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24 July 2017

How a US-UK free trade deal could revolutionise world trade

by Iain Murray

Originally published by Brexit Central.

While the incoming Trump administration has given much of the world something to fear regarding future US trade policy, for good reason, there is a bright spot for the United Kingdom, which can look forward to a warm reception in Washington. And America can benefit as well. Done right, a US-UK trade deal could set the stage for a major rethink of trade policy that could set the stage for productive liberalisation in the future.

Starting in the early 1990s, American trade deals ceased to be about free trade in the classical sense of lowering tariff barriers. That’s because, thanks to the success of the General Agreement on Tariffs and Trade (GATT) after the Second World War, tariffs long ago ceased to be a major barrier to trade. Instead, non-tariff barriers such as regulatory requirements became the big issue, so American trade deals started to concentrate on those.

The way they went about it, however, was very European. It was similar, in fact, to the European Union’s “harmonisation” scheme, which aims for every EU member country to regulate in more or less the same way. That, of course, resulted in a significant increase in the regulatory burden on British business. America’s approach was to require similar regulatory reforms from every country with which it negotiated trade deals, especially in the areas of environmental and labour standards. As these requirements came to dominate trade deals, negotiators dropped “free trade” from the deals’ monikers and came to call them “partnerships,” all of them hundreds of pages long.

Fortunately, these regulatory matters appear to be the last thing on the minds of the officials Donald Trump has tapped to negotiate America’s future trade deals. That doesn’t mean all’s well, either. Legendary investor Wilbur Ross, the designee for Commerce Secretary, seems to share the President-elect’s concern over what the latter calls “dumb trade,” for which the remedy is to promote American exports, though such measures as “border adjustment” for taxation purposes.

Such policies rely on the mercantilist idea that exports are good and imports are bad, which was refuted long ago by Adam Smith. Meanwhile, Secretary of State nominee, Rex Tillerson, has said in the past that he is strongly in favour of free trade, albeit of the Trans-Pacific Partnership variety.

So whence the silver lining for Brexit Britain?

The President’s team seem quite OK with imports from countries with free and open economies —who are by nature more open to imports from America. That suggests that the prospects of negotiating a Global Free Trade Association (GFTA) of free economies are bright indeed. GFTA member countries would agree to minimal trade barriers between them as long as they maintain free market economic policies, such as low tariffs and few non-tariff barriers, openness to foreign investment, strong adherence to property rights, and regulations that are not overly burdensome on businesses. British Ministers David Davis and Liam Fox have explored that option in their “prosperity zone” proposal.

The core of such an association would centre on the Anglosphere countries — the United States, Canada, Australia, New Zealand, and the UK — and other committed free traders like Chile and Singapore. Hong Kong, another likely partner, is notable for its almost complete absence of import barriers and therefore would set a good example of open trade policies that can lead to unprecedented prosperity.

Moreover, instead of “harmonisation,” such new-style trade deals would include Mutual Recognition Agreements (MRAs), which allow the free flow across borders of goods manufactured in accordance with member countries’ different regulatory standards. An example is the MRA between Germany and its EU partners that allows the sale in Germany of beer not brewed in accordance with the Reinheitsgebot, the country’s centuries-old Beer Purity Law. As it happens, Germans quite like the law, so foreign beers have not diluted the market noticeably. For German brewers, however, the MRA means they can produce beers for export not subject to the law, allowing them to cater to different consumer tastes across Europe.

MRAs would also lead to regulatory competition. If one country’s regulations proved to be clearly superior to another’s, then the latter country would have an incentive to change its regulations for the better, whether to reduce costs or enhance consumer safety.

A GFTA’s success would provide a strong incentive for other nations with mostly free economies to liberalise in order to join the club. Other free economies, like Ireland, might be tempted to leave a sclerotic, harmonised EU in favour of a dynamic, competitive GFTA.

The first step towards that arrangement is with informal trade talks between America and Britain. The idea would be to have a trade deal on the table ready to go once the UK is free to sign trade deals on its own (though some critics, including Andrew Lilico and Lawyers for Britain, argue compellingly that the UK may negotiate trade deals on its own already). Other Anglosphere nations also seem keen to join the club. And why wouldn’t they be? A global prosperity zone is a smart idea both the President and Prime Minister can get behind which would prove a bright prospect indeed.

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