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Four key principles for post-Brexit international trade

Oliver Ilott argues that the UK needs to consider four key principles when formulating its post-Brexit trade policy

As Theresa May visits India, Oliver Ilott argues that the UK needs to consider four key principles when formulating its post-Brexit trade policy.

Theresa May’s trade mission to India will not have a significant impact on UK trade. Such visits tend to be more about political posturing than about hard-nosed economic policy. But the trip will focus minds on the question of how, under certain Brexit scenarios, the UK might develop its own trade policy.

With that in mind, she needs to consider four things:

1. Size and distance matter

One of the ‘most robust empirical finding in economics’ is the idea that trade between two countries will be influenced by their size and by their distance. The bigger and nearer a country is, the greater the value of its trade with any given partner. This holds for trade in services, as well as goods.

This ‘gravity model’ partly explains why Switzerland, which has roughly a third of Canada’s population and GDP, imports twice as much from the UK. In 2012, a government paper found that the UK had the smallest market share in those economies that were furthest away.

Gravity model scatter pol

The implication for UK trade policy is that deals with large, near neighbours will be more valuable. Trade with India – however large an economy it is and however quickly it grows – is always likely to be limited by this fact.

2. It is never just about goods and tariffs

Trade deals are becoming more complex and comprehensive. Tariffs and quotas on goods have now fallen to such an extent that many trade deals focus on those ‘non-tariff’ measures which can also impede or encourage trade. 

The EU-South Korea deal contains provisions on regulation (i.e. ensuring that EU standards on consumer electronics will be recognised as equivalent in South Korea), on ‘geographical indicators’