Brexit, trade and Britain’s place in the world

The fifth part of a series looking at the Leave vote, Brexit and what they will mean for the UK.

In London, Friday 24 June dawned with overcast skies. But few were looking skyward. Most were staring at some point, with differing reactions, at the news that the electorate had supported leaving the EU. During the day, the temperature climbed to a mild 22°C; reaction to the vote was febrile.

Recriminations in the Remain campaign began early, interrupted by a judicious, sober and mature announcement by the Governor of the Bank of England and by the brief speech of the Prime Minister announcing his intention to resign following a leadership contest in the Conservative Party. Then all hell broke loose.

We cannot foresee how, twenty years hence, we will look back at the events of that morning and the vote on the previous day. But it seems likely we will remember them and judge them to have been a turning point. As yet, we do not know in which direction the country will have turned, how far or to which destination it will travel or whether it will perceive itself as having arrived at a destination. So what do we know?

It is the common wisdom that, since the culmination of the Suez crisis in late 1956, Britain’s role in the world has been in decline. Crippled by debts from the second world war and struggling to rebuild its country and economy, the embarrassment of being forced, largely by the US, to withdraw from the Sinai dealt a severe blow to British prestige and established a largely subservient relationship to the US in foreign policy that continues to this day. Britain has not always followed the US; the US debacle in Vietnam was achieved without substantial British involvement. Similarly, the UK defended the Argentinian invasion of the Falkland Islands in 1982 without US assistance. But, following the Suez crisis, Britain’s influence in the Middle East declined and America’s grew. Britain has been a natural ally and partner to US foreign policy in Europe and the Middle East, but a junior partner.

When Britain finally joined the EEC in 1973 after the death of former French President Charles de Gaulle who had been implacably opposed to UK membership, EEC countries represented around 53% of its goods export markets; the UK sourced 50% of imported goods there. Over that time, though, Britain’s balance of goods to services has shifted from 70:30 in 1979 to more like 60:40 today. In 1973, the UK’s trading relationships with former colonial trading partners were substantial. As a UK House of Commons report on trade notes, since 1960 . . .

the US and Germany have remained the UK’s main export market for goods. However, the tables also show how the UK’s main export markets have shifted away from the Commonwealth countries to the EU Member States. In 1960, Australia, Canada, South Africa, India and New Zealand were all ‘top ten’ markets for UK goods, accounting for one quarter of all UK exports of goods. By 1980, not one of these countries was a top ten export market and in 2011, India (the highest ranked Commonwealth country and ranked 13th) accounted for less than 2% of UK goods exports. Eight of the top ten goods export markets for the UK in 2011 were members of the EU. The EU as a single ‘market’ accounted for 53% of all UK goods exports.

In relation to trade with Europe, in other words, to borrow a phrase from the French essayist Alphonse Karr, plus ça change, plus c’est la meme chose.

Since joining the EEC in 1973, Britain’s trading relations with the rest of the world have been governed by European rules and, increasingly, negotiated by European emissaries. As the world – including former colonial partners – has traded, with varying degrees of success, increasingly openly through the Bretton Woods instrument, the General Agreement on Tariffs and Trade (GATT), and the emerging mechanisms of the World Trade Organisation, the UK has been sheltered by the protections of the EU.

It is common here to view the EU as a benign force in international affairs. Mostly, this is fair. But on trade, the picture is more complex. Since the inception of the EU and its predecessor institutions, including the EEC, the biggest item of EEC/EU expenditure has been the Common Agricultural Policy. Born in 1962, by 1980, CAP consumed 72% of the EU budget; by 2014 that number had fallen to 39%. Largest CAP payments go to France (>10%; the third largest net EU contributor overall, behind Germany and the UK), Germany and Spain (<8%) and Italy (>6%). The UK is the fifth largest recipient at around 4% of annual CAP payments. Whatever their benefits or perceived political necessity, these payments maintain inefficient production and distort prices and margins throughout their recipient countries’ food value chains. And they hurt most the world’s poorest people and retard their economic development.

