Trade & Brexit: Where next?

The New BrexitSec

Among the changes in Prime Minister May’s post-referendum reshuffle David Davis has now been appointed new ‘Secretary of State for Exiting the European Union’ or BrexitSec as I’m growing used to calling him. He caused a bit of a stir last Monday when he appeared not to know that the Republic of Ireland was no longer part of the UK. While a quick glance at a map may have told him otherwise I was slightly more surprised at some of his other comments which appeared to reveal his lack of knowledge over international trade, which will no doubt be a key part of any post-Brexit UK-EU relations. Discussing prospects for trade outside the EU he offered:

“Post Brexit a UK-German deal would include free access for their cars and industrial goods, in exchange for a deal on everything else…Similar deals would be reached with other key EU nations. France would want to protect £3 billion of food and wine exports. Italy, its £1 billion fashion exports. Poland its £3 billion manufacturing exports.”

He seems to have missed the part where being part of the EU means that you don’t have individual trading deals with single EU nations; rather they trade as a single bloc. Considering he was a former Europe Minister, who a government whip when parliament voted on the Maastricht Treaty in 1992 this was rather bewildering.

Last week he also said in an interview with Sky News that he expects the UK to negotiate a trading area “probably 10 times the size” of the European Union. However 10 times the size of the EU would of course be much more than the economy of the entire planet combined. Aside from minor discrepancies under pressure it is worth looking at what leading Brexit campaigners such as him (those who haven’t fled the scene or retreated to a safe distance) have in mind when it comes to Britain’s post-EU trading position. In a recent article on ConservativeHome on the subject he suggested:

“within two years, before the negotiation with the EU is likely to be complete, and therefore before anything material has changed, we can negotiate a free trade area massively larger than the EU”

He is of course aware it won’t be able to conclude any trade deals at all as it will still be bound by EU rules. The prospect of this happening within two years remains rather remote as it might require deals bigger than any the UK currently has and he hasn’t laid-out under what formula these would be conducted under, nor does it have all that many trade negotiators ready to conduct such deals. What makes trade matters with Europe more complicated is that the European Commission have already signaled their unwillingness to conclude any EU-UK trade deal before the Brexit negotiations are complete.

Mr Davis calls the ‘WTO model’ of trade negotiations “The worst case scenario” which would be in agreement with many trade experts, who see the WTO as being far from the vanguard of new trading partnerships, with large deals involving regional trade blocs becoming far more likely to lead to global trends. The EU currently has 36 regional trade agreements notified with the World Trade Organisation (WTO), whereas the UK has none, and it’s far from certain that the UK would be able to benefit from the existing arrangements after it left the EU. All free trade agreements negotiated by the European Commission specify that the agreements apply to members of the European Union and ‘docking on’ to these by a country no longer part of single market would require approval from the EU. This could mean the UK could have to negotiate 36 times to get back to where it once was. In this instance be better for London to go in search of fresh deals.

More shallow deals are on offer as part of the European Free Trade Area (EFTA) which countries such as Switzerland are part of and which the UK left in 1973. However a similar situation is on offer here as with the 27 countries who currently have free trade agreements with EFTA as they stipulate they would require additional treaties for others to join. Even though EFTA was able to conclude a trade deal with Canada in two years, much quicker than the EU did, it is much less useful to the UK than the EU – Canada deal, known the as Comprehensive and Economic Trade Agreement (CETA). The EFTA deals mostly cover goods and not services, so far from what would be ideal for the British economy.

David Davis’ has previously said that his preferred model is the CETA, which has just been agreed and is due to enter into force in the next few years (pending ratification). For a deal with Canada to provide a model is a surprising choice as the current deal reflect’s Canada’s specific trade portfolio based on commodities as well as agricultural and manufacturing products. While CETA does include services, investment and other trade aspects useful to the UK economy, it has very limited regulatory cooperation or harmonisation of standards, a crucial feature of the EU internal market.  On his recent trip to Canada Britain’s International Trade Minister Liam Fox said that trade talks with Canada had already begun, only to have his Canadian counterpart say publicly that the talks were currently only about the EU as a whole. Incidentally CETA has so far taken seven years to negotiate, so if it is the new BexitSec’s preferred option he may have to wait longer than the two years he had hoped-for.
The real prize for many is the EU-US free trade deal, known as TTIP. Barack Obama famously told the UK that it would be “at the back of the queue” if it were looking for a free trade deal with the US if it left the EU. What many forgot is that the UK (as part of the EU) is currently very close to the front of the queue as negotiations between the EU and US on TTIP are now well advanced and have been ongoing for over three years. However despite John Kerry’s statements in Brussels last week most insiders say that the deal is now effectively dead. It seems likely the deal will fail, largely as a result of a lack of results on the European side, but now thanks to Brexit and an up-coming US election, the deal (born at the G8 summit in Lough Erne in 2013) may never see the light of day.

The “queue” for free trade deals with the US is currently rather full, Washington is as of today in negotiations with 13 individual countries and five separate blocs of counties, the most important of which being the Trans-Pacific Partnership of 11 separate states. If UK were to politely get its way to the front of that queue there are prospects for such a deal, given that a simple bilateral deal could encompass areas where the UK and US are more similar (such as financial services and products) without having to defer to some other European concerns. However some have warned the mis-match between the two economies could lead to “TTIP on steroids” meaning that the US could hold vastly more sway in any such deal than the UK could. From a Northern Irish perspective if hormone-treated beef or chlorine-washed chicken were allowed into the local market-place as a result of the deal its uncertain what the consequences could be for the local agri-food sector, but my guess is they wouldn’t be helpful. And then there’s the NHS. Many are worried about the prospect of US companies buying their way into parts of the NHS privatised under the Conservative government. Hilary Clinton hasn’t said much on any such deal so far, most of the positive statements have come from Republicans in Congress, which is unlikely to reassure people on the NHS issue. Both current US secretaries for trade and commerce denied any bilateral UK-US talks outside the TTIP were ongoing this week.

The different theoretical options for post-Brexit trade remain just that. What seems likely from interaction with Foreign Staff since the vote is that there is certain to be a degree of jostling between Boris Johnson (Foreign Office), Liam Fox (International Trade) and Davis. It’s not known how these three Breixteers will work together, but an inevitable tug of war (or Eaton wall game) will surely have to take place to see who can deliver what with which resources and when. Splitting it across the three departments might have increased Theresa May’s control of direction of travel it will likely bring us no closer to what post-Brexit trade will look like.