The Market Solution: Stage five – Trading with the rest of the world

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Britain outside the EU will be able to craft its own external trade policy. In this, it could act independently, it could act with EFTA, or it could work through ad hoc alliances.

There are sometimes gains to be made from negotiating as part of a formal bloc, not least for the protection afforded in times of financial crisis. There are also disadvantages to formal collective action, so the UK government should keep its options open, keeping the advantages of EU membership while minimising the disadvantages. It also needs to avoid the downside of being an independent actor, while making the most of opportunities presented by changes in global trading patterns.

The best way to do this is to keep policy as flexible as possible. Trade doesn’t have to be locked into formal free trade agreements, and nor do agreements have to be permanent or geographically-anchored. They can involve ad hoc alliances with blocs such as the Cairns Group, and can cover groups of geographically unrelated countries.

To stay influential, Britain will need to re-acquire skills and capacity for working with the global community – this may take a little time. The arrangements negotiated must be compatible with Britain’s new-found independence, and be politically sustainable. In this respect, the government may find itself confronting major reforms in foreign and trade relations that are heavily influenced by domestic policy. This may become a crunch issue.

The essence of the supranational EU is that legislation agreed in Brussels is binding and superior to national law. The longstanding distrust of this system will require that new relationships are based on an intergovernmental model.

Whatever provisions are made, Britain will remain party to a bewildering multiplicity of agreements. Only some deliver actionable instruments. OECD members, for instance, agree legally binding directives, similar in manner to EU. Such instruments will then have to be processed into useable law.

With the UK having become an independent nation, it rather than the EU will be doing this job, with the risk of divergence from standards applied elsewhere in Europe. We will, therefore, have to continue close liaison with the EU and other parties, to ensure that harmonisation is maintained.

An important part of any post-exit settlement will be the formalisation of trade relations with the United States. Depending on the timing of British exit negotiations, the Transatlantic Trade and Investment Partnership (TTIP) will be in progress or may have come to a conclusion.

However, there is no certainty that a TTIP talks will be successfully concluded but, if they are, Britain will be drawn into the slipstream of the process which will facilitate global trade generally. Developments in the WTO may accelerate this process.

Putting all the requirements for an effective trade policy together, we can link them to emerge with an eight-point programme.

The first action is to continue the process of regulatory repeal and replacement, initiating a fundamental review of the entire legal framework. The second action is to make improvements to the regulatory system. In many instances, that involves changing the philosophy of regulation, creating different, less onerous ways of achieving results.

The third action is to grip the unparalleled surge in transnational organised crime (TOC), estimated to have cost roughly 3.6 percent of the global economy, or $2.1 trillion (USD) in 2009. This is undermining the entire global trading system. Therefore, no sensible trade policy can be complete without measures to reduce system vulnerabilities and improve enforcement, all directed at reducing crime. There is no point is freeing trade and reducing “red tape” if the main beneficiaries are criminals.

The way forward is to integrate controls and restraints into the regulatory and administrative systems, giving them higher priority than is currently afforded. Costs of potential criminal activity should be factored into assessments of the cost-benefits of trading arrangements.

The fourth action is continuing the global programme of regulatory convergence – aligning trading law. In this, we need to distinguish between enabling and proscriptive legislation, keeping the laws which facilitate trade and removing those which unnecessarily stop people doing things.

As part of this, far greater account needs to be taken of the little-known but massively important phenomenon of regulatory hysteresis. This is a divergence effect which happens when agencies in developing countries are presented with complex laws that they find too difficult to enforce. In this case, harmonising laws can have the reverse effect on the ground. More emphasis needs to be placed on convergence through better enforcement.

Action five requires addressing the resolution of trade disputes. In many respects, trade agreements are no better or worse than the dispute systems on which they rely. Investment in better or more equitable systems is, therefore, worthwhile.

Dispute resolution is becoming the fault line between advocates of bilateral free trade agreements and the WTO/UN-administered multilateral rule-based system. It is argued that improved dispute resolution could be more cost-effective than increased regulatory convergence and harmonisation inherent in modern “second-generation” free trade agreements.

Undoubtedly, better systems would ensure that trade law was more uniformly applied, but there is unease over the growing remit of international courts and quasi-judicial bodies, while some proposals are provoking fears of a “corporatist power grab”. There is actually no best system, so the topic is wide open to debate and an independent Britain could take an active part in it.

The sixth action focuses on “unbundling”. This means moving away from large scale free trade agreements such as TTIP which promise much but which often deliver little. Instead, we negotiate smaller, more manageable deals (“unbundling”) covering single sectors or even small groups of products. This is sometimes known as the “single undertaking” approach. When agreed bilaterally, they are similar in principle to Partial Scope Agreements (PSAs), which deal mainly with tariffs.

In determining priorities, we can look for the sectors or products which will yield the greatest benefits. Motor vehicles, electrical machinery, chemicals, financial services, government procurement and intellectual property rights are thought to be the most promising.Global trading 8ptThe seventh action covers freedom of movement and related matters at a regional and global level. This is one of the more complex issues. Although, in the shorter term, changes to EEA Agreement are not anticipated, we do have greater flexibility in managing the flow of migrants from the EU.

But EU issues are less important than dealing with ECHR provisions, international conventions and other agreements. In order to resolve issues, the UK needs to be fully engaged at a global level. It also needs to integrate diverse policies, where they have impacts on “push” or “pull” factors.

Insofar as there is a correlation between prosperity and population stability, and a further correlation between international trade and prosperity, it can be argued that international trade policy is one means by which migration pressure can be reduced. Currently, with trade policy ceded to the EU, the priority is not directed at containing migrant flows. More usually, the policy intensifies migration pressures, causing an increase in flows to Europe.

To prevent this, an independent Britain needs to be part of the global dialogue. Supplementing local activity on its own specific problems, it needs to be working directly with international agencies such as the Geneva Migration Group and the International Organisation for Migration. And while it needs the freedom to act locally in support of the national interest, effective measures will often need to be integrated with regional and global initiatives.

Finally, in the eighth action covering free movement of capital and payments, it is essential that the UK regains tax sovereignty, to control money laundering and to limit corruption (and transnational organised crime generally), as well as preventing the funding of terrorism.

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