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Hello from Brussels, from which safe distance we had some fun watching the UK-Australia trade talks last week in London. After a spicy beginning, with some bright spark on the UK side trying out the personal abuse school of diplomacy, the meeting ended in warm words and the promise of a deal in principle in June. This will be interesting to watch: conversations with people involved suggested that completion of the talks would require either London to offer a lot more access to its agricultural markets or Canberra to moderate its demands for the same.
In this context, today’s main piece examines what the UK’s activities unilaterally, bilaterally, and multilaterally (at the World Trade Organization) tell us about its claims to be a bold free-trade liberaliser, the answer being that it’s early days but there are few signs yet. In Tit for Tat, we quiz the Peterson Institute’s Adam Posen on why Joe Biden’s nostalgia for manufacturing jobs is misplaced.
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When the UK’s liberalising dream met dull reality
In retrospect, you can date quite precisely the moment the UK realised this Global Britain free trade thing was harder than just waving around printouts of David Ricardo’s theory of comparative advantage and unilaterally slashing tariffs to nil.
In March 2019 Theresa May’s government published its proposal for the tariff schedule that would apply in case of a no-deal Brexit, a libertarian wishlist that envisaged sharp cuts in protection. The response from British businesses, farmers and campaigners was ferocious. The revised “Global Tariff” schedule applied to all WTO members — including the EU in case of a hard Brexit with no trade agreement — released a year later under Boris Johnson was much more cautious, mainly replicating the schedule the UK had inherited from EU membership.
To give the Department for International Trade its due, its civil servants have done a tremendous job rolling over most of the preferential trade deals the UK enjoyed as an EU member state. Britain’s widely admired mission to the WTO in Geneva also negotiated continued membership of the organisation’s government procurement agreement. And Britain has worked alongside the EU (admittedly a light-welterweight tag-team partner to a super-heavyweight fighting champion) to split up the EU28’s agricultural tariff-rate quotas at the WTO, facing down demands from agricultural exporters such as the US and Australia that the overall quotas be significantly expanded.
But technical competence is not political courage. The UK has done little as yet to break out of the EU’s trade model, particularly its agricultural protectionism. Some ambassadors in Geneva are muttering that Global Britain is so far the EU Mark II. The Global Tariff and tariff-rate quotas were missed opportunities to change direction.
Another chance is coming up, with WTO member governments this year discussing farm subsidies ahead of a big ministerial meeting in December. The UK Department for Environment, Food and Rural Affairs, which has the lead on agricultural trade issues, told Trade Secrets it was sympathetic to concerns expressed by the “Cairns Group” of agricultural exporting countries in the WTO about the need to cut subsidy entitlements. But it remains to be seen whether Britain will be a loud advocate for reform or keep a low profile.
That timidity has also been evident so far in its bilateral talks with Australia and New Zealand, whose super-competitive beef, sheepmeat (lamb) and dairy farmers want the same tariff-free access to the UK market as their EU counterparts. That’s a bold demand: the UK has Welsh hill farmers to protect, and tariffs on those products are high.
People familiar with the Australia talks say that, as late as last week, the two sides were still in the process of exploring the UK’s sensitivities in those areas. Those privy to details of the New Zealand negotiations say that, after four rounds of talks, the UK has made no market access offer for beef and sheepmeat and only a weak one for dairy.
Sirma Karapeeva, chief executive of New Zealand’s Meat Industry Association, told us: “It is disappointing to see that, despite their ambitious talk of being ‘Global Britain’, the UK is still unable to come to the negotiating table with a credible offer to address our key trade interests.” The UK also wants to tie agricultural market access to animal welfare in a way many export farmers regard as disguised protectionism.
Most likely there will be deals with Australia and New Zealand, but they probably won’t end up being much different from the ones those countries are also negotiating with the EU.
Britain’s farm lobby notes with some relief that ministers have had to rein in their liberalising and deregulatory zeal, on food and farming standards and tariffs. Nick von Westenholz, director of trade and business strategy at the UK National Farmers’ Union, said: “The government might have thought three years ago that they could do large-scale trade liberalisation quickly in agriculture, but they are now much more aware of producer sensitivities and public opinion.”
