Brexit Britain goes looking for a new direction

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Hello from Brussels. It seems a bit surreal to be talking about food hygiene regulations and rules of origin when the US just survived a violent insurrection, and yet here we are.

Maybe, fresh from its investment agreement with China (debate about which continues to rumble on), the EU should now pitch a new trade deal with the US to export human rights and democracy there. Those are, after all, fine European values, so long as no one looks too closely at Hungary and Poland. More substantively, the chaos on Capitol Hill will undoubtedly be cited in Brussels as evidence that the EU cannot rely on the US as a stable partner. Anyway, today’s main piece looks at where UK trade policy will go now (answer: the far side of the world), while Tall Tales mops up some of the Brexit nonsense still floating about. Charted Waters looks at how the breakdown in relations between Beijing and Washington did little to dissuade US investors from buying Chinese stocks.

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Welcome to the UK, new jewel of the Asia-Pacific

Right, so that’s Brexit done. Now what?

If any UK ministry had a good 2020, it was the Department for International Trade. Being kept out of the chaotic Brexit negotiations (handled by the Cabinet Office, the department that supports Downing Street) makes anyone look competent by comparison. But even objectively, DIT’s great horde of civil servants, many learning very rapidly on the job, got a lot done.

They managed to roll over the bulk of the EU’s bilateral trade deals into new agreements with the UK, hugely helped by the deferral of the original deadline of March 2019. Notable successes that looked touch-and-go until quite recently included Japan, Canada, Singapore and, though rules of origin still need fixing, Turkey.

OK, so the UK has proved it can roll over. But can it fetch new deals, or will it just have to sit and stay? (It’s a dog-training metaphor. Sorry.)

There are two big projects for this year: joining the eleven-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and negotiating a deal with the US. The animating idea is to navigate away from the sclerotic EU and towards the fast-growing economies of Asia and the UK’s fellow Anglosphere nations.

The problem with this is evident upon looking at an atlas and briefly perusing the academic literature on trade. The fast-growing economies of the Asia-Pacific are a long way away from northern Europe, and the biggest ones in the CPTPP — Japan, South Korea, Mexico and Canada — already have trade deals with the UK via the EU rollovers. Liz Truss, DIT secretary of state, has insisted that the distance effect in gravity models is smaller than traditionally thought, but she has yet to overturn the standard economic thinking on that topic.

Boris Johnson signs the UK’s trade deal with the EU © Andrew Parsons/No 10 Downing Street

Let’s accept that CPTPP is mainly a signalling device. Will the UK persuade existing members to let it in? Ironically the biggest barriers to entry are probably what Empire-nostalgic Brexiters like to think of as Britain’s Anglospheric cousins, Australia and New Zealand, with whom the UK is also negotiating parallel bilateral deals. Said nostalgics presumably haven’t met many Aussie or Kiwi beef and dairy lobbyists, who have little sentiment about historical allegiances and see two separate opportunities to prise open access to UK markets.

Other potential issues with CPTPP include investor-state dispute settlement (ISDS), on which Japan remains keen. As a founding member, New Zealand negotiated some ISDS carve-outs, but latecomers such as Britain are less likely to get an easy ride. “It’s a matter for negotiation, but basically we will be expecting all the applicants to CPTPP to agree to all the rules,” a senior Japanese official told us. “Our initial perception is that the original contracting parties are somewhat different to new applicants.”

Britain’s problem here is part of a wider one we identified a while back: the government doesn’t know what the public thinks about trade issues and hence ministers find it hard to give directions. There were demonstrations against ISDS outside British hospitals during the EU’s trade negotiations with the US under the Transatlantic Trade and Investment Partnership a few years ago. However, campaigners back then could rouse protesters by citing the threat of rapacious American companies to the NHS. Will they be less concerned about the Japanese? Seems possible, but nobody knows.

There’s another just-as-well-the-Americans-aren’t-here issue in the CPTPP: agriculture. In theory the UK could be subjected to US-style sanitary and phytosanitary (SPS) food hygiene rules, with boatfuls of hormone-riddled beef and chemical-washed chicken turning up in British ports. In practice, though, the actual SPS text in the CPTPP isn’t hugely different to existing World Trade Organization rules. And since the US didn’t join the CPTPP, its government won’t be there to insist on specific promises to let American produce in to the UK.

As for the US-UK bilateral itself, be prepared for a long wait. Trade Promotion Authority, the White House’s ability to put a trade deal to Congress for an unamendable up-or-down vote, expires on July 1 and it’s unlikely the Biden administration will immediately want to take on the big battle of renewing it. That doesn’t leave much time to negotiate an entire trade deal. Given the controversies involved, the UK might even secretly be quite relieved to have talks deferred indefinitely. 

There are other issues (including data flow) and policy forums (including the G7, which the UK chairs this year, and the WTO) where Britain is keen to make a mark. These are big subjects we’ll come back to later. For the moment we’ll just observe that the DIT has assembled a good civil service machine and has a plan to change the subject from Brexit by signing some new trade deals. What it doesn’t have is partners for those agreements large and geographically close enough to Britain that workers and businesses are likely to notice much difference.

Charted waters

Column chart of proceeds from equity offerings by Chinese groups in the US, by year ($bn) showing Chinese companies have raised north of $140bn in the US since 2000

One might think that the breakdown in trade relations between Washington and Beijing might have put global investors off buying equities of Chinese groups listed on US exchanges. That was far from the case in 2020, however. Indeed, as the chart above shows, Chinese groups raised about three times as much from US equity markets last year than they did in 2019. The figure for 2020 was on a par with the level seen in 2014, the year of Alibaba’s IPO.

Tall Tales of Trade

Apologies for raising false hopes in the piece above: Brexit isn’t really done. It never will be. It will continue to involve many tall tales being invented and quickly vaporising on contact with reality.

Prime minister Boris Johnson’s Brexit-related trade claims have a very short consume-by date, generally going rancid in weeks, sometimes days. Euronews has done a fine job here collecting and then disassembling nine of them. Perhaps Johnson’s best was his absurd claim, made on Christmas Eve just after striking the deal with the EU, that there would be no non-tariff barriers to trade. This was so patently wrong he didn’t try to defend it himself less than a week later in the House of Commons.

But the one that had us giggling this week was disintegration of the absurd claim that there would be no trade barriers of any kind down the Irish Sea. It turns out that GB to Northern Ireland exports are already experiencing serious frictions thanks to the extra permissions and paperwork, just as we all said they would. The best bit was a Brexiter that Johnson himself elevated to the House of Lords whingeing and mewling that Northern Ireland was becoming “an economic colony of the EU”. Well, yes. Told you so. It’s one thing to spin tall tales to try to convince the public or confuse the media. It’s quite another to believe them yourself.

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