Stephen Booth is Head of the Britain in the World Project at Policy Exchange.
Global trade is the result of billions of individual decisions taken by businesses and consumers, but trade negotiations and agreements are inherently political. They not only require politicians and policymakers to haggle, in painstaking detail, over tariffs, quotas, rules and regulations; trade deals are also tools of foreign policy and in an increasingly unsettled, competitive and multi-polar world they can signify alliances between nations or groups of nations. Outside the EU, the UK’s trade agreements must therefore simultaneously address narrow economic and wider geopolitical interests.
Last week, we learnt that the UK-Japan trade talks had hit a roadblock over UK demands for greater market access for exports of Stilton cheese. The talks still seem likely to conclude successfully but the episode illustrates how seemingly small issues can play a disproportionate role in trade negotiations.
This would be a significant agreement for the UK. Japan is the third largest economy in the world and an increasingly important strategic ally for the UK post-Brexit. A UK-Japan trade deal is also an important step towards the UK’s accession to the 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Total UK exports to Japan are already worth around £14 billion, just over half of which are in services, so increasing the market for UK blue cheese exports, which is currently worth around £100,000 in Japan, might appear a strange issue to potentially derail the talks. However, the UK’s demands on Stilton have not simply come out of the blue.
Growth in cheese exports is a recent UK success story, with the Department for International Trade (DIT) noting that the UK made it into the top ten cheese exporters worldwide in 2018, selling £665 million worth, almost half of which was cheddar. Growth in Asian markets in particular has been strong, with demand in China rising from £67,000 in 2013 to £6.5 million in 2018, so it is not unreasonable for the UK to seek greater opportunities for these products in Japan.
More significantly, the UK-Japan deal will replace the EU-Japan deal, which will cease to apply to the UK when the Brexit transition period ends on January 1, 2021. The goal, largely on the insistence of Japan, has been to seek a new agreement, rather than simply copy and paste the existing EU-Japan deal. Inevitably, however, with time tight, these talks have not departed significantly from the EU-Japan precedent with regard to trade in goods (services and data are likely to be the more innovative aspects of a UK-Japan deal).
“Automotive for agriculture” was a major feature of the EU-Japan negotiations and, in this case, Japan has been targeting an immediate removal of UK car tariffs, whereas the EU-Japan agreement only provides for phased reductions over several years. The UK has understandably countered that it cannot make the concession for nothing in return.
Under the EU-Japan deal, Japanese tariffs on hard cheeses such as cheddar would be phased out by 2033. But for blue cheeses, such as Stilton, there will only be duty-free access on an agreed quota. Reportedly, the UK has also targeted a faster reduction to Japanese tariffs on pork. If the UK is successful in increasing the quota or removing tariffs faster, it will have achieved concessions the EU did not, which would have obvious symbolic significance for Brexiteers.
We don’t yet know the full details of the eventual UK-Japan deal but the likely compromise is that neither side will get as much as they would like on cars or agriculture. Ultimately, this kind of tussle is part of the theatre of end-game trade negotiations, where both sides need to be seen by domestic audiences to be fighting hard over every inch. Indeed, given the importance of getting the agricultural lobby onboard in various UK trade negotiations to come, going into bat for British agriculture now is not a bad PR move for the Government.
Some commentators have questioned whether spending political capital on trade agreements is worth the candle since the estimated macroeconomic gains from them are relatively small. DIT estimates the increase to UK GDP from a Japan deal will be 0.07 per cent over the long run, while a deal with the United States would provide up to a 0.16 per cent boost.
Putting aside a valid debate about how accurately existing models capture all the facets of comprehensive modern trade agreements, these types of numbers are not unique to UK FTAs. The EU-Japan deal (the biggest ever completed by the EU) was estimated to boost EU GDP by 0.14 per cent, a figure regarded by independent researchers as “plausible, though at the high end of the range of past estimates”.
Ultimately, for advanced and open economies, trade agreements are rarely macroeconomically significant. They are opportunities to address microeconomic issues and require trade-offs to be made between them. These decisions can be hugely important for individual sectors, which is why they can be politically controversial.
Beyond any quantifiable economic benefits, closer economic and political cooperation via trade agreements presents an opportunity to build coalitions to help shape the course of regional or global developments. Successful conclusion of the Japan agreement and accession to the CPTPP will boost the economic and political relevance of the UK in the Indo-Pacific region, which is likely to host most of the world’s economic growth in the years ahead.
Similarly, Japan’s enthusiasm to reach a deal with the UK is not only about commerce. Foreign Minister Toshimitsu Motegi’s recent trip to London also provided a chance to discuss bilateral co-operation on security and defence, including the UK’s stronger stance towards China on issues such as Huawei and Hong Kong. A trade deal is another way to strengthen strategic bonds.
It is worth keeping this mind as another round of UK-EU talks – in this case to loosen ties – get underway this week. The Remain campaign had wanted the Brexit debate to be about trade above all else, but it was always primarily about politics. All trade agreements are political, but the level of economic and legal integration in the EU means it is as much, if not more, about politics than trade. Remain lost because it was unable, or unwilling, to make the intrinsic case for political union, or at least that it should be tolerated.
Indeed, the most significant macroeconomic consequences of Brexit – leaving the customs union and the single market – flow from the political desire to “take back control” of trade and regulatory policy. Continued dependence on Brussels in these fields without a vote in the EU’s political institutions was always likely to be untenable for the UK in the long-term.
Equally, sovereignty is never absolute. The more integration the UK seeks from trade agreements with the likes of the US and the CPTPP in the future, the more the UK will face difficult political trade-offs over its approaches to various issues from agricultural liberalisation to the regulation of data. Existing trade flows and geographical proximity to the EU will inevitably play some role in how the UK takes these decisions over the long-term.
However, it shouldn’t be a surprise that Brexit means treating the EU much more like any other trade partner. It’s the politics, stupid!