DEBUNKING THE MYTHS ABOUT UK TRADE OUTSIDE THE EU
As we await to know if there will be a last-minute free trade agreement between the UK and the EU, Tony Sims analyses the realities of UK trade outside of the EU. It’s a long read – but you’ll see, it needs to be.
BREXITERS CLAIM that being in the EU reduces our ability to trade freely with the rest of the world and that the UK will be better off being able to negotiate its own free trade agreements.
Is that true?
They tell us, for example, that world food prices are cheaper outside of the protectionist EU and the British consumer will get a better deal once we leave, with greater imports of items such as New Zealand lamb.
They also object to a French company being awarded a contract to produce blue passports, simply because the French company is more efficient and can produce the passports at lower cost to the British taxpayer.
They appear to be saying that we can buy goods cheaper outside the EU, but actually we don’t want to buy them cheaper if it means UK jobs being lost.
And we want to save taxpayer money by leaving the EU, but then spend taxpayer money to save UK jobs, even though this would violate the free trade rules we want to adopt.
Perhaps the people who keep lecturing us about “the will of the people” are starting to realise that international trade is a complex beast.
THE EU DIDN’T STOP US TRADING WORLDWIDE
Let’s start with a basic fact about international trade.
Every person and business can sell goods and services to any person or business anywhere in the world, subject to the rules and regulations of the importing country.
There is a linked fundamental truth that Brexiters try to muddy the waters over – membership of the EU does NOT inhibit the UK’s ability to sell goods and services to any country.
Emmanuel Macron visited India in March 2018 and returned with a deal whereby French companies will supply various goods and services, including engines to an Indian airline and water system modernisation to the city of Davangere.
In total, €13bn worth of deals have been agreed. The deals were facilitated by the trade agreement the EU has with India.
Theresa May visited India in November 2016 and returned with deals worth a little over £1bn.
Clearly, membership of the EU doesn’t prevent member countries buying from and selling to the world.
THE REALPOLITIK AT PLAY
So why can France enter into better agreements than the UK?
One reason involves personalities. The UK and India are historically close, but there is a realpolitik at play.
For example, in 2018, Mrs May had a 90 minute meeting with Indian counterpart Narendra Modi. However, Mr Modi broke protocol to personally welcome M Macron on arrival at the airport near Delhi.
Emmanuel Macron was welcomed with a bear hug at the airport; Theresa May was welcomed with a casual handshake at Hyderabad House.
A harsh reality for the UK is that some countries are better at negotiating deals.
Partly because of productivity, partly because of political incompetence (it doesn’t help having a former Foreign Secretary, now Prime Minister, who delights in pleasing his base at home by insulting his hosts, for example), and partly because the UK is no longer seen as an attractive market.
The creator of Cobra beer (manufactured in Burton upon Trent, Staffordshire, as well as in Belgium and India) has been on numerous trade trips over the last 20 years and has said that breaking links with the EU means that the UK will become less important to Indian businesses, even though Indian companies have invested more in the UK than anywhere else in Europe.
EXISTING EU AGREEMENTS ROLLED OVER
When we left the EU, we were promised that countries were lining up to sign comprehensive free trade agreements with the UK.
But most agreements have simply rolled over existing EU treaties.
As for India, the UK’s medium term objective is no longer a comprehensive FTA, but limited sectoral agreements.
Following a meeting in July 2020, Liz Truss said that both countries wanted to keep all options on the table, including the possibility of a free trade agreement at some point in the future.
Indian garment manufacturers are concerned that there won’t be a tariff free deal on clothing, but, given that British retailers are considering reducing supply chains given the impact of Covid-19 on international movement of goods, the UK government would be seeking to keep tariffs to protect the developing minimum wage industry.
So much for cheaper clothing for British consumers, although the ‘Everything But Arms’ policy means that the UK will continue to import clothes from Bangladesh tariff free.
Some have suggested that trade with India is at such a level that there would be only marginal gains from future trade deals and it’s more important to look at Australia as a market.
India has a population of 1.3bn and GDP of $2.4 trillion and, in 2020, overtook the UK in the list of the world’s largest economies. Australia has a population of 24.6 million and is the 13th largest economy with GDP of $1.4 trillion.
