Boris’s tough line on trade is NZ’s (and others’) opportunity

British PM Boris Johnson is not one to muck around.  Re-elected last week, he is hustling Parliament back into action to vote on his Brexit legislation before Christmas, to make sure the UK actually leaves the EU on 31 January 2020.

But the new and significant addition to the legislation is a requirement that the proposed transition period cannot be extended beyond 31 December 2020.

New – because it rules out a negotiating extension to complete a trade agreement.  It presumably means that on that day the status quo evaporates, to be replaced by WTO terms, and whatever the parties have managed to agree.

Significant – because it challenges the EU’s negotiating strategy.

To date the EU has dared Britain to accept a crushing embrace or take the initiative in leaving.  This choice mesmerised former PM Theresa May and her officials, maximising the uncertainty. Boris has called the bluff (if indeed it is one).

European academic Philippe van Parijs offers an insight into how some of the EU leadership will be thinking about Brexit.  He says:

“The agreement on ‘future relations’ must ensure that the outcome of the Brexit process is fair in a far more demanding sense. In particular, it must prevent a buccaneering Britain from wrecking Europe’s civilising project through tax competition, cherry-picking immigration and free-riding on the global public goods produced by the EU and funded by the net contribution of its more prosperous member states.”

The implication is that Britain conforms or is shut out.

Some Europeans – like Financial Times commentator Wolfgang Munchau – are less doctrinaire and more inclined to see the value in remaining close to a diverging Britain. He argues that the EU should not treat Brexit as a threat, but regard it as an opportunity to forge a strategic bilateral relationship. But he is not hopeful:

“If EU leaders had any strategic sense, they would now pause for a minute to decide exactly what they want from a new bilateral relationship with the UK. The signs of that happening are not promising. I am marginally encouraged by Angela Merkel’s comments right after the UK election, looking forward to “friendship and close co-operation between our nations”. But Mette Frederiksen, the Danish prime minister, immediately raised the issue of fishing rights – an issue with the potential to kill any trade deal. Ursula von der Leyen, the European Commission president, set out a sequence with a first phase of talks to include only goods and fishing. This is exactly the same approach the EU took in the negotiations over the withdrawal agreement. The UK would be mad to accept this.”

Boris now has the initiative and must be clear on what he wants to achieve.  As we pointed out in a previous posting, the fundamental choice for the UK is policy freedom vs trade preference.

If you think policy freedom is worth more, you would expect Boris’s initial offer to be based on reciprocity, resting on three principles:

  • Maintenance of the current tariff-free terms of entry for UK goods and services providing they continue to comply with the EU’s product rules (and vice versa for EU output complying with Britain’s).  Mutual recognition would be even better – but hey, it’s a negotiation remember.
  • For everything else, market terms.  If the EU wants disproportionate access to UK fish stocks, for example, someone pays.
  • And no future subsidies either way (with an exception for settling agreed bills, like pension liabilities).

As Munchau suggests, this sort of deal is a long way from the EU’s way of thinking.  So the UK must be ready to leave the transition on WTO terms, at least initially.

There would be advantages for the UK in this, if it moved unilaterally to a lower tariff regime (than the current EU-dictated one) and a more equalised one (ie, not favouring particular countries).  This would put price pressure on current EU suppliers. UK producers would have to adjust to more competition and less price distortion. The most productive businesses would expand; marginal ones would contract. 

The disadvantage is in the adjustment costs.  The Thatcher and Douglas revolutions give a hint of what these might look like.  This is why some knowledgeable voices say Boris wants close alignment with the EU (even though they know the cost of that may be intolerable).

Despite all the talk, no-one can credibly predict just how adjustment would play out.  It could hurt hard.  Nissan’s volume car assembly plant in Sunderland and Welsh hill farmers look highly vulnerable, for example.  But if you are prepared to pay extortionate subsidies (perhaps recycling the new resource rentals paid by EU fishermen?), you can keep just about anything on life support for a while, even if the mixture of collapse and panic is never pretty.

But risk for the UK and EU is opportunity – perhaps unprecedented – for trading partners ready to take advantage of the forthcoming separation.

Given the desirability for the UK of an open low-tariff strategy, there has perhaps never been a better time to negotiate a free trade agreement based on internal policy flexibility, mutual recognition, free movement of (skilled) workers, and external openness, whilst increasing economic integration with one of the world’s leading English-speaking services, tech and knowledge economies.  And also reducing dependence on powers with incompatible political systems (yes – this means you China).

One suspects the UK is following up vigorously on Japanese PM Shinzo Abe’s suggestion that it might join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).  Some aspects – like intellectual property – seem more consistent with Johnson’s emerging trade strategy.  And at the least, it could provide a softer landing for the Japanese auto operations in the UK. 

Is there is an even bigger prize?  U.S. President Donald Trump has hinted he is interested in (re)joining the CPTPP if there were a substantially better deal for the US, and indeed the recently-agreed USMCA free trade agreement already incorporates CPTPP-type rules on intellectual property.  A suitably structured US – UK free trade agreement might provide an opportunity for both countries to join a revised CPTPP. 

Even with a clear objective and a strong will, it is hard to see this being negotiated in less than a year.  However, both Donald Trump and Boris Johnson have compelling deadlines in the last eight weeks of 2020, giving them some pretty overwhelming incentives to strike a deal – in principle.

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