Trade policy in the time of Brexit

 

Earlier this week, in the midst of the unfolding political crisis over Brexit, I was invited to discuss the questions posed by the UK trade in services inquiry at the International Trade Committee event at the House of Commons, alongside other researchers and academics, trade policy experts and a number of business representatives. The news headlines were dominated by the just-released information on temporary import tariffs cuts that would come into force in case of a no deal Brexit, as well as by the ‘no deal’ vote itself.  Exciting times have not necessarily made for good policy. Our service-oriented economy may be particularly badly hit by a Withdrawal Agreement that restricts our access to the global market for services.  Let me explain.

In 2017 the European Union was the UK’s largest trading partner for both exports and imports of services. Whether the UK leaves the EU with or without a deal the outlook for the UK services exports is of concern. The Withdrawal Agreement as well as the Political Declaration offer a relatively unchanged access to the EU only for the UK goods. Therefore, it is almost sure that the British firms that would want to continue to sell services to the EU market will face new obstacles.

Previous NIESR’s analysis finds that trading on the WTO rules would mean that GDP would be some 5 per cent lower by 2030 than under a soft Brexit, with almost half of this effect (just over 2 percentage points) accounted for by a reduction in trade in services. Under the Chequers scenario - which is almost identical to the Withdrawal Agreement in the context of services trade - total GDP is predicted to be some 4 per cent less and the reduction due to the decline in services trade with the EU accounts for nearly 2 percentage points.

There are many factors that affect free trade in services, all of which relate to the non-tariff barriers such as harmonisation of regulatory frameworks, a set of equivalence rules, mutual recognition of qualifications, and free movement of people. The ways services are supplied also matter: they are often reactive to the architecture of the destination market, and vary across different sectors.

Although the EU’s Single Market is not fully liberalised, it is still significantly less restrictive than the market access conditions faced in the EU by the non-EU service suppliers (OECD, 2019).

Services trade liberalisation is a bilateral or multilateral process and, although often the WTO’s General Agreement in Trade in Services (GATS) is quoted as the reference point, it is in fact progressing mainly through modern trade agreements (e.g. CETA or the European Single Market). If the UK wants to gain, or re-gain, market access following the basic rules of trade negotiation, it will need to offer something in exchange (and in this context e.g. unilateral liberalization of tariffs on goods limits the scope for action). Leaving the EU may also deal a huge blow to the UK negotiating power, as the UK will no longer be the access gateway to a market of 500 million customers.

This leads to the broader question of the goals and potential of the UK trade policy in the near future.

First of all, Brexit is taking up much political energy in terms of domestic policy, leaving little space to think about other pressing general economic issues affecting the country (see for instance regional development policy ). When it comes to trade, it is vital not to lose sight in the Brexit fog of the big overarching challenges for trade policy, such as digital trade and e-commerce liberalisation, mode 5 services trade or agreements encompassing flows of data (e.g. recent EU-Japan trade agreement). As it happens the EU is often a leader in these areas. It might be sensible to join in this group in some capacity and have some control over the direction of those advancements.

Second, trade policy should be a slow-moving process, free of secrecy and ad hoc declarations, and possibly free of uncertainty. As many studies of the Brexit referendum vote have shown – uncertainty has real-economy impacts: UK entry into the EU exports would have been 5 percentage points higher in 2016; it has caused a 19 per cent decline in the overseas investment to the UK and a 12 percentage point increase in the number of new investments made by UK firms in EU countries.  

One of the big achievements of WTO negotiating rounds was a huge step towards transparency in the development of trade policy. The UK would benefit from such an approach in the context of Brexit, especially given that government has already a set of sound recommendations at hand.

Last but not least, any extension of the deadline by when the UK must leave the EU that leads to a deal is clearly desirable but if it leads to a no-deal scenario this does not mitigate the uncertainty in any significant way. Any period of extension should be used thoughtfully to develop and clearly communicate trade policy goals for the interim period as well as for the terms of the future UK-EU relationship. This policy should be publicly communicated as early as possible and with as much consultations and analysis as possible.

This is not just abstract economic theory. Businesses are vocal in their disappointment at the stalled political process and the uncertainty caused by Brexit has already had a toll on them in terms of withdrawn investment or reorganisation of business structures.

When it comes to trade the reality on the ground cannot be squared with some of the lofty ideas and suggestions being debated in the UK parliament. We really need experts, and we really need to listen to them.

 

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