessels from performing maritime services wholly within the country. The US pays more in all sorts of ways because of this, but there is no possibility of the barrier being removed soon. Many other US barriers in services come in the form of state level regulations, which are typically not included in their trade agreements.
We have our own barriers which we will find hard to remove. Other countries believe our visa restrictions are a barrier to trade, and would like to see this addressed in our trade agreements. This will be difficult for the UK, but we will need to find some concessions if we want others to do the same.
Beyond tariffs and services there is talk of the opportunities to align regulations with other countries. Again though this typically requires detailed negotiation. Mutually recognising the products or qualifications of other countries is rarely straightforward, and requires a considerable amount of trust, for obvious reasons of safety. Similarly ensuring that rules and regulations facilitate rather than obstruct trade in areas such as intellectual property, customs, and procurement is usually painstaking work.
None of this is to deny the opportunities. There are many things that government can do through trade policy to support businesses, helping to clear the path for their exports, and ensuring the imports they need enter the country with minimal obstruction. Not all of this requires FTAs, indeed while we can only negotiate full agreements with a few countries at a time, we cannot ignore the business issues elsewhere. We need a global programme of negotiations, diplomacy, and patient work in international regulatory and standards bodies.
FTAs are just one of a suite of tools the UK government should be using, and not necessarily the main one. They require considerable work, and will not deliver amazing economic results. They should not be oversold only to disappoint, but rather prepared and delivered with extreme care, to gain the best results for UK businesses and consumers.
