Fredrik Erixon

Boris and the Brexiteers are talking nonsense about Britain’s trade policies

Boris and the Brexiteers are talking nonsense about Britain's trade policies
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Meet Boris Johnson, Britain’s new chief trade negotiator. I admit it is an effort to imagine Boris in that parish, haggling with dry regulators over technical barriers to trade like phytosanitary rules and mutual recognition of standards in nuclear engineering. Yet Boris has great aspirations for Britain’s future trade deals, and his gusto is certainly needed if the UK is to replace its current market integration with Europe. Yet relish for the Brexit cause hides neither his confounding story about Britain’s future in trade policy nor his obvious ignorance of the matter. Unfortunately, his fellow Brexiteers do little to suppress the suspicion that, on post-Brexit trade policy, they really have no idea what they are talking about.

First came the idea that Britain could emulate the new (yet unratified) trade agreement between Canada and the European Union for its post-Brexit trade arrangement with the EU. Boris seems to have set his eyes on duty-free trade, and if Canada could get such a deal with Europe, only 'merchants of doom' can come up with the silly idea that Britain couldn’t get it too.

Perhaps it wasn’t such a brilliant idea after all. Canada’s deal with Europe may be great for Canada, because it mainly exports already duty-free commodities such as gold, uranium, and oil to the EU – and wasn’t asking for much liberalisation. It is also too far away from Europe to plug into European markets and their value chains through trade. Canada doesn’t need to bother about all behind-the-border restrictions and non-tariff costs of trade that are Britain’s chief trade priorities. UK services trade with the EU is eleven times the size of Canada’s, and these traders face regulatory barriers to trade, not tariffs. If Britain’s insurers, architects, designers, researchers, engineers, and digital entrepreneurs were saddled with the same regulatory barriers in Europe as their Canadian peers, Boris would have a hard time explaining why he’s given away the family silver.

Then came the embrace of the free trade agreement between Australia and the United States from 2005. Why can’t the UK settle its affairs with Europe in the same way that Aussies got duty-free trade with the Yankees?

I have to admit I am impressed, because it takes some guts to embrace that trade deal. For starters, it’s never been popular in Australia. While the deal cemented the alliance between the U.S. and Australia over the Iraq war, its economic merits are poor. Economists are rather convinced that the trade deal diverted almost as much trade as it created – and both countries therefore trade less with the rest of the world than they would have done without it.

Australians don’t like governments gambling with their trade policy, and the country’s free-traders vented frustration with the entire enterprise at the time of the negotiations. To quell their criticism, the government ordered a study that found all sorts of imaginary benefits to follow the agreement. Australia would gain $4 billion in new income (pretty far away from the $53 million gains that consensus studies found), mainly because America would liberalise its highly protected sugar market for Australia’s exporters. When the U.S. refused to open that market a new version miraculously found even bigger income gains to emerge because the trade deal would reduce the 'equity risk premium' in Australian companies. Ross Garnaut, Australia’s doyen of trade economics, ridiculed the entire exercise for not passing the 'laugh test'.

Boris-the-negotiator does not pass the laugh test either. Unfortunately, nor do many Remainers that are trying to debunk his masquerade as trade expert. It simply isn’t convincing to argue that Britain outside the EU won’t be able to do trade deals with others parts of the world, including the EU. The fault line is rather that stand-alone Britain won’t get trade deals that advance free trade or provide its companies with better conditions to trade. Brexiteers imagine a free-trade utopia to descend upon Britain if it votes to leave, but the reality is rather that Britain is too small an economy to wring meaningful trade opportunities from the hands of the large and populous economies.

Boris, for instance, recently told Andrew Marr that his key argument for Brexit is that it is a once-in-a-lifetime opportunity to strike new 'trade deals with the growth economies around the world'. In other words, if Britain leaves the EU it could cut deals with China, India, Indonesia, and other emerging economic powers. Boris isn’t alone in that persuasion. 'Is it not extraordinary that after all these years in the EU,' asked John Redwood pointedly during a recent Financial Times debate, 'we still don’t have a free trade agreement with America, our biggest trading partner, or with India or with China?'

No, it is not extraordinary. In fact, the UK government and other free-traders have for decades argued against bilateral trade agreements with these and other economies. They rather wanted the attention for trade liberalisation to be directed to the World Trade Organisation and deals involving all economies, not just two. After all, many bilateral trade agreements aren’t worth the value of the paper they are written on because, just like the Australia-U.S. deal, they reshuffle trade rather than create more of it. They don’t come with much liberalisation. That’s also why the British government first rejected the idea of a transatlantic trade agreement – now known as TTIP – when the idea first emerged in 2012.

Brexiteers don’t seem to have updated their trade politics for a while. They still talk as if continental protectionists hold Britain away from negotiating better trade conditions with the world. The actual reality, however, is that Britain and other free-trade governments are bigger obstacles than the Club Med to the EU signing more agreements. If Italy’s Matteo Renzi was in charge, TTIP would already have closed successfully with a tariffs-only agreement. The governments of Greece, Portugal, and Spain accepted the grossly inadequate market access that India offered a few years ago in its trade talks with Europe. Just as with Italy’s call on TTIP, Britain and other free-traders resisted – and rightly so. The offered conditions wouldn’t give Europe much new market access, especially in India’s closed sectors – finance, retail, telecom, life sciences, and government procurement, and would be inconsequential for the economy.

Boris and his co-campaigners are in for a hard confrontation with reality if they think stand-alone Britain could sign better free trade agreements. No doubt it could negotiate a trade deal with India, but what exactly is the evidence or logic behind the notion that India would offer the UK better market access than what the EU got? Stand-alone Britain has so much less to offer India in return for better access and, in bilateral trade agreements, reciprocal exchange of trade benefits is everything. Like Iceland and Switzerland, post-Brexit UK could do a trade agreement with China, but do Brexiteers really want to copy these agreements? Have they even read them?

Iceland’s trade agreement with China is hardly an example because its dominant ambition was to get better openness for its $61 million exports of fish. It couldn’t offer China much in new exports to Iceland, but it had another currency to pay for its small gains: supporting China’s frenetic campaign to get a seat at the table of the new Great Game in the Arctic. The Swiss trade deal with China has largely been inconsequential for bilateral trade. Swiss export growth to China after the deal has been weaker than, for instance, UK export growth to China. And don’t be surprised about that outcome. Switzerland doesn’t have the economic power to open up China’s protected sectors. Nor does Britain. Those who think China, an economy almost five times the size of Britain’s, would liberalise in a trade deal with the UK have another thing coming. Britain’s chief priorities for better market access in China is exactly in those sectors that are highly protected and where the state still dominate.

There is a debate to be had over EU trade policy. But what should worry those who want freer trade for Britain is that Boris and his group are talking nonsense – not on a marginal issue, but one that they have promoted as a central cause for leaving the EU.