A trade deal with the US might have tested those commitments if the Americans insisted on radical changes in food regulations, such as the infamous chemical-washed chicken. But those talks have predictably stalled because of the US congressional timetable, pushing that issue years into the future.
The UK certainly talks a good liberalisation game when it demands concessions from negotiating partners, such as investment and services deregulation from Australia and its longstanding desire for cuts in whisky and car tariffs from India. We wish the UK luck with the latter, we really do, but India hasn’t signed a comprehensive trade deal since the multilateral Uruguay round deal in 1994 (given the horrors of the Covid pandemic there, trade deals are understandably probably not at the top of Delhi’s mind right now either).
To its credit, the UK has also escaped the EU’s unhelpful aversion to putting provisions in trade deals to encourage cross-border data flow. Britain agreed a chapter on data and digital trade in its bilateral with Japan, on the model of the broader Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) deal that it is applying to join. But as founder members, Australia and New Zealand have a veto over CPTPP accession as well: there’s no escaping those farming quotas.
And of course, outweighing all of this a simple fact: the EU is by far the UK’s largest trading partner and will remain so. Deals with Australia and New Zealand, even the whole CPTPP, are minuscule by comparison. The EU is the reference point for most UK regulation, including data and financial services. A UK government that puts friction into that relationship is not a free-trade government. Ricardo totally nailed it on trade in wine and cloth but was a bit weak on adequacy findings on data protection and regulatory equivalence for derivatives clearing houses.
A wise person said to us this week that in trade policy, the UK is in the process of becoming a normal country. The free trade ideologues are held in check by producer lobbies and public opinion, so far resulting in a stance that looks quite a lot like the EU’s. The Global Britain buccaneers will probably end up disappointed. This stuff is harder than it looks.
Tit for tat
We ask Adam Posen, president of the Peterson Institute for International Economics, three questions about whether, when it comes to trade policy, the US is paying a heavy price for nostalgia about the manufacturing industry.
We think of US decoupling as something that began with Donald Trump and has continued under Biden with the “Buy American” drive. Is that view right?
That view is incomplete. Trump accelerated a trend of US disengagement from the global economy that started 10 to 20 years earlier — openness to trade, immigration, and foreign direct investment in the US were all slowed or reversed by American policy in absolute terms and relative to the globalisation of other high-income democracies over the same period.
The Biden administration is continuing some Trump trade policies, but it seems to be increasing the efforts to decouple from China in particular and to channel technology for US foreign policy goals. The focus on creating “good jobs” in manufacturing is going to widen the divisions with allies as well as China — that goal will also do harm to most low-income American workers, while neglecting their real needs. Decoupling ignores the problems at home.
Has trade openness been unfairly blamed for the decline in blue-collar jobs, which we’ve witnessed in the US and other advanced economies over recent decades?
Yes, trade gets scapegoated for displacement of blue-collar workers. Advanced economies which were more open than the US, and which liberalised more while the China Shock went on, had much the same job losses, but with less suffering and reactionary politics. Economies like Japan and Germany which ran ongoing trade surpluses had the same steady decline in share of manufacturing employment as the US did.
As Robert Lawrence points out, a large part of this decline is due to a decline in demand for manufacturers in rich countries as they got richer, and to the price of those goods declining. But remember, 85 per cent of jobs for US non-college educated workers are in services, and they have always been subject to churn and displacement. It is the elevation of mostly white male manufacturing workers’ dislocation over that which has been accepted as normal for services workers, mostly female or of colour, that is truly unfair.
Are there other factors that are equally, or more, important in explaining why labour’s share of output is lower now than in the 1970s?
Along with skill-biased technological change, it is clear that the combination of reduced labour bargaining power, increased corporate concentration, and politically potent supply-side ideologies have enabled capital to retain a larger share of national income in recent decades. Some would argue that labour would not have been weakened so much if China and eastern Europe had not been allowed to trade unfairly or cheaply, or immigration had been lower. But there is enough variation across high-income countries in capital share over time to show that domestic factors are dominant — especially since the US has been disengaging from the global economy while others opened, and yet delivered a lower share of income to labour than most of its peer economies. Running most high-income economies short of full employment potential out of fear of inflation also contributed, and also was due to politics and ideology rather than trade.
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