Sunday, March 26, 2017

Matt Ridley: Free trade agreements are easier if you keep them simple


The prime minister will soon press the button and launch Article 50 on its inexorable, ballistic trajectory towards impact in March 2019. From the political class here, let alone in Brussels, comes incessant pessimism about those two years: it will be fractious, we are not ready to negotiate, a trade agreement is all but impossible, the timetable is too tight, we’re going over a cliff.

This is mostly wishful thinking by those who want us to fail. A conversation last week with the former Australian prime minister Tony Abbott brought this home to me. When he became prime minister, Mr Abbott did something unusual. Noticing that his country’s trade negotiators had spent years meandering towards deals with China, Japan and other countries – enjoying room service in five-star hotels in different cities as they did so – he set them deadlines.

Within six months Australia had signed a trade deal with South Korea; Japan took eight months, China 13. There were just 150 people or so involved on the Australian side. As Mr Abbott says, trade deals are simple – if (shock!) you make them about trade. It’s only when you make them about standards, regulations, legal disputes and corporate interests that they get difficult. The Legatum Trade Commission, assembled to advise on Brexit under the chairmanship of Shanker Singham and consisting of senior trade negotiators from America, Canada, Mexico, Switzerland, Singapore, Australia and New Zealand, has said much the same: these deals are as hard as you make them.

[Here is Mr Abbott's own account from his Australian Spectator diary: 

Obviously, Australia’s deals with China, Japan and Korea owed much to the indefatigability of our then trade minister, Andrew Robb; and the skills of our official negotiators, ably led by Jan Adams, now our ambassador in Beijing. My contribution to our success was first, to set a deadline to conclude discussions that had been meandering along for a decade; second, to ensure that we weren’t side-tracked by peripheral issues such as labour and environmental standards; and third, to ensure the focus and drive from the top without which these deals never come to fruition. Our insight was to grasp that free trade deals are too important to leave to the officials. If you leave it to the negotiators, the negotiations never end. Some of them had already involved up to 20 rounds of talks. Goodwill had been established, issues had been clarified and problems had been crystallised but all that had ever really been decided was the need for another meeting at a suitable venue. ]

The European Union makes them very hard. It began negotiating a trade agreement with America 27 years ago. The resulting TTIP leviathan is barely about trade at all, but about the rights of multinationals in the courts and other such matters. As the financier and philanthropist Miles Morland put it: “Even the EU politicians gagged on that. Great negotiating, Pierre. The TTIP is never going to be signed. It’s loo-paper.”

[Here is a longer extract from Mr Morland's essay: 
“Never mind,” say the Doomies, “Once the UK has left it will have no Trade Agreements. We’re lost without them. And, as the EU has been doing all the trade negotiating for its members England doesn’t even have any trained trade negotiators. We’re doomed. How can we trade without Trade Agreements?” So runs the mantra repeated daily in the EU Pravdas as the Guardian and FT advise Mr Davis which knee he should bend to Mr Juncker as he begs for Access.

Scary stuff. I was worried too by this dandruff of doom and so I did a bit of nosing around to find out which of these important EU Trade Agreements we will be missing out on after we leave. In the forty-three years that we have been an EU member they must have negotiated some great deals on our behalf.

The EU’s biggest trade partner is the US. Well, thank God for the TTIP, the Transatlantic Trade and Investment Partnership between the US and the EU. The EU’s super-skilled negotiators have now been negotiating this for, er, 26 years, having started in 1990. Is it signed? No. Will it ever be? No. Why not? Because Brussels’ super-skilled technocrats have allowed the Americans to write an agreement which lets US multinationals do what they want in Europe without being answerable to European courts. Even the EU politicians gagged on that. Great negotiating, Pierre. The TTIP is never going to be signed. It’s loo-paper. When Mr Obama says the UK is at the back of the queue we could tell him that there is no room left as it already has 28 EU countries standing there sucking their thumbs knowing that they will never have a trade agreement with the US.

Oh OK, forget the US. We need to trade with China. That’s where the action is. China is the EU’s second biggest partner. How can we trade with them without the benefit of the famous EU-China Trade Agreement? Ah yes. Would that be the one that the EU’s super-skilled negotiators have been working on for ten years? Yup. How many summit trade meetings have they had in that time? Sixteen. And how close are they to signing an agreement? Well, put it this way, the Labour Party is more likely to win an election first.
Well, India, then. They’ve just falsified their numbers to show they are growing even faster than China these days. The EU is India’s largest trade partner. Must be because of the EU-India accord. Ah, that accord, the one the Brussels and Delhi bureaucrats have been negotiating since 2007 and are nowhere close to agreeing. Mr Modi seems keener on signing an agreement with the UK than he is with the EU. At least we speak the same language.

Wow, Puzzling. Does that mean the EU has never succeeded in signing a trade agreement with any of its major trading partners? It does. Never, and not in sight of doing so. One hates to think where they would be without their “skilled negotiators”. It’s true that the EU does have some agreements with other European countries and trade associations, like Switzerland, Norway and the EEA, and a number of agreements with countries that used to belong to the Europeans’ various empires, like Algeria and South Africa, but, as far as actual signed trade agreements with non-Europeans are concerned, the EU has signed a “customs union” with those nice Turks and has agreements with Chile and Mexico. No idea if drugs are included in that one.

