No Time for Unrealistic Trade Agreements

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By Professor of Strategy and International Business Klaus Meyer

Recent discussion on alternative agreement for international trade to replace what political leaders consider ‘not in the national interest’ has shown the great naiveté of some very senior politicians. Let me focus on the UK’s efforts to shape its post-Brexit trade relationships, though similar arguments apply to the US with respect to the possible renegotiations of NAFTA, TPP and other international initiatives.

Other commentators have rightly criticized Theresa May’s ideas about fine-grained sector specific trade deals on the grounds that they would create a bureaucratic nightmare for business (e.g., Alan Beattie in the Financial Times), and that they require large numbers of experts to negotiate, which the UK simply does not have (see Nigel Driffield in The Conversation). Yet, there is an even bigger issue: any (trade) deal needs to offer gains to all parties. Why else would the others sign it?

Ms. May essentially wants free trade for sectors where the UK has comparative advantages –  such as cars and aerospace – and to create trade barriers where the UK has comparative disadvantages. Naturally others would want the same. Yet, by definition, advantages are comparative: one country’s advantages are another country’s disadvantages. So, a trade deal has to serve both sides – or neither.

Boris Johnson, the British Foreign Minister often mistaken for a comedian, might be right that potential partner countries are lining up to negotiate free trade deals with post-Brexit UK. But that’s because they expect to have strong bargaining power to get the UK to agree to liberalize sectors where they have comparative advantages!

Take the US. Similar to the Transatlantic Trade and Investment Partnership (TTIP) negotiation between the US and the EU, the US is likely to expect trade partners to remove barriers to their agricultural products, many of which Europe (including the UK) have long resisted: genetically modified foods, hormone treated beef and chemically treated chicken. Also, US health care service providers are looking for free trade access, without competitors being subsidized or otherwise government-supported. Agreeing to that would undermine the current funding model of the British National Health Service.

Or take China. A basic requirement of the Chinese authorities to start talking free trade will be recognition that China is a market economy under WTO rules, and a commitment to end anti-dumping actions against Chinese products. That will make it more difficult for UK representatives in China to complain about the unequal playing field that UK firms argue they face in China. It will also make it much more difficult to apply anti-dumping measures on Chinese imports to the UK; essentially the battered UK steel industry would lose its last line of defense.

In the EU it is even more complex. Anything other than simple trade deals would have to be given the green light by all 27 remaining members, or more specifically their national parliaments – in some cases even referendums. This is, by the way, thanks to 30 years of UK objections to transferring more power to the EU authorities; so don’t complain about it. But, good luck in designing a deal that creates benefits for all 28 national economies! It would be a nice spectacle to observe Theresa May and her colleagues canvassing through rural Poland or Lithuania to bring out the referendum vote for a contract that gives the UK the one-sided benefit it craves!

Dictating the rules for international treaties only works if one party has all the bargaining power, which the UK might have had during the height of its colonial empire. But not in the 21st century. Great Britain is a small island off the coast of Europe with a small manufacturing base. In the global economy it will soon be eclipsed by rising giants such as China, India and Brazil. Accepting that may be hard for a government party ideologically anchored in the past. But the more quickly they accept this fact, the more likely it will be for them to get any deal at all.

This article was first published by The Economist Intelligence Unit.

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