I have a trade deal in my pocket, and I’m prepared to use it!

An opinion piece by Dr T. Huw Edwards

Mike Pompeo, US Secretary of State, has just waded into the Brexit debate, promising a trade deal with the UK is very close. This move is clearly intended to influence the debate in the UK against a close relationship with Brussels.

But, if we were indeed to make a ‘no deal’ minimum WTO terms break from the EU this autumn, would Pompeo really have a deal on offer? Would it be a deal worth accepting? More importantly, is this actually a clincher in the arguments over whether the UK should continue to tango with the EU?

Former US Treasury Secretary, Larry Summers, had a very clear statement on this argument. As one of the World’s leading policy economists, Summers deserves to be taken very seriously, and indeed his analysis is flawless… up to a point.

Mr Summers’ analysis: First, a UK on its own, outside the EU, would be in a weak bargaining position vis-à-vis the USA. We shall come back to this later. But in addition, Summers argues that the USA itself should not be prioritising a deal with Brexit Britain: a wider deal with the EU (and one with Asian countries…) would offer more potential benefits to the US economy.

In this, Summers speaks for mainstream economists (such as myself), but we need to bear in mind that he is a former Democrat Treasury Secretary – his economic thinking is in line with President Obama, when he said ‘back of the queue’, but emphatically not Donald Trump.

In part, this difference of line represents a different view of trade between the Democrats (and indeed moderate Republicans) and the Trump administration. To someone like Summers, trade agreements provide benefits of integration and specialisation, provided they are carried out across a broad range of countries.

A deal between the USA and European Union is, in many ways, the pot of gold awaiting trade reformers: two large (roughly equal sized) advanced market economies, who could provide a big boost to the global economy if they could remove barriers to trade on new products and innovations.

By contrast, a deal with the United Kingdom would be small beer: a UK split from the EU would be a small economy to work with, and the imposition of trade barriers between the UK and Europe would in fact create problems for a free trade deal with the USA, as pesky rules of origin would mean many tariff-free products could not be integrated into wider supply chains.

By contrast, the Trump administration takes a more-or-less zero sum view of trade agreements: less win-win, more win-lose. Hence the division of the gains from an agreement is seen as more important than the scale of total gain (and doubtless they hold a less sanguine view on the economic promise of trade, full stop).

Hence, Summers is correct to warn that the UK should beware a deal with Trump, but sadly not correct in assuming that Trump will follow mainstream advice (as did former US administrations) in the prioritisation of such deals.

Of course, Mike Pompeo would never say this. He would definitely not wish us to consider that the deal he is offering is anything other than a wonderful deal for the UK, and a present to our people for entering into Brexit. After all, marketing is a strong point of the Trump administration.

Now let us turn to the extraordinary aspect of the proposed US-UK trade deal: the swiftness with which both sides seem to be expecting this to happen. Consider that trade negotiations take many years – reference is often made to an average of seven years, although this can vary.

The Peterson Institute argues that 20 US trade deals have taken an average of 5 years to reach implementation. The EU-South Korean Free Trade Agreement was relatively quick, being negotiated 2007-2009, provisionally applied from 2011 and finally came properly into force in 2015. This was actually fast work on the part of EU negotiators, who started slightly after US negotiators, but got the deal through sooner.

The other trade agreement, with which I was involved in an initial economic assessment, was the Ukrainian Deep and Comprehensive Free Trade Agreement with the EU, where the initial work was done in 2006-7, but was not signed until 2014, and did not come into force until 2016. The CETA agreement with Canada, which has been provisionally applied from 2017, followed from initial studies in 2008.

It is, of course, possible to sign a trade agreement much faster than this, if the agreement contains relatively little that is controversial (for example just a lowering of tariffs).

However, in today’s world, tariffs are rarely the most important impediment to trade anyway, and reform of non-tariff barriers is more important: particularly when it is accepted that these involve issues of regulation, standards, property rights, movement of labour, capital, information and the like. Quite often these negotiations strike at deep areas of difference between national cultures and preferences: hence the many stumbling blocks.

So why might a deal be struck quickly? Here, Summers has one important part of the answer: Britain might sign on the line out of desperation. In that position, we might well concede a long list of things that would not otherwise be conceded. We shall come to what these might be later in this piece. 

However, first, we should ask a related question: How could a deal come to be drawn up quickly? – at least one that goes far beyond simple tariff lowering?

There are a number of points here. First, prior to President Trump, the USA and EU were engaged in very ambitious negotiations over the proposed Transatlantic Trade and Investment Partnership (TTIP).

Most economists agree this would have offered very large benefits to both economies (of a different order of magnitude to just a UK-US deal), but there was a long list of complexities and stumbling blocks, notably over agricultural standards (the chlorinated chicken and genetically modified foods debates), as well as over US demands for access for their firms to state-run healthcare systems.

Above all, the most contentious point – well worth considering given the Brexiters’ campaign about sovereignty and ‘taking back control’ – was the question of how a deal would be enforced: hence contentious arguments about Investor State Dispute Settlement (arbitration courts with the power to force governments to compensate firms who are affected by any laws deemed to breach the agreement).

So the US and EU sides had their wish lists on TTIP, and the differences had not been fully closed when Trump came to office.