The EU has introduced a basis for trade with the world’s least developed countries – the Generalised Scheme of Preferences. GSP (tariff reductions on a range of trade categories) and GSP+ (tariff elimination in those categories) and ‘Everything but Arms’ (duty-free and quota-free entry) agreements offer some access to the world’s largest developed market for the world’s poorest nations. However, the pernicious effects of extensive subsidization of European agriculture via CAP appear to overwhelm the major benefits of these regimes. Most consequentially, relatively less efficient (i.e. higher wage cost and more capital-intensive) European agricultural production is maintained by preventing the gale of creative destruction from blowing through French and German agriculture. In place of consistent price signals and level trading ‘playing fields’, African and Asian agricultural producers are offered official development aid. Incentives to improve productive efficiency are dampened both in Africa and Asia as well as in Europe.

The progress of the EU in negotiating trade agreements under WTO rules has been decidedly mixed. A brief review suggests the EU is slow, indeed painfully so, at negotiating and concluding trade deals. By creating a multi-layered system of approval and prohibiting bilateral negotiations by EU members with non-EU countries, the EU predicates agreement with negotiating partners on post-deal approval and ratification by all EU countries; the free trade deal with Canada (CETA) has just been placed on this track. A deal commenced in 2008 with negotiations opening in May 2009. The deal was concluded in September 2014 and was reviewed, translated and approved by the Commission in July 2016. It will now be subject to ratification by all EU member countries. This suggests the period required for negotiation of trade deals with the EU. British ambitions for rapid agreement of a free-trade deal with EU appear fanciful.

That does not mean there will be no trade and no trade deal post Brexit. Without a separate, negotiated deal in place, Britain’s trade with Europe will be governed by WTO rules; it will trade under the WTO ‘Most-Favoured Nation’ status. There will be no vacuum. The EU could not impose punitive tariffs, quotas or other barriers on UK exports there or vice versa. Outside agriculture, the trade world would keep spinning. Even MFN status would see agriculture potentially facing substantial tariffs and quotas. However, as a heavy net importer of food, producing only 60% of the food it consumes, UK agriculture is likely to be benefit from any increase in tariffs; certainly, internationally, there are alternative sources of agricultural produce waiting in the wings. This is the greatest argument for the EU to negotiate rapidly to conclude a trade deal with the UK.

In financial and professional services, the picture is less clear. Within the EU, the UK serves as a convenient, legally predictable, English-speaking staging post in to the world’s largest market. That market, of roughly 500 million of the world’s wealthiest people, is an attractive target for Britain’s sophisticated financial services industry. A portion of the firms basing their European operations in the UK for that reason will relocate to mainland Europe. However, even within the EU, creating and accessing the single market has been problematic. Other professional services leverage the success of the finance sector. How that sector responds will be crucial to the short- and medium-term economic performance of the UK which depends heavily on those sectors.

Tellingly, the EU does not have trade deals with Commonwealth countries. These would seem to be the obvious place for a brexiting UK to begin. Although the differences in its stage of development and economic structure mean that India is not a natural starting point, Business Secretary Sajid Javid has already commenced trade discussions with Indian counterparts. The Chancellor is meeting a Chinese delegation shortly; Chinese officials have already signalled a willingness for such discussions, as have officials in a range of other countries. Canada, Australia and New Zealand all seem obvious candidates for direct negotiations. The day after the referendum result, US House of Representatives Speaker Paul Ryan urged a new trade deal with the US. No such deal is in prospect within the EU; the Canadian experience suggests it would be a long while before such a deal could be concluded with between the EU and US.

At a high-level, the impression is that the EU has performed poorly and is structurally inhibited in concluding trade deals with other countries. In contrast, there is no reason why the UK cannot be both nimble and effective. But trade deals take time and the devil is surely in the details – a brief survey of the Pacific free trade deal (TTP) illustrates the enormous complexity thereof.

In leaving the EU, Britain faces four principal problems:

(i) Perspective in industry and the bureaucracy

For forty years, British businesspeople and bureaucrats have increasingly engaged with the world as members of the EU. There are senior businesspeople who have never viewed the world through any other lens than that afforded by EU membership and the position post-Maastricht. A generation of British students have faced the option of degrees in EU politics, EU law, EU regulation. Industrial thinkers and negotiators and Whitehall technocrats are largely reflexively pro-European. If Britain is to thrive post-Brexit, they will need to adjust to a new non-EU European identity and a new, more internationalist reality.

