12 June 2019

Forget leverage: there’s a better way to liberalise trade

by Jonathan de Leyser

Historically, economies with “leverage” are those able to prise open smaller economies, by threatening to block access to their larger economy.

As many sceptics of Brexit have pointed out, while the United Kingdom is the world’s fifth largest economy, it is obviously not as large a market as the European Union, and its “leverage” will therefore be diminished.

But “leverage” is not the only game in town – there are other forms of negotiating capacity.

While Trump’s actions on steel and aluminium are clearly acts of protectionism, there are some who grant him the benefit of the doubt on some targeted actions against China. They argue that his actions there are intended to liberalise global trade: that he is using US leverage to correct China’s statist economic policies. If true – and not purely a protectionist means by which to block more competitive imports – this strategy would in many ways be a macrocosm of what goes on in other bilateral and plurilateral trade negotiations: countries use their leverage in order to prise open reluctant foreign economies.

There are a number of problems with this approach. Firstly, it frames trade negotiations in terms of “concessions”, perpetuating the notion that “exports are good; imports are bad”. In turn, this framing legitimises certain political economies of trade, and is therefore vulnerable to capture by special interests. And finally, it is often a slow process, during which the economy is not enjoying the benefits of liberalisation.

But there is another way: a new paradigm led by the agile and intelligent, rather than the old ways of the large and lumbering.

Our view is that the UK should abandon the old strategy, which withholds market access in order to maintain leverage. Indeed, the UK should renounce a large part of its leverage in the first place by unilaterally lowering tariffs across the board – except a phasing for only the most sensitive sectors, of no longer than 10 years.

While new, this paradigm is not untested. Amongst the four leading lights in this movement are Brunei Darussalem, Chile, Singapore and New Zealand. These – the “P4” – with a combined population of under 29 million, and a combined GDP of only $898.5Bn, were the initiators of the world’s gold standard trade agreement: the CPTPP.

As trade expert Hosuk Lee-Makiyama has explained: the P4 approach is to “build your leverage on the world stage with your ideas and ambitions, rather than your market size. And the world’s biggest economies will come to you.”

This is how to reconcile unilateral trade liberalisation with an ambitious trade policy. This way, we can enjoy imports – the principal benefits of trade – presently, without giving up on liberalising other economies.

It is also important to note that this does not abandon bilateralism or plurilateralism, only that the negotiation of these should depend upon innovation rather than leverage.

New Zealand’s sagacious Chief Negotiator, Vangelis Vitalis, has some advice on how to pursue this: “be constructive and creative, interesting and interested”.

And what sort of innovations could the United Kingdom offer? To start with, why not sweeping mutual recognition of the sort proposed in our IFT/Cato paper “The Ideal US-UK Free Trade Agreement”.