Whether or not you think Brexit was a good idea, it affords the United Kingdom new opportunities, including in the area of trade. By acting on its own, instead of having to reach a common negotiating position on behalf of 28 countries, Britain can become a voice for trade liberalisation across the world.
In one way, the stars seem to be aligned. In Washington, the new administration is interested in simple bilateral deals, such as one between the United Kingdom and the United States, instead of complicated and opaque multilateral arrangements, often seen as infringing on national sovereignty. There is a strong constituency for fast-tracking the US-UK FTA, ready to enter into force as soon as Britain leaves the EU.
Walking away at the end of March 2019 with no deal would not be innocuous. It would be an act of gratuitous economic self-harm.
However, in order to capitalise on new opportunities, we must stay grounded in the reality of international trade. On the practical side, it is laudable that the British government is beefing up its capacity to conduct trade talks after a hiatus of over 40 years – for instance, by drawing on support from Commonwealth countries such as New Zealand, which has already seconded an official to help train the UK’s trade policy unit.
More importantly, the British political class must not dream about a new British Empire and recognise that trade liberalisation in the 21st century is rarely glamorous, involving hard political trade-offs and lots of tedium.
If there is one lesson from decades of research into international trade, it is the following. The size of trade flows between economies is determined primarily by their distance and size. Large economies trade more than small ones and geographically close economies trade more than distant ones. That pattern has not been weakened, as one would expect, by the dramatic fall of transport costs over recent decades.
For the UK, that means that its primary focus has to be on not disrupting economic integration with its largest trading partner, the EU. Walking away at the end of March 2019 with no deal would not be innocuous. Quite the contrary: it would be an act of gratuitous economic self-harm. The single European market, predicated on the principle of mutual recognition and on the alignment of regulatory practice, has led to the development of production chains spanning multiple countries, shipping intermediate products back and forth across borders seamlessly.
For instance, while Guinness beer is brewed in Dublin, it is packaged at a Diageo facility in Belfast before being shipped back to Ireland. The Nissan factory in Sunderland is part of a much more complicated production network integrated through EU countries. If Britain were to just crash out of the single market, countless businesses would have to start working around costly certifications and inspections, both at and beyond the border.
The broader lesson is that as long as economies are governed by complex regulations, trade liberalisation will always be complex. Tariffs are at historic lows and quotas are practically non-existent. Explicit discriminatory measures break World Trade Organisation rules, inviting retaliation and legal proceedings. The biggest challenge for companies doing business across borders is therefore compliance with the countless environmental, safety and sanitary rules of different jurisdictions.
In a case cited by the Alliance of Automobile Manufacturers, for instance, a US company that sought to export a popular model of light truck to Europe had to create 100 unique parts, spending an additional $42 million on design and development, and perform rigorous tests of 33 different vehicle systems – “without any performance differences in terms of safety or emissions”.
Free-market conservatives might deplore the rise of the regulatory state but it remains a fact of life across advanced industrialised economies. Even if Brexit leads, as some of us hope, to a bonfire of unnecessary red tape in the UK, the issue of divergence between regulatory regimes will remain at the heart of efforts to liberalise trade.
For free marketeers, the tool of choice when dealing with divergent regulatory regimes is mutual recognition. Applied consistently, it could lead to extremely simple FTAs bridging different regulatory regimes and fostering competition. In such a world, a drug approved by European Medicines Agency (EMA) could be marketed, say, in the United States without the need for further testing.
While mutual recognition has obvious appeal, its practical use has been limited to situations where governments see regulatory practices as closely aligned. In the European Union, the Cassis de Dijon principle is contingent on a high degree of harmonisation of rules. Perhaps the most successful example of mutual recognition involves Australia and New Zealand – two countries with a shared political history, common legal heritage and close coordination of regulatory policies. By contrast, the United States and the EU have a number of mutual recognition agreements that are not enforced as a consequence of divergences in regulation on both sides of the Atlantic.
Regulation lies at heart of the reality of opening up markets to foreign competition. That will not miraculously change after Brexit.
The political problem with mutual recognition is one that conservatives should be attuned to: national sovereignty. By allowing for unconditional recognition of rules set by other countries, domestic regulation can be rendered ineffective. Whether that is a good thing may be an open question. Either way, it is highly controversial.
As a result, effective trade liberalisation will involve a messy, sometimes acrimonious, process of political bargaining over the forms of regulatory cooperation used to bring down non-tariff barriers. In some cases, trade agreements mean a harmonisation of rules. In other cases, governments commit to open-ended partnerships on regulatory policy, or to using international standards set by transnational organisations, or to mutually recognising each other’s assessment bodies in evaluating conformity with their respective regulations (that way, a drug developed by a European company could be tested by the EMA for compliance with US standards). Each of those of approaches has different costs and benefits – and is likely to trigger different responses from the public.
Regulation lies at heart of the reality of opening up markets to foreign competition. That will not miraculously change after Brexit – even if President Donald Trump’s Anglophilia translates to real political action. The sooner the British learn to navigate that reality, the greater the likelihood that Brexit will boost the cause of free trade and open markets.