13 July 2018

The White Paper would still make Britain a progressive force for global free trade

by Jonathan de Leyser

Originally published by CapX.

While introducing the Initiative for Free Trade, where I work as Director to someone recently, I was asked: “So, is it free trade with Europe that you’re promoting, or free trade with the rest of the world?”

As a way of trying to plot IFT on the “Brexit spectrum”, I thought this was in one sense quite an intelligent question. As Douglas Carswell commented after the Chequers Statement: “So much political journalism is about supposing that if one tribe favours something, the others must oppose it.”

But from an economic point of view, the idea of seeking one and not the other would of course be ridiculous for an organisation worthy of our name.

There are a number of objectives against which commentators are assessing the government’s latest White Paper. Does it take back control? Is it technically coherent? Is it viably negotiable? Will it be expedient or deleterious to the UK economy? These are extremely important questions, and will bear heavily on the question singled-out in brief here – namely: to what extent would the White Paper leave the United Kingdom equipped to be a progressive force for global free trade?

Immediately, of course, it is clear that the government has not proposed the ideal mutually-recognising, unilaterally-reforming, bureaucracy-simplifying arrangement that free traders dream of. But starting from the truth that divorces are messier than not marrying at all – that there would clearly be some disruptions, if we were to immediately adopt said arrangement – most free traders will (warily) read on.

First of all, it’s important that we recognise the incrementalism which the White Paper outlines. For every area that it chooses to maintain features of integration – the copying and pasting of parts of the acquis – it at the same time restores the final say to the British Parliament. This White Paper should not be thought of as the proposal for a final arrangement; it is a starting point of a process over which we would be sovereign.

On the capacity of the agreement to allow Britain to become a revitalising force for the global trading system, it must also be recognised that the ability to trim regulatory differences on (non-agri) goods would achieve this to a limited degree. The Brussels Effect (or “California Effect”, in the US) means that many exporters would anyway volunteer to produce their products to the EU’s standard, in order for them to be compatible for both market destinations.

While there might be some gains to be made here, they are arguably worth stalling (temporarily, perhaps) for the sake of continued ease of existing and important just-in-time supply chains. No doubt, these would eventually smooth over in a No Deal scenario (which HMG should continue to step up preparations for), but there would undoubtedly be consequences in the short-term.

Regulatory alignment on agri-foods, however, is an extremely significant element in this proposal. Although some cite Iceland and Switzerland’s deals with China and Canada, there are opportunities which do become non-starters because of continued regulatory alignment – for example with the EU’s Sanitary and Phytosanitary (SPS) measures.

For this reason, Trump has unsurprisingly raised doubts about a trade deal with the US under these plans. And – even though aspirations to join the CPTPP were rightly mentioned – this Paper will cast doubts on the feasibility of our accession. This is something which IFT plans to publish on at greater length, but an immediately obvious issue is that the TPP’s SPS Chapter is likely too liberal for the EU.

Article 7.9, for example, includes scientific risk analysis definitions which it would most probably deem unacceptable. Article 5.7 of the SPS Agreement (which names the Precautionary Principle) is also conspicuously missing from the TPP’s SPS Chapter. The WTO Dispute Settlement Body has ruled against the EU on this area in the past, and the EU will hesitate to accept further liberalising international commitments which seek to conform it further away from its own interests.

On the other hand, there are elements in the paper which will help to facilitate third country agreements. For example, the “diagonal cumulation” proposal in 1.2.2 (23) would prove valuable to any third country deals. Diagonal cumulation liberalises Rules of Origin requirements, by allowing products from party X to be considered to contribute to any local content requirements that party Y might have with a party Z. This would be important both for grandfathering the EU’s current FTAs, as well as for any new preferential agreements.

Furthermore, too rarely appreciated in the discussion surrounding trade in goods – and conspicuously absent from the White Paper – are the integrated services found in goods, called “Mode 5 services” (those inextricably linked to goods, including inputs such as design and R&D, and also any financial services tied to a good). The EU’s Chief Economist Lucian Cernat has calculated enormous global gains from liberalisations in this area. With an independent framework for services, this could be an area in which the UK cuts a competitive edge – even potentially on goods exported to the EU.

As expected, the Facilitated Customs Arrangement looks complex. As it has been in the past, the EU’s OLAF body would continue to be an active presence over our management of customs. The White Paper states that “we will leave the Customs Union upon withdrawal”, but also that it will require “a phased approach”. If there is a period of time between our withdrawal and a functioning FCA, what will be the “back-stop” arrangement in the meantime, if not ongoing Customs Union membership? It is essential that both sides lay out either a time-limit, or else the precise details of what would constitute a “ready system”. If this judgement is left to the EU, we could be left suspended in a Customs Union at their discretion.

This White Paper leaves some important questions unanswered, and would involve concessions to the UK’s free trading agency with non-EU countries.

But by its crucial commitment to leaving the Customs Union, and the other mentioned liberalising measures, on the whole it does equip the UK to become a progressive force for global trade. It should be understood as the start of an incrementally diverging process, over which we will be in control.

“Is the proposed deal better than no deal? Just about.” wrote IFT President, Daniel Hannan, commenting on the Chequers statement. I believe his judgement holds true for the White Paper too.