Trade negotiations post-Brexit; what the UK can expect

The issue with trade negotiations is that they are reciprocal negotiations. In order to gain something in a negotiation your country has to be willing to make a concession to the other country. To gain something you have to be willing to give something. On tariffs you have to agree to lower your tariffs in certain sectors in order to make gains in the other country’s market. Therefore, it is important that any time you are seeking to make an advantage you have to be willing to cede something in your own market.

There is definitely advantage to size—the bigger the entity negotiating, the greater the gains to the other country. For example, several countries have indicated that if the UK were to try to negotiate agreements independent of the EU they would be willing to give less to the UK than they would to the EU as a whole. That is because the EU as a whole is a larger market and they stand to gain much more. Certainly, if you are a smaller entity you have less leverage in trade negotiations. Ultimately trade negotiations are a political process. The more leverage you have, the more you are able to extract in concessions from the other party and the less you have to give yourself.

If we look at the multilateral level of the WTO, for example, in theory the WTO operates by consensus and every country has one vote. In practice, however, it is the most powerful states that dominate the WTO and effectively make the rules of global trade. Discussions take place among a small group of the most powerful countries and then are extended out to the rest of the membership. The EU has been one of the countries in that elite inner circle. The UK, as an independent entity, would not be. It does not have the economic clout or the economic might to be part of that elite inner circle at the high table of decision making. By leaving the EU, the UK would be diminishing its power in multilateral trade negotiations. If we look at Japan, to take one example, its economy is twice the size of the UK’s and it is not a part of that elite inner circle so there is no reason to expect the UK would be. It would therefore be substantially diminishing its leverage.

The EU has been a fairly effective negotiating vehicle to date for the UK in international trade negotiations, both at the WTO and also in bilateral and regional negotiations. The EU is the world’s second largest economy and is a major economic power. Therefore, it has been a heavyweight in international trade in a way the UK alone would not be.

Trade in goods is relatively simple in trade negotiations. Typically, the primary issue is tariffs, so it is a question of how much you are willing to reduce your tariffs. Services become more complicated. These are not physical items that are traded across borders, therefore services trade liberalisation typically involves granting rights to foreign companies to operate within your territory. It can also involve harmonisation of the regulation of services, and allowing things like recognition of licensing across different territories. For example, this could involve allowing banks or insurance companies to operate in another market or it could involve allowing the licences of professionals, like architects or accountants, to be recognised in another territory.

Another major aspect of services trade is often labour mobility. This is the cutting edge of services trade negotiations. This is a key thing that many countries are demanding in trade negotiations now, access for their workers to foreign markets. This can involve low-skilled labour, for example, farm workers, but it mostly involves high-skilled workers, engineers, software developers and other high-skilled professionals. This is a major demand of many countries now in trade negotiations. If the UK is to be involved in independent trade negotiations this is likely to be one of the key demands that it will be getting from other countries, to open up its market to the temporary movement of labour, and that is obviously a very politically sensitive issue in the UK.

There are ways of indicating what specific sectors you will liberalise and what ones you will continue to protect. The idea of a positive list is a list where you explicitly stipulate the sectors you will liberalise. A negative list is the opposite, where you stipulate the sectors you will not liberalise. It has to do with trying to protect specific services sectors—for example, health or education—where you specifically do not want foreign entities operating in your territory.

That, again, comes down to a process of negotiation, the relative strength of the two parties involved in the negotiation. Certainly, if the UK were to be in a bilateral trade negotiation with the US, particularly under the current US administration, we would imagine that would be an extremely difficult negotiation for the UK to try to protect its sensitive areas. It would probably be under considerable pressure to liberalise sectors that could be of commercial interest to US corporations.

I would add that it looks increasingly like most countries will want to renegotiate, that they will not be willing to let the UK just replicate, copy and paste agreements. Another example is Japan, which has already come out and clearly stated they will not be willing to just replicate the EU-Japan free trade agreement. They are going to demand more from the UK on labour mobility. They want more flexibility in terms of getting visas for their workers in the UK. They also are going to want a reduction in the UK’s auto tariffs and they are going to be willing to do less in their own domestic market on agriculture liberalisation. Another country, South Korea, has also indicated this as well. It is highly unlikely that the UK will be able to just replicate the deals it has now. It is going to wind up with lower quality access to foreign markets and have to give more in its own market.

 

 

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Kristen Hopewell's picture
University of Edinburgh
7th September 2018
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