New trade ties in the spotlight as May triggers Article 50
Dr Mark McClelland - Head of Research and Political Risk
| Dods Research
Dr Mark McClelland, Head of Research and Political Risk at Dods Research, discusses the daunting task facing the Government and the Department for International Trade as the UK seeks new economic opportunities outside of the EU.
In the wake of Article 50 being triggered, media attention will focus on the state of negotiations between London and Brussels, but attention is also turning to what sort of trade relationships the UK will seek to construct with non-EU markets. The establishment of Liam Fox’s Department for International Trade and Theresa May’s rejection of the central planks of the EU customs union are evidence that new free trade ties will be a major priority post-Brexit.
When combined with the ‘Global Britain’ mantra, there are clear signs that the government is looking for economic opportunities outside of the EU to help compensate for additional costs in UK-EU trade and to tap fast-growing markets further afield. Although no new deals will be agreed during the two-year interregnum between today and the moment of exiting the EU, the government will begin laying the groundwork on future arrangements for the post-Brexit era.
The task facing the government is daunting. As has been widely publicised, with relatively limited resources at his department’s disposal, Fox will not be able to enjoy the luxury of a full-spectrum assault on numerous trade fronts. Instead, the government will need to prioritise which markets are of most strategic importance, aligned with the UK, and able to deliver clear gains in a relatively short space of time post-Brexit.
And it is not all about high-profile attempts at negotiating trade agreements with new markets. The government must also focus on the more prosaic, but no less important, tasks of ‘grandfathering’ existing EU free trade deals with other countries, and agreeing new World Trade Organization (WTO) membership terms (‘schedules’). The latter will be even more important if negotiations with the EU sour and the UK leaves the bloc without a trade agreement.
Boosting bilateral trade ties with the United States will be a key priority, despite Donald Trump’s somewhat pariah status in the UK. Theresa May’s rush to Washington the week after the president’s inauguration gave a clear indication of the importance the government will place on transatlantic ties. Although Trump is breathing new life into economic protectionism, trade ties with the UK will likely prove to be an exception, especially given strong support for a US-UK trade agreement among congressional Republicans.
In addition to attempting to liberalise trade with the United States, a number of other proposals are circulating. Shanker Singham, heading up the Legatum Institute’s Special Trade Commission, has advocated the development of a quadrilateral, free trade, ‘prosperity zone’ between the UK, Australia, Singapore and New Zealand. Other variants include the ‘CANZUK’ model, notably championed by the Executive Director of Europe Economics, Andrew Lilico, which would see the UK pursue a quadrilateral free trade and free movement zone between the UK, Canada, Australia and New Zealand. A number of Conservative Party backbenchers also favour new trade ties which focus on Commonwealth partners.
Critics of Brexit counter that advocates of new post-Brexit trade arrangements are driven by halcyon dreams of an imperial past – ‘Empire 2.0’. Instead, they argue, the focus should be placed on fighting Brexit, or at the very least strongly backing a comprehensive agreement with the EU that replicates the advantages of the single market. Former Liberal Democrat leader Nick Clegg has repeatedly made the argument that trade ties are heavily driven by geographical proximity and that trade links with small countries inside the EU are more extensive and important than with some major economies in other parts of the globe.
Irrespective of whether the UK secures a comprehensive trade agreement with the EU, agreeing new schedules at the WTO is going to be of critical importance. Current schedules are held collectively at the EU level by all member states, so the UK will be required to disentangle itself from the EU schedules and establish new, independent rights and obligations in trade.
Opinion remains divided on how easy this will be to execute – even the CEO of the WTO at times seems conflicted. In the run-up to the referendum, Roberto Azevedo, the CEO of the WTO argued that the UK would have to start from scratch and it would be a very difficult process, but in October 2016, he argued that Brexit would not cause trade disruption. One of the key points of contention is whether each of the other 163 members of the WTO has a genuine veto over the schedules the UK establishes.
Now that Article 50 has been triggered, the work in building the initial foundation of future trade ties with markets outside the EU will begin. Liberalising trade with similar free market economies in North America and Australasia will be seen as ‘relatively’ quick wins by Fox’s department, especially given positive noises emanating from Washington, Canberra, and Wellington. The UK will also seek to ‘grandfather’ Canada’s trade deal with the EU, in addition to trade pacts already in place between the EU and other markets. Agreeing new schedules at the WTO, however, will be the most important priority for DIT. With both the UK and EU already poles apart on the size of the divorce bill, there is a risk that a comprehensive trade agreement may not be reached, increasing the stakes for diplomacy in creating a new trade framework for the UK at the WTO.
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