It has been another busy week with Brexit-related developments on all fronts, which illustrate that Brexit is far from over and that it continues to create new divisions in the UK and Europe.
French fishermen – angered by the delays to the issuing by the UK of licences necessary for them to fish in UK waters – erected blockades at Boulogne-sur-Mer to prevent lorries with fish from Britain entering France. PM Johnson was quick to deny any responsibility for the delay in issuing licences.
Tensions remain high with the EU institutions as well. The European Parliament finally set a date for the ratification of the Trade and Cooperation Agreement (TCA), but several MEPs also warned that the agreement could be cancelled if the UK continues to disregard aspects of the deal.
Closer to home, Yorkshire police reported an increase in hate crime and attributed the rise partly to Covid, partly to Brexit. On the other side of the divide, the anti-Brexit movement SODEM has announced new anti-government protests in Yorkshire and other cities in the UK once the Covid restrictions are lifted.
Problems persist at the border between Great Britain and Northern Ireland, with a group of ponies stuck at the port for several weeks making the headlines, while the demand for veterinarians – needed to carry out border checks – is soaring.
In Scotland, polls ahead of the Holyrood elections in May, suggest that Brexit has pushed a large number of Scots to support independence. 51% of the people polled said they supported the SNP’s proposal for independence and re-joining the UE.
All this indicates that Brexit continues to create divisions in the UK and beyond.
Trade Deals: Johnson’s Brexit Vaccine
What stuck out this week, however, is the importance that the topic of free trade agreements (FTA) has started taking in the post-Brexit debate. That is not surprising, of course. For PM Johnson, FTAs are to Brexit, what the Covid19 vaccine is to the Pandemic: Success on that front will make forgotten – so the PM will hope – the botched initial government handling of the issue. People who have lost loved ones in the pandemic may not easily forget the botched Covid19 response, with Johnson’s reckless approach to the pandemic in early 2020. The public at large, however, will soon only remember the successful vaccination campaign. The same holds for Brexit: Whatever happened in January to the promise of ‘frictionless trade;’ whatever promises Brexiteers have broken since 2016, if FTA agreements can be signed that make up for the loss of access to the EU’s single market, all this will be forgotten. Therefore, FTAs are Johnson’s ‘Brexit vaccine.’
This week brought mixed news on that front. The week started with a bizarre episode of leaked disparaging comments that Trade Secretary Liz Truss is said to have made about her Australian counterpart Dan Tehan ahead of a meeting to discuss a UK-Australian FTA. Some observers saw this as part of a ‘trade bullying’ negotiation tactic, although it is far from clear what the UK government may have hoped to achieve with snubbing one of its closest allies.
It might also be a sign of the lack of expertise in trade negotiations in Whitehall after 30 years of outsourcing of trade negotiations to the EU. The view that the Johnson government adopts an amateurish approach to trade negotiations may also be supported by news this week about the EU outflanking the UK on its trade partnership with Mexico. The UK rolled over a previous deal between the EU and Mexico in December, which was hailed as ‘great news’ in spite of the fact that a House of Lords committee found several important ‘flaws’ with the deal. Last week, the EU has concluded a new deal with Mexico that is likely to provide EU companies with significant advantages over UK companies. Nevertheless, on Friday, some outlets reported ‘major breakthroughs’ in the negotiations with Australia.
The UK-India trade deal and the promise of the ‘Indo-Pacific tilt’
The other important development regarding trade was PM Johnson’s cancelled trip to India where he was hoping to make progress towards an FTA with India. The UK-India FTA holds a lot of promise if you ask the pro-Brexit side of the debate. In particular, it is a key element in the UK government’s Indo-Pacific Tilt strategy. Therefore, the stakes are high. Yet, like I wrote last week finding common ground with India on an FTA is considered difficult given that the country has not concluded any FTAs since the 1990s.
In this context, it is interesting to see a new paper from the Institute for Economic Affairs’ (IEA) Shanker Singham on ‘The Eastern Promise,’ which provides an optimistic outlook on the likelihood of a UK-India trade deal.
Reading IEA publications always feels like a trip down memory lane; Into a time when trickle-down economics - which WB president Jim Yong Kim defined as “that assume any undifferentiated growth permeates and fortifies the soil and everything starts to bloom even for the poor” – was the dominant development paradigm and when few economists doubted that unbridled markets were the most efficient way of organising an economy. Since then, the world has changed of course. Not only was there the largest Global Financial Crisis since the 1930s, but also increasing evidence that the current model of capitalism is both creating inequality and destroying the environment. The World Bank – previously a champion of the neoclassical approach to economic development – rejected trickledown economics already in 2015. These developments seem to have passed by the IEA, which still advocates a simple approach to growth focussing on property rights and reducing trade barriers, with everything else falling into place as a result.