WHY SIZE MATTERS
There is a brutal truth in international trade, size really does matter.
India is far more important to the UK’s economic future than Australia will be.
And will we be able to agree a deal with Australia as easily as Brexiters say?
In November 2020, the Australian government announced that they were expecting to sign a free trade agreement by Christmas.
That remains a possibility, but there is a complication.
Australia is seeking a freedom of movement element within any FTA, but that would contradict the UK’s declared immigration policy that, in theory, won’t discriminate between countries.
Meanwhile the UK was doubtful that an agreement will be signed as quickly as announced by Tony Abbott.
As regard the bigger picture in Australia, it is seeking to enter into a comprehensive agreement with the EU.
How easy is it to negotiate a free trade agreement with the largest countries?
We’ve seen that an agreement with India is far away, there is no chance of a full agreement with China, so what about the USA, the world’s largest economy?
Johnson liked to claim that a comprehensive deal with Trump’s America was going to be easy to reach, but what was the reality?
The USA has free trade agreements with only 20 countries, 8 of which were in the former NAFTA or the Central American Free Trade Area. And Trump demanded and obtained major revisions to NAFTA, because size matters.
Meanwhile, the EU and Japan have agreed what has been described as the world’s largest free trade agreement.
When the transition period ends on 31 December, the UK will be outside of that agreement.
FREE TRADE WORKS BOTH WAYS
The nature of trade agreements is that countries buy and sell to each other. So, for example, if we want to sell to Japan, we have to agree to buy from Japan.
Japan has a population of 127 million and GDP of £4.88 trillion. The UK has a population of 65 million and GDP of $2.57 trillion.
The UK has signed an agreement with Japan, but who do you think had the upper hand? Under the UK/Japan agreement, Japan has the right to intervene if the UK government tries to unfairly subsidise UK industry.
So much for the “sovereignty” demands that the UK is making when the EU seeks a level playing field on State Aid.
And the agreement with Japan is not a Free Trade Agreement. Tariffs remain in some cases, are abolished in others and are increased for some products.
When the UK was a member of the EU, more than 450 UK firms already had a presence in Japan, including smaller companies for whom Japan is a key market.
Membership of the EU allows the government to negotiate preferential terms for those firms, because of what EU membership offers in return.
Apart from some very minor concessions, the UK was unable to obtain more beneficial terms for those smaller companies than they already had and, in some cases, the UK producers are worse off.
For 10 out of 25 products that benefit from reduced tariffs under the EU/Japan agreement, including cheese, tea mixes and wheat products, the UK will be able to use any quotas left over by the EU. (The EU has priority on those quotas.)
Other products, including butter, whey and sugar, have lost all access to lower tariffs.
Evidence that, once again, the largest economies have the upper hand and we won’t get better deals just because Messrs Johnson, Gove, Fox and others wish it.
THE UK WAS BETTER OFF IN THE EU
The EU has over 50 different types of trade agreements with other countries and is in negotiations for better deals with every G20 country other than the USA.
And there are moves to try to reopen EU negotiations with the USA now that Trump will no longer be President. However, the EU remains firm on not opening up state healthcare to American private sector firms.
Whereas the UK has backed away from its promises to the UK public.
Whichever way you look at it, the UK was better off, politically as well as economically, in the EU.
One thing we have been told continually, by both pro-EU and anti-EU politicians, is that the British people did not vote to be worse off.
However, when the reality of world trade is examined objectively, the inescapable conclusion is that they may well have unwittingly voted to be worse off, partly because of the myth that the EU somehow inhibited our ability to sell goods and services to the world.
It didn’t and being outside of the EU weakens the ability of the UK to sign comprehensive agreements.
Article by Tony Sims, who is a retired corporation tax specialist.
On USA trade deals: https://ustr.gov/trade-agreements/free-trade-agreements
On EU trade deals: https://fullfact.org/…/how-many-free-trade-deals-has…/
On trade with Japan: http://www.exporttojapan.co.uk/doing…/uk-exports-to-japan
On the UK/Japan agreement: https://www.thegrocer.co.uk/…/uk-japan…/649911.article