Marcus Fysh is MP for Yeovil.
The House of Commons Select Committee for International Trade, of which I am a member, recently published its first report, into the UK’s trade options after we leave the European Union.
It is in the interests of both the UK and the EU to achieve a fully negotiated preferential trade agreement or binding framework for such between them within the UK’s two-year Article 50 withdrawal process, and I urge national governments across the EU to ensure that this happens.
Were this not achieved it would be a major missed opportunity and a blow for the credibility of the EU. However, the view that the alternative is “no deal” which would be “deeply damaging” to the UK, as has been mentioned by some in the House of Commons and elsewhere, is in my view not supported by the evidence.
Growth potential for the UK under the scenario of reversion to WTO membership without a preferential trade agreement was underestimated by commentators in the run-up to the referendum in June 2016, and their mistakes persisted in the evidence which the committee recently heard in its inquiry.
Notwithstanding that there are challenges with moving to trade under WTO rules, which I deal with below, there are three main ways in which the negative view of the WTO option is mistaken.
Firstly, it relies on a “gravity model” for the economics of trade, which is flawed since it merely reflects the correlation of trade growth with the proximity of nations involved in trade over the last 20 years, and assumes that this is a causal factor for trade which will persist in the future.
Contrary to the assertion within the report that this correlation holds “over all time periods”, and therefore would be repeated in the future, it was admitted by Dr Swati Dhingra of the LSE under questioning that her model merely used a correlation assessed over the last 20 years, and she did not demonstrate causation.
The 20 years in question were a period in which the integration of global supply chains accelerated after the fall of the Berlin Wall, with the advent of “just in time” manufacturing and with the accession of developing markets to these globalising processes in all major geographies. These processes were augmented in regions under newly established regional trading arrangements such as NAFTA, the EU Single Market after introduction of the Euro, and the development of ASEAN in association with the accession of China to the WTO.
Most of the data available in those 20 years, from which those who espouse “gravity models” derive their extrapolations, were affected by these factors which are not immediately repeatable. For instance the integration of developing nations and the integration of global and local supply chains due to technological innovation, and the impetus within new regional trade blocs that allowed proximity of nations to exhibit correlation with trade growth, such as NAFTA supply chain integration, and enlargement and interest rate convergence in the EU, have now run their course. Some, such as the new US administration, are looking to reverse their policies, and there are well-known problems in the Eurozone financial system.
The assumption within the modelling by those with a negative view of the WTO option – that the U.K. will experience relatively little growth in trade and no longer benefit from the exchanges of ideas that promote productivity and growth – are therefore tendentious.
Secondly, the negative view of the “WTO Option” fails to take proper account of the potential for a growth dividend from the UK’s service sectors if we can take a leading role in new rounds of multilateral service liberalisation via the WTO. It must be said that WTO members and the secretariat are excited and enthusiastic about that prospect. This includes liberalisation of trade in services. Renewed impetus in this area could also dramatically improve the prospects for bilateral or pluri-lateral discussions of other preferential trade agreements which the UK may undertake.
It should not be forgotten that the UK has a particular future role to play in continuing to offer its assistance to EU members in helping optimise international services liberalisation for the mutual benefit of the EU and UK, a role which the UK has been happy to lead on while an EU member.
Thirdly, the negative view of the WTO option fails to take proper account of the potential for a unilateral liberalisation approach to be a positive economic force. A unilateral liberalisation of applied tariffs on trade in certain goods could improve competitiveness, for example by means of cheaper imports, greater efficiency and value addition in similar domestic traded goods sectors.
Such positive effects are seen in the performance of the Australian and New Zealand economies over the past three decades. Nor does this does mean abandoning important sectors, as some like to imply.
Importantly, negotiating coin for future trade agreements is preserved with unilateralism because the liberalisation can be made permanent if transferred from applied tariffs to the bound tariff schedules. Leading in this area could encourage similar liberalisation and positive economic effects in the EU over time. In my view, the committee did not fully and properly examine this issue, in what was admittedly a short timeframe. Optimal trade policy is something the committee will be coming back to.
To return to the nub of the issue about future frameworks for trade with the EU, the overarching requirement of the Lisbon Treaty is for the EU to establish or maintain close relationships with neighbouring countries, as under Article 8. Furthermore, under Article 50 the withdrawal process has to take account of the framework for trade that will replace that which exists while the UK is a member.
Not to grant the UK successional arrangements on departure from the EU which at least establish mutual recognition, equivalence of assessment and conformity processes at its borders such as to maintain reasonably frictionless trade would arguably be a breach of Article 8, and for the EU to refuse to discuss these matters in parallel with discussion of the terms of withdrawal would arguably be a breach of Article 50.
The UK also has obligations in regard to these processes and articles, and it should as a matter of urgency put in place modern and flexible border arrangements which enable data compatibility and notification, conformity assessment grandfathering and origin-tracking processes in which the EU may reasonably have confidence. This would smooth our ongoing co-operation at the border, whatever the tariff and tariff rate quota division arrangements of our relationship going forward. Even under an EEA “single market” option, which is not realistic, such border arrangements would be required in many products, as they are on the border between Norway and Sweden, for example.
We should not underestimate the degree to which it is in EU members’ interests for us to be successful under any scenario at the WTO for schedule rectification with respect to tariff rate quotas and quotas for aggregate support. These are of crucial importance to agriculture and food processing within the EU, and would encourage third parties not to challenge the EU as it looks to adopt its own new schedules.
It is worth remembering that the EEA, which is often referred to erroneously as the “single market”, is an agreement between some EFTA states and the EU which was designed as a pre-accession tool to smooth accession to EU membership. It has stalled. In response to my questions of relevant players in EFTA and the EU I have not been given indication there is any chance at all that the EU would be content to offer such an agreement to the UK, even if the EU were prepared to renegotiate jurisdiction of the ECJ and free movement in that context, which it has stated it is not. Moreover, EEA agreement would bind the UK’s domestic regulation of services to EU norms, meaning there would be no dividend for the UK from multilateral services liberalisation. The Prime Minister is therefore right not to waste time and negotiating capital on this option.
The committee’s report did recommend that EFTA membership, with its variable geometry, might be something the Government would like to consider and I would support such consideration. It may also be worth the Government considering elements of the Lugano Convention, which EFTA members have signed up to for enforcement of certain judgments across wider territory, in order to preserve the efficiency of English law and jurisdiction in international business.
This is a time for heightened national spirit which we can turn to mutual advantage. Trade is not a zero-sum game but we need to be bold and make positive moves. We must all pull together in making new arrangements that work to the advantage of both Britain and the European Union. All departments should be task focused and oriented, and given the tools, resources and authority to move Britain rapidly to its positive new position. The private sector should also be proud to second its resources and employees towards making this national effort a success.
In this context I am very happy to support the Government’s constructive approach to Brexit and the negotiation of positive and open new arrangements with our EU friends and allies.