Sunday, January 07, 2018
The most important trade deal is on our doorstep
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

I always try to start a new year in a mood of good cheer, and it is only in the past few days that I have come to realise the comic possibilities of Brexit. While some would call it a black comedy, who could fail to have been amused by David Davis’s “dog ate my homework” embarrassment a few weeks ago when the 58 detailed sectoral Brexit studies he had boasted about turned out to be nothing of the sort.

Then there was Theresa May’s dawn dash to Brussels in December to secure an agreement, days after the Democratic Unionist Party had scuppered a deal to move on to the second phase of Brexit negotiations. There will no doubt be more such dashes; not so much shuttle as shuttlecock diplomacy.

Many people have also seen the comedy in the activities of Liam “Air Miles” Fox, the international trade secretary, who is reported to have travelled 219,000 miles in the 18 months since he took on the job. He provoked mirth by holding out the possibility of Britain joining the successor to the Trans-Pacific Partnership (TPP), the trade grouping apparently fatally wounded by Donald Trump’s withdrawal.

With America out, the grouping consists of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Though Britain is not committed to replacing America in a new pacific partnership, Fox has not ruled it out and his ministerial colleagues say geography is no barrier to Britain’s participation.

The cue for the mirth is that this is happening as Britain is leaving a perfectly good trade arrangement with the European Union, an export market more than five times the size of the 11 TPP signatories. It is also that, whatever ministers may say about geography, it matters hugely for trade and, Brexit or not, Britain is not about to be towed into the Pacific.

I am no cheerleader for Fox but the barbs seem a little harsh. Travelling around the world is exactly what a trade secretary should be doing. The international trade department, started from scratch in the wake of the Brexit referendum, and having to cope with a gap of more than 40 years since Whitehall last had expertise in trade negotiations, has gone about its task in a sensible way.

In contrast to Davis’s Brexit department, known as DEXEU, where staff turnover is running at 9% a quarter and where the top civil servant, Oliver Robbins, was moved to the cabinet office in September to co-ordinate negotiations for the prime minister, the trade department is quietly getting on with it.

Trade negotiators have been recruited, and more are being sought. And, while Britain lacks firepower and expertise compared with the EU, America, and many other countries, the lost ground is being gradually made up.

There is nothing wrong, either, in an ambitious approach to future trade deals. Most of the supposed freedoms gained from leaving the EU are illusory but the freedom to negotiate trade deals, assuming there is no U-turn on belonging to the customs union or its equivalent, is one of them. Britain belonging to a pacific partnership may seem ludicrous but there is no harm in trying, and there may be goodwill as well as trade to be gained.

Britain runs an overall trade surplus, in goods and services, with the non-EU world, in contrast to the deficit with the EU. The three big prizes for post-EU trade deals, which will be the world’s big three economies by the middle of the century, are China, America and India. All three will be problematical, with conditions we may well not like. But they will need to be done, even of they take a very long time.

That is why there are two important provisos. The first priority for Britain’s future trading arrangements, which has to come before any new deals, is to roll over or “grandfather” the existing trade agreements the EU has with more than 60 other countries.

This will not be easy, as a new paper from the UK Trade Policy Observatory points out, and it may be necessary to prioritise some of these agreements. Agreement has to be reached by March 2019 and will involve trilateral negotiations between the EU, Britain and the third countries concerned. One difficulty that may arise is over definitions of the domestic content in exports once Britain leaves the EU. Another will be over regulatory divergence. I shall return to this.

The second proviso is that far-flung trade deals will be of little use if not accompanied by a comprehensive trade agreement with the EU that is as close to single market membership as possible. The EU is Britain’s biggest trading partner and, for reasons of both geography and history, will be for the foreseeable future.

Though the EU’s share of Britain’s exports has declined in recent years, thanks to the financial and eurozone crises and the rise of emerging economies, the EU share of Britain’s imports has been broadly stable. The export share, moreover, is now showing signs of increasing, reflecting the strong recovery EU economies are now achieving. The share of Britain’s goods exports going to the rest of the EU rose from 48% in 2015 to 48.2% in 2016 and 48.6% in the first 10 months of 2017.

This will be the year when the government has to move from vague generalities about Britain’s future trading arrangements to the specifics of at least achieving an outline deal by the time of Brexit, with the details then to be negotiated. The prime minister will find that she can no longer keep winging it in the hope of keeping her cabinet together. We are approaching cards on the table time.

There is nothing wrong, meanwhile, with the trade secretary travelling the world and talking potential trade deals with other countries. But this can never be an either-or. The most important trade deal to be negotiated is on our doorstep.