Signing a UK-US trade deal might be a bit simpler than the TTIP. The Peterson Institute points out that deals with single countries are usually a bit quicker to achieve than multilateral ones, although trade economics says the latter are far more beneficial (more chance of ‘trade creation’ rather than ‘trade diversion’ from one trading partner to another).

Peterson also argue that US trade deals were slightly quicker when signed with monarchies (possibly indicating less local scrutiny?), or if signed in election years.

Further, since the stalling of TTIP, there has been subsequent work on the US side, with the Trump Administration asking businesses for their views of what they would like in a US-UK trade deal. In addition, the right-wing Heritage Foundation has been working with the British-based Institute of Economic Affairs (who provide key advisors to the Johnson government) on a draft deal.  

Beyond the contentious issues already raised, Globaljustice.org – admittedly a site definitely unfavourable to the Trump administration – lists other potentially controversial aspects of the Heritage/IEA proposals as being zero restrictions on cross-border data flow (with potential implications for privacy and security), zero restrictions on foreign direct investment (meaning increased potential for tax evasion), mutual recognition of US standards (chlorinated chicken and the like) and ‘continued liberalisation of the NHS’.

We should note here that Donald Trump, on his visit, mentioned the NHS as a target of his potential trade agreement, but publicly backtracked under pressure from the UK. More likely, perhaps, is a limitation of the NHS’ single buyer power to force down pharmaceutical prices in the UK: something which could blow healthcare budgets sky high.

Any talks begin with such wish-lists, usually on both sides, which is one reason why talks usually take several years. This raises the question of how such a deal could be agreed quickly?

The first step of the answer is that, in the aftermath of a no deal Brexit, the UK would be desperate to find new markets for its exports, which would be facing tariff barriers (and traffic queues) heading for Europe. Without such access, one would expect the pound to plummet and a major recession.

However, this is only a partial answer. After all, the UK is still not in a position of such weakness: nor would we be if we either remained in the EU, or accepted a soft Brexit, or even the type of deal Theresa May wanted. We would be putting ourself into a position of desperation. So why would we do this?

This is where real questions begin to arise about the agenda of the Tory right (to say nothing of the Brexit party)m and its democratic – or rather anti-democratic – implications. Is it possible that putting Britain under pressure to sign a trade deal quickly (essentially what game theorists call an ‘ultimatum game’) is seen by some on the ‘libertarian’ right as being desirable, precisely because they would expect to force through (and underwrite by treaty) things which they believe the electorate might well not vote for – lower environmental standards, NHS privatisation and the like.

Some Brexiters speak glowingly of ‘Singapore on Thames’ – yet it is doubtful whether the removal of health and safety and labour standards, and the embracement of environmental denialism are really things they would expect the Leave voters of Sunderland or Mansfield to wish for.

A deal with Trump could lead them to force voters, who perhaps have not looked as far ahead in the Brexit game as they should have, to accept a set of measures which, far from being anti-elitist, are as pro-elite as it is possible to imagine. One can consider here Jacob Rees-Mogg’s recent statement about Indian health and safety standards being appropriate for the UK.

This raises the issue of the leaders of Brexit being true believers in an extreme pro-corporate, anti-environment, anti-workers agenda, about which they have just not been open with their voters.

The alternative (and it is not an either/or question) is that the people and institutions involved may be compromised – in other words, they simply are not batting for Britain.

How can one claim this about a government so keen to wave the Union Jack? The very public ‘patriotic’ face seems to belie a policy stance that is quite the reverse (a ‘minister of the Union’ Prime Minister who seems bent on annoying Scotland).

So where does this discussion lead us? We can perhaps set the problem up as a game with two steps: first the UK and EU decide upon their relationship, and then, subject to that, the UK and USA may sign a trade deal (contingent upon Congressional approval – which is far from guaranteed).

The linkage of the two steps is central:

a) If the UK remains in a permanent Customs Union with the EU, then the USA will be unable to sign a deal independently with the UK, but may return to negotiating with Europe (which will result in more compromises over environmental and health and safety standards than the US might like);

b) The same applies, at least in the short-run, to the agreement which Theresa May tried to get through;

c) The Canada-style FTA agreement with Europe, which the UK Brexiters desire, but which is not on the table, would allow the UK to sign its own FTA and mutual recognition agreements with the USA (but once we did so, a hard border within Ireland would almost certainly be necessary, and there would also be more checks and barriers in trade with mainland Europe, due to rules of origin and enforcement of European bans on chlorinated chicken and the like);

d) A no deal Brexit might actually create the kind of situation where the UK might sign a separate deal with the USA quickly, without allowing much internal discussion of the controversial terms.

If we end up in the ‘d’ situation, the ‘libertarian’ Brexiters seem to be assuming that they may then be able to sell a US trade deal to the UK, even if it will involve UK voters accepting many cuts to standards which they would not normally do.

In other words, the Brexiters’ case seems to rely upon bounded rationality on the part of British voters: that they can be led (or misled) into accepting a hard Brexit which puts Britain in a desperate situation, and then that desperation leads voters to accept terms that they would not have done had they been presented with the whole deal in one go.

All of this seems to call for a renewed emphasis upon openness, scrutiny and democratic accountability, just at the point when, in my opinion, the British government is moving in the opposite direction.

This Blog post was written by Dr T. Huw Edwards, a member of the Economics discipline group and leader of the TRANSIT RIG. Huw can be reached on t.h.edwards@lboro.ac.uk