Are trade agreements passé? Deal-making after Brexit

19 July 2016

Flush from their Brexit referendum victory and settling into their new ministerial offices, hopefully those responsible for trade policy in Theresa May’s government are contemplating the UK’s priorities. Fevered speculation concerns the trade deals the UK could do and – in the case of the EU – must undo.

That speculation hasn’t got entirely out of hand. No one is seriously suggesting, for example, that the UK prioritise multilateral trade talks. Regrettably, almost a decade ago, the WTO ceased to be a viable place to liberalise commerce on a grand scale. All that’s left is the occasional consolation prize, the Trade Facilitation Agreement.

In a neat and tidy world, the UK would sort out with the EU and other governments new terms for London’s WTO membership. But precedent suggests that needn’t happen quickly – the EU still hasn’t agreed new WTO terms after its enlargements – and it is not clear what the trigger for closure would be on new UK terms either. Geneva will remain a backwater for UK trade policy, as it is for most WTO members.

Much speculation has focused on the regional trade agreements that the UK might sign once free of Brussels. What is worrying is that the weight of societal opinion is shifting in many countries away from using binding trade deals to implement reforms and liberalise economies.

It is hardly encouraging that the best that supporters of the Trans-Pacific Partnership (TPP) can hope for is the election of a US President that wants to renegotiate this deal. (The other candidate wants to tear up the TPP.) Ratification of the TPP may happen in the lame duck session of the US Congress before the next US president takes office – but don’t bet on it. It should be evident that in these populist times there is much less support for trade deals in the US.  

Add to this the toxic nature of discussions in European civil society about the Transatlantic Trade and Investment Partnership (TTIP). In April, representatives from more than 40 regions and cities met in Barcelona to declare their opposition to TTIP and the global talks on services reform (Trade in Services Agreement or TiSA). Some cities – even in Bavaria, the most conservative region in Germany – have gone so far as to declare themselves TTIP-free.

Let us also not forget that in the face of implacable public opposition in parts of the EU, President Juncker of the European Commission essentially gave up Brussels control of the trade negotiating mandate on genetically modified organisms, allowing members states to introduce production and import bans that effectively fracture the single market. Concerns that TTIP tramples on other cherished rights (e.g. data privacy) aren’t going away. You don’t have to accept the validity of these concerns to recognise their political potency.

Even more recently, the decision by the European Commission to allow the EU-Canada Comprehensive Economic and Trade Agreement to be ratified by the legislatures of the remaining member states introduces political risks that should worry any foreign government negotiating with Brussels. Once again, proponents of trade deals were on the back foot. Such deals have lost political viability on this side of the Atlantic as well.

Lack of clarity on the future of UK-EU trade relations, the potential for issue linkage with non-trade matters to complicate Brexit talks with the EU, plus doubts that legislatures of the EU member states will ratify any eventual deal with the UK, will cast a shadow over any trade talks the UK has with non-EU countries. Given this uncertainty, the UK should not be surprised if potential partners hold back. Even if some foreign governments start trade negotiations, London shouldn’t be shocked if foreign negotiators ask for clauses in trade deals extending the benefits of a subsequent UK-EU trade deal to them (technically speaking third-party most favoured nation clauses).

In their rush for results, UK ministers may be tempted by a trade deal with the US. No doubt some will point out that the Australia-US free trade agreement (FTA) was negotiated in 10 months, at lightning speed in trade policy circles. Alas, the electoral timetable in the US, plus the need for at least six months for the next set of US senior trade officials to get their feet under their desks, make unlikely the conclusion of any trade deal with Washington before the mid-term US congressional elections in 2018.

Proponents of a US-UK trade deal also need to realise that, in reality, foreign governments negotiate around the edges with the US. The US has a template for trade deals – you can take it or leave it. As for being a close foreign policy ally of the US, tell that to the Australians who were made to swallow a bad trade deal (so bad their own trade negotiators recommended that their government not sign it.) Doubters should read Ann Capling’s inside account of the Australia-US FTA talks, aptly called All the Way With the USA. Given its febrile mood, the British public might not swallow the US FTA template either.

Whether it is populism, electoral timetables, and the hard realities of trade negotiations, at this time real questions arise whether trade agreements are politically viable vehicles for market opening and liberalisation. So what does that leave?

As anyone who really watches commercial policy knows, the action these days is almost entirely taken at the national level. From new “Buy America” provisions to “Make in India” to Russian and Saudi “import substitution” initiatives, for better or for worse, 21st century trade policy has been principally about what commercial policies nations implement outside of trade talks. What matters more for British living standards is the terms that London sets for access to and operation in UK markets than the terms it wrings from others during a dash for foreign trade deals.

Simon J. Evenett is Professor of International Trade and Economic Development at the University of St. Gallen, Switzerland.