Stephen Booth is Head of the Britain in the World Project at Policy Exchange.
Brexit is necessarily reshaping Britain’s trade relationship with the EU. Meanwhile, the UK is simultaneously trying to ensure continuity of, or build upon, existing trade agreements with non-EU countries, such as Japan, and reach entirely new deals with partners including the United States, Australia and New Zealand.
The UK also intends to accede to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which currently includes 11 countries on the Pacific rim including Japan, Australia, New Zealand and Canada.
Predictably, the EU negotiations are set to go down to the wire. Since Boris Johnson became Prime Minister all signs have pointed to a so-called “skinny” free trade agreement (FTA) or none at all. For this Government, Brexit is primarily about establishing sovereign independence, while the EU has sought to underline and assert its role as the dominant regulatory and economic power.
It is no wonder that politics has trumped economics throughout the Brexit process. The EU is a political endeavour pursued by economic means. The €750bn economic recovery plan agreed by EU leaders last month illustrates the extent to which the UK’s preference for confining deeper political and economic integration to the Eurozone faced an uphill struggle had it remained in the bloc. It is impossible to imagine any British government agreeing to such a dramatic expansion of the EU’s financial firepower or the precedent it has set for further moves towards a common EU fiscal policy.
Nevertheless, there are reasons to be cautiously optimistic about a UK-EU deal being reached. The latest negotiating round appeared to mark a breakthrough on governance issues. David Frost’s statement welcomed the EU’s “more pragmatic approach” on the Court of Justice and suggested the UK was ready to consider the EU’s preference for one set of governance arrangements, rather than a suite of separate arrangements.
The remaining sticking points are fishing and state aid. Fishing is not significant in terms of GDP but is politically totemic in the UK and certain EU member states. Therefore, a deal must be left to the last minute. Establishing a “level-playing field” on state aid is proving to be the biggest substantive issue to resolve. The EU is moving away from its request for dynamic alignment and the issue now is what domestic regime the UK will propose.
Negotiations with the US appear to have got off to a good start. However, both sides accept that a deal cannot now be reached until after the US elections in November. Therefore, the most difficult areas, such as agriculture, will not be addressed until later in the year at the earliest.
The most pressing issue Liz Truss, the Trade Secretary, discussed on her trip to Washington earlier this week is the removal of US retaliatory tariffs as part of the ongoing Airbus/Boeing dispute, which sits outside the FTA negotiations. The US has levied tariffs on whisky and further tariffs could be extended to gin and other products if the dispute is not resolved.
The prospect of delay with the US has made UK engagement with the Asia-Pacific countries all the more important and pushed accession to the CPTPP up the agenda. Toshimitsu Motegi, the Japanese Foreign Minister, is in London this week in an attempt to finalise talks on the UK-Japan FTA.
The Japan deal is an important stepping stone towards CPTPP accession, since Japan is the biggest economy within the agreement. The Japan negotiations are working to a condensed timetable because the parties are aiming to ensure a successor to the EU-Japan FTA is in place before the end of the Brexit transition period on January 1, 2021.
The time constraints mean that a UK-Japan deal will be largely modelled on the EU precedent. However, media reports have suggested Japan might be prepared to accelerate tariff cuts for British pork, and Japan is seeking the immediate elimination of car tariffs. The major opportunities for innovation in UK-Japan trade relations is on regulatory cooperation in the services and digital sectors. The FTA can provide the architecture but domestic regulators will need to work together to realise long-term gains.
Another reason why the CPTPP may become increasingly important is that Joe Biden has indicated that he might be prepared to (re-)join the CPTPP if his presidential bid is successful. President Trump pulled out of its previous iteration, the Trans-Pacific Partnership, spearheaded by President Obama. However, this could be a slow process, since Biden’s campaign has also emphasised that his primary focus will be on domestic investment and he has previously suggested he would seek to renegotiate CPTPP if the US were to re-join.
Some have suggested that engaging with the US via the CPTPP rather than bilaterally would defuse some of the thorniest issues, such as agricultural standards on chlorine-washed chicken or hormone-treated beef. However, the reality is that while the optics might be different, the UK will face many of the same substantive trade-offs whoever is president.
The CPTPP rulebook is much closer to the US approach – indeed the World Trade Organisation’s (WTO) approach – to regulating agriculture than we have inherited from the EU. Blanket bans on agricultural imports, not supported by scientific evidence, will not only be viewed as a protectionist move by the US but potentially by other members of the CPTPP.
The question of agricultural liberalisation cannot be ducked for much longer. Equally, as we noted in the recent Policy Exchange paper, The art of the UK-US trade deal, the issue need not be as stark as some of the hyperbole has suggested. The starting points should be to promote consumer choice, while ensuring consumer safety. The UK already has the right, under WTO rules, to prohibit the import of unsafe food. Labelling, either via domestic legislation or voluntary certifications, can be used to inform consumers of food production methods.
The UK’s domestic and international policies must also work in tandem. UK tariff liberalisation can be phased in gradually, giving UK producers time to adjust to new trading conditions. This would reflect the gradual introduction of the UK’s Environmental Land Management scheme, replacing the EU’s Common Agricultural Policy. Meanwhile, it should also be remembered that agricultural liberalisation is an export opportunity for high quality UK products, particularly beef and lamb.
In today’s world, trade agreements do not merely set tariffs or regulate cross-border investment. For medium-sized powers in particular, they are important building blocks for wider political relationships and alliances. However, in order to unlock these relationships, the UK must be willing to live up to its rhetoric on free trade.