And, since you ask, the EU has no free trade agreement with Japan, the world’s third biggest economy, nor with Russia. Nor Canada. Nor Singapore. Nor Australia. In fact, South Korea is the only major economy with which it does have an agreement. But, wait, the EU is close to finalising an agreement with Zimbabwe.

Our betters in Notting and Primrose Hills tell us though that “without access” to the market of the soon-to-be-bankrupt EU we are doomed. Free access is the only thing that will save the UK, say they. We must go on our knees to Mr Juncker and pay him bribes for “access” while he “punishes” us, his words, for voting the wrong way.

The funny thing is that the EU does a huge amount of bilateral trade with the US, China, India, Canada, Japan, Russia, Australia, Brazil and many more. None of these countries has “free access” to the EU yet they don’t seem to be doing too badly at trading with them. In fact, no country of consequence apart from South Korea has free access to the EU. If we don’t either, is that going to kill us? We’ll be in good company, along with the US, China, Japan, Russia, Canada, and Australia. And, somehow, I suspect our civil servants will get by without the help of the skilled EU trade negotiators who, in the seventy years since the founding of the EU, have yet to sign a free trade agreement with any of the world’s top five economies. http://www.theeuroprobe.org/2016-056-well-written-article-on-post-brexit-by-miles-morland/]

The European Union has spent ten years negotiating trade agreements with China and India, with no agreement in sight. So when you hear the usual Sir Humphreys babbling on to the BBC about how it takes at least seven years to negotiate a trade deal, and the usual m’learned friends licking their lips as they talk of the thousands of lines of detail appended to such deals, remember there is another way of doing things. Countries like Australia and Iceland did quick trade deals with China that were about…trade.

Besides, there seems to be a growing misapprehension that you need trade deals to trade, as if they were licences to trade. America, China and India, with which the European Union has no deals, are among its biggest trading partners. The EU is actually the best organization to join if you don’t want trade deals. It has remarkably few and they are mostly with small countries: Mexico and South Korea are the biggest. This is not surprising, because getting 28 countries to agree the terms of a trade deal is not easy.

None the less, there is a big reason that getting a special UK-EU trade deal by 2019 is actually easier than it looks. It is unlike any other trade negotiation, because at the start there are no existing tariffs, or differences in regulation and standards between Britain and the EU. We would like to keep it that way as far as possible, and so would most European commercial interests and consumers. We will have to discuss introducing trade barriers from scratch. In every other case, it’s a matter of “We’ll remove tariffs and barriers to your exports if you’ll remove the barriers to ours”.

(Note in passing that this the wrong way round. Imports are what we want; exports are what we are prepared to give to get them. After all, we impose sanctions on evil regimes to deprive them of imports. If we ran our lives the way politicians talk about trade, we would insist on giving a shopkeeper as much money as possible, then reluctantly accepting some of his goods.)

The UK-EU trade talks could therefore conclude quickly with good will. Good will, however, is lacking on the other side and the EU may indeed want to impose barriers from scratch. If that happens we should not retaliate. As Patrick Minford and Edgar Miller of Economists for Free Trade, put it, retaliation “will lose half the gain from achieving global free trade, will disrupt manufacturing supply chains, and is likely to harden the EU’s resolve not to climb down over the long-term.”

So we should sign a one-sided deal anyway. The only reason not to is that £50 billion bill. If they insist on that, then we can leave the EU on World Trade Organisation terms. WTO tariffs are a low barrier to trade with the single market, as China, America and others show every day – and if we abolish the EU’s external tariff when we leave we will see huge gains from trade. In any case, the fall in the pound more than compensates for such tariffs. I talked to a British manufacturer last week who said with the pound at $1.20, he can barely keep up with global demand on WTO terms from the rest of the world.

Diehard remainers who liken that outcome to crashing off a cliff edge into catastrophe are wrong for two reasons. First, under the WTO’s Most-Favoured Nation principle, the EU cannot raise tariffs on our goods higher than they impose on other countries. It cannot discriminate against us.

Second, under the WTO’s National Treatment Principle, the EU cannot use non-tariff barriers, such as regulations and standards, to discriminate against British goods and services to favour domestic businesses instead. 

[Patrick Minford put it this way in an email to me: Since plainly we satisfy all the regulative requirements, being currently subject to them, it cannot apply discriminative treatment against our products, claiming they do not satisfy the EU standards required for sale in the EU. We have consistently assumed this in our calculations. Similarly for anti-dumping duties or threats of them. Any EU attempts to apply such ntbs to us would create grounds for WTO court action.]

So there is no cliff. The EU negotiators can make a cliff if their want, but only for their own consumers. Imposing tariffs is like blockading your own ports in wartime, says Ryan Bourne of the Cato Institute.Tim Worstall tells me that Joan Robinson paraphrased Frederic Bastiat when she said: 

"Even if your trading partner dumps rocks into his harbor to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbor."

The prime minister is quite right to insist that no deal is better than a bad deal.

Ask yourself, for a change, what could go right. As Daniel Hannan MEP put it when introducing Tony Abbott at an event last week, only two countries – Hongkong and Singapore – have tried unilateral free trade and eschewed retaliation recently, with spectacular results. If a major economy like Britain did it, the world could be transformed.


Matt Ridley, a member of the British House of Lords, is an acclaimed author who blogs at www.rationaloptimist.com

1 comment:

Peter Caulton said...

As usual Matt a bulls eye for truth and facts.