Based on this ‘theory,’ Shanker considers that the chances for the UK to conclude a deal with India are good. Shanker’s optimism is based on the assessment that India will mainly be asking that its agricultural produce are not banned from the UK market and for progress on ‘mode 4’ service liberalisation. Mode 4 – in WTO-speak – means nothing else than the free movement of natural persons to provide services in the partner country. Singham’s analysis suggests hence that if the UK lowers its Sanitary and Phytosanitary (SPS) standards and liberalised the movement of service providers, a trade deal could be reached. On the former, he is optimistic that the UK will show a greater willingness to compromise on agricultural product standards compared to the EU. Indeed, the paper castigates the EU’s ban on Indian Basmati Rice due to “low Maximum Residue Levels allowed in agricultural products – far lower than sound science would suggest” (p.8 – no reference for the scientific evidence is provided). The suggestion seems to be that the UK could use its new-found freedom to lower its residual levels for agricultural products, coming dangerously close to the chlorinated chicken strategy that we were told would not be pursued after Brexit
If the UK government were to envisage such a deal, it would essentially betray two important promises made during the Brexit process: maintaining food standards and limiting immigration. On the latter, recent evidence in the negotiations with the EU suggest that that the UK government would hardly agree to anything that smacks of free movement of people. Yet, assuming for a moment the government would go down that route, would this make up for the lost access to the EU market?
It depends of course on what the UK would get in return. Here Shanker’s analysis of UK interests is telling. The table on p.4 of his paper, setting out the countries’ main offensive and defensive asks, is almost comically empty. Indeed, besides high-end business services, the only British produce mentioned is Whiskey. Will the export of Whiskey to India make up for the lost access to the EU common market? I will let readers reach their own conclusion on this one.
Of course, export of business services – an area where the UK is undoubtedly world leading - may have a considerable effect on increased UK exports. However, the paper neglects a fundamental truth about trade deals that Brexiter still seem reluctant to accept, i.e. that they cut both ways. If India grants access to its service industry, it will want similar access in return. Here, the fact that the UK and India are two countries with vastly different levels of development – and hence wages – is important. While India can hardly compete with the UK in high-end business service, India is a provider of a wide range of services in the area of IT, retail etc. For instance, many call centres have of course been moved from Europe to India in the past decade or so. Due to the strong wage differential between the UK and India, it is unlikely the UK could compete with Indian rivals on price in the area of low skill services. If Indian providers of such low-skilled services are granted wider access to the UK market, considerable competition could arise to UK companies. There is growing evidence of a ‘China shock’ in the USA, whereby areas that were particularly exposed to import competition in manufactured products from China, have seen long-lasting negative effects on labour markets and living standards. Would a UK-India trade deal along the lines of Shanker’s Eastern Promise, imply an ‘India shock’ in the UK?
Of course, Shanker considers a UK-India trade deal not just economically desirable, but also as an important geopolitical move to start forging a democratic alliance to counter Chinese influence in the Asia-Pacific. The paper however does not provide much by way of explanation of its optimism about the possibility of such an alliance, which other commentators find rather unlikely. Thus, the FT’s editorial board notes “[m]any countries, including India, are wary of being part of anything that might be construed as a global anti-China alliance.”
Sovereignty: The discovery of a double-edged sword
Shanker’s arguments about the advantages of trade liberalisation in services illustrates a more fundamental point that Brexiteers clearly have not yet gotten used to. Namely, the fact that sovereignty cuts both ways and trade deal imply reciprocity. The British voted for Brexit because they wanted their ‘country back,’ placing sovereignty over market access. That’s the choice ‘we’ have made. Yet, Brexiteers cannot accept that other countries will retorque with the same strategy in in the post-Brexit world. Contrary to DUP MP Paul Grivan, who told the House of Commons Select Committee on International Trade this week that “we’ve been shafted and we’ve been punished by the EU for leaving” – I think we can hardly blame the EU for sticking to the deal that the UK government wanted. Surely, taking back control over your borders also means that you take back control over the goods and services that are sold in your country. Or as the French fishermen demonstrating against the delay in getting their licences to fish in UK waters after Brexit – agreed on by the Johnson government under the TCA put it: “If you want your waters, keep your fish!” If you do not want products to be sold that were produced using procedures you deem unfair or sub-standard by your country’s standards, isn’t that the very definition of sovereignty? Only in the age of gunboat diplomacy could you reasonably expect trade deals to grant you far-reaching market access without making any concessions on the alignment of regulatory or product standards. Yet, Brexiters keep insisting that the UK should be allowed to set its own rules, while denying the same right to the EU.
Is export-led growth an option for the UK?
This week’s news has highlighted the great importance Brexiters attribute to FTAs to deliver on the promise of continuing growth and increasing living standards in the UK. Yet, this raises two more fundamental questions. Namely, whether an export-led growth model is desirable (There are of course also downsides to export-led growth model, as German experts increasingly recognise. Andreas Nölke for instance calls Germany an ‘export junkie [DE]’) and secondly whether the UK could successfully implement an export-led growth model.
On the second point, despite all the rhetoric about Britain’s great past as a trading nation (e.g. in a report by the Institute of Export published this week), Britain actually has not been particularly successful in establishing an export-led growth model after World War 2. Since 1948, it has had yearly trade surpluses (the value of exports exceeding the value of imports) only eighteen times, all but one instances coming before 1985. Since then, the country has seen trade deficits every year. To be sure, service exports have grown, and the trade balance is mostly positive there. But overall, Britain spends more on importing than it earns through exporting. This hints at the fundamental fact that the UK has become an economy where aggregate demand is driven by domestic consumption – which is increasingly financed through private debt and the financialisation of real-estate assets. As a result, the contribution of exports to growth in the UK is more limited than in countries like Germany, Switzerland, and even Canada.
Were the UK to go down the German road of setting on foreign demand to generate demand for British products and services, what would its options be?
This questions hints at another important point that the IOE acknowledge in its report, namely that the international trade strategy needs to be aligned with the domestic industrial strategy. Indeed, you can only be a successful exporter, if you produce something that can be exported. This seemingly obvious point is often neglected in the current debate, and the government does not seem to attribute much importance to a domestic industrial strategy. Indeed, as Chris Grey aptly put it: we probably should not credit the Johnson government with having ‘plan’ where there simply there is none. This is illustrated by the fact that the Government recently dropped the latest UK industrial strategy elaborated under the May government in 2017 and instead replaced it with a much vaguer Plan for Growth earlier in the year.
As Damian Raess – of the World Trade Institute at the University of Bern – pointed out in the above mentioned International Trade Committee companies and national economies essentially have two ways to compete in the global economy: Either using the ‘high road’ of competing on quality in high value-added sectors, or the ‘low road’ of competing on price. Raess rightly pointed out that there may be a temptation in the UK to compete on price rather than quality. That is the case not only because of the UK’s tradition of a laissez faire approach to capitalism, but also because of the absence of necessary ‘beneficial constraints’ - – i.e. regulations that constrain firms’ leeway in undercutting certain standards, tame market forces, and encourage long-term investment in the workforce and equipment. Such beneficial constraints are considered key for high quality production and services.
The IEA, the government and other pro-Brexit actors clearly do not believe in such beneficial constraints. Rather, the intuition is to start a ‘bonfire of regulation’ and thus allow companies to purse any strategy they like. The latter can only lead to a race to the bottom, which makes high quality competition impossible. Competing on price, however, can quickly lead to a trap in the new post-Brexit trade world: One wonders, for instance, how much lower employment costs in the UK would have to be to compete with India in low-skill services.
Some actors seem to be aware of that, with the City of London for instance opposing far-reaching deregulation that would undermine the City’s reputation for high quality services. Indeed, the high-end service sector seems to be the area where such ‘beneficial constraints’ do exist in the UK. This week KPMG’s CEO Karim Haji confidently stated that the UK could live without an agreement on Financial Services with the UK, due to its leading role in developing such regulation allowing the provision of such business services.
The IEA on the other hand is moving towards a new terminology on regulation, distinguishing between anti-competitive, growth-restricting regulation and pro-competitive regulation. Such distinctions may make perfect sense (for instance they are integral part of ordoliberal theory). However, the IEA’s controversial Plan A+ is exceedingly vague on what distinguishes one from the other. Rather, any regulation coming out of the EU seems to be classified in the former category almost by assumption. The IEA clearly does not acknowledge that there are two strategies for competition and that one of them requires ‘beneficial constraints’ for market forces not preventing companies from making commitments to invest in skills.
To get his ‘Brexit vaccine’ PM Johnson will need to develop a joint-up trade and industrial strategy, that makes it possible to make concessions to trade partners without putting undue competitive pressures on domestic businesses. For now, such a strategy does not seem forthcoming.