30 November 2018

In praise of comprehensive free trade agreements

by Jonathan de Leyser

An effective trade policy means being able to contribute to the progressive reduction of tariffs and other trade barriers, which are - currently - most ambitiously and successfully being realised by comprehensive FTAs.

It is with deference that I reply to Sam Lowe – one of the truly clued-up gatekeepers of the post-Brexit-trade-twittersphere – but his recent CER article on the compatibility of customs union membership with “an effective trade policy” does warrant a response.

What constitutes an effective trade policy obviously depends on what one views trade policy to be for – what it is meant to be effective towards. From those in the “pro-trade camp” (as I understand Sam to be), one might expect an answer along these lines: “trade policy is effective wherever it responsibly removes barriers to trade”, therefore enabling economic growth.

The main issue with this article is the diminutive extent to which it believes the United Kingdom should be ambitious in its ability to be effective toward this goal.

Sam admits that ‘a customs union would certainly constrain an independent UK trade policy…’ such that the ‘…focus would need to shift away from headline-grabbing, comprehensive free trade agreements’. Indeed, this assessment is in agreement with an IFT report authored by Hosuk Lee-Makiyama and Dr. Deborah Elms last month, which concluded that UK accession to CPTPP (acknowledged as the modern gold standard FTA), while in a customs union, would ‘likely be impossible in practice’.

While tariffs on goods are not the only barrier to trade, they do remain important. And while the (unweighted) average of all EU tariff lines is 5.5% (US is 3.5%), there are certain sectors in which they are far higher. These come at a significant cost to consumers and the global economy.

Agriculture remains one of the most protected sectors. Since its produce consumes a greater proportion of the incomes of poorer people than the rich, this should be a trade policy priority. CFTAs can be very effective in reducing protections on agricultural products and foodstuffs. For example, Japan’s 38.5% tariff on beef is being steadily lowered to 9% in both its FTA with the EU, and in the CPTPP. The EU-South Korea FTA has reduced the EU’s tariff on pasta from 6.4+9.7~24.6€ /100kg to zero; and it’s tariff on non-alcoholic beverages have fallen from 9.6% to zero. In industrial goods too, tariffs are still being lowered within FTAs. For example, the EU-South Korea FTA has reduced EU tariffs for cars from 10% to 0%, which has helped result in $7.5Bn worth of exports from South Korea to the EU.

These achievements have been made possible because of comprehensive free trade agreements. But tariff reductions are not all that CFTAs can achieve. Since some countries prefer to negotiate in a single undertaking, having control over tariffs can also enable parties to unlock all sorts of regulatory cooperation on TBTs and other areas. In short, there is far more value to CFTAs than headlines or political points.

However, CFTAs are not the be-all-and-end-all. In fact, many free traders only regard them to be a kind of useful idiot. As Dan Ikenson of the Cato Institute explained in his preamble to our Ideal US-UK FTA, ‘free traders are most concerned about eliminating domestic barriers to trade, whereas trade agreement negotiators consider those same barriers to be assets’ - which are there to be “conceded” or “won”. He explains: ‘[Free traders recognise that] the primary benefits of trade are measured by the value of imports that can be purchased for a given unit of exports - the more, the better.’ But while FTAs are never theoretically “pure”, they do remain useful - particularly in their ability to lock-in reciprocation, and impede backsliding.

There is at least consistency of thought to prefer a Brexit scenario involving customs union membership because of a certain reading of the surrounding factors. But for the reasons above, I think it over-ambitious to defend membership of a customs union - in its own right - as a framework from which the UK can deliver an effective trade policy.

Particularly at a time when the enemies of trade are gaining ground, the United Kingdom should endeavour to be an ambitiously progressive force toward the liberalisation of global trade. And, in order to be so, we must leave the customs union.