(ii) Tendency to focus on the EU

Because we are leaving the EU, the natural tendency will be to focus on the process of exit. With so much of that relationship determined by existing rules, Britain’s future will stand or fall on its relations outside the EU and the deals it forges with other countries. Excessive focus on the EU exit process and subsequent arrangements will drain British energy and vision.

(iii) Availability of experienced trade negotiators

Britain has only a limited sovereign trade negotiation capability. While there have been British trade negotiators in Brussels, they have been representing European interests not British interests. The UK will need to source – and source very rapidly – a population of trade thinkers, negotiators, trade lawyers and other support personnel. These people will have other country affiliations. Somehow, the UK Government must figure out how to form a foreign-sourced negotiating capability in to an effective negotiating group that feels valued and contributory because it is valued and is contributory. That will not be an easy task.

(iv) No clear vision of its role in the world

Most importantly, after 40 years of life inside the EU, the UK lacks any clear or strategic perspective of its role in the world or its intention and capability to contribute independently to a liberal world order. Following slavishly the US has been shown to be unpopular and unrewarding; breaking from it would be destabilising, dangerous and self-defeating. The EU’s vision of effortlessly exporting freedom and democracy has proved limited and less-than-appealing to its intended audience, especially without the capability or intent to back up its words with actions when the circumstances of deteriorating security dictate.

Of the problems facing Britain after voting to leave the EU, the last is the least tangible but the most material.

The last time Britain expressed clearly and without equivocation a clear and resonating perspective of its role in the world was when Winston Churchill rose in the House of Commons to give his famous speech on Britain’s defence, less than a month after becoming Prime Minister. It was a brilliant and defiant speech of defensive intent; but it was a speech of character rather than vision. Now is not the time to speak of fighting on the beaches and the landing grounds, the fields and the streets and the hills; now is the time to look outward rather than inward.

Britain’s subsequent attempts to define a global role have been collectivist and internationalist, most notably Bretton Woods and successor bodies, the United Nations and its subsidiary organisations (such as the FAO, WHO, etc.) OECD, World Bank Group, IMF, IAEA, more recently the IPCC and a host of others. And, since 1949, NATO. And then, since 1973, the EEC morphing in to the EU. While many seek legalistically to invoke this internationalist perspective as a source of influence or legitimacy, such as over the decision to join the invasion of Iraq, British people do not refer to these organisations with pride; they do not evoke a ‘Battle of Britain’ spirit or, really, any spirit. They do not speak of or to our identity; they are technical, technocratic, they have utility.

Anguished attempts by successive recent Prime Ministers’ – Blair, Brown and Cameron, all – to define ‘Britishness’ are symptomatic of a Britain that is unsure of its identity, and thus strategically, adrift in the world. Cushioned by EU membership, this has not been a material problem – Britons have been ‘European’ and have had, sometimes reluctantly, to follow European rules – but the cushion itself has contributed to the effect. The British, and particularly the English, have been increasingly uncomfortable that their astonishing history and material, largely positive, contribution to building the world and to what it means to be ‘Western’ being subsumed in a willfully non-national, deliberately almost post-national, European identity. If the Leave vote was about immigration, it was as much about the visible manifestation of erosion of sense of identity as it was about pressure on public services. Post-Brexit, Britain’s unsettled identity and its strategic drift will be a problem.

A Britain that continues to drift politically and philosophically and cannot project a clear identity internationally will, like the elves of Tolkien’s Middle Earth, diminish and go in to the West. Such drift would make the exercise of looking back twenty years hence on the decision to leave the EU one of regret and a sense of opportunities squandered, of lives lessened. This would prove a weighty burden for those responsible.

By defining its role independently in the technical and legalistic sphere of world trade, Britain will, in part, redefine its broader role in the world. This will happen consciously and deliberately or incrementally, accretively and by default; as the great English Enlightenment philosopher, scientist, lawyer and politician, Francis Bacon, observed in 1597:

time is the greatest innovator; and if time of course alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?

Rather than drift, the next British premier and the Government she leads should reflect on who and what Britain is and why and how it came to be that nation: Western, European, enlightened, but independent and outside the EU. If done well, both the country and the world will be the better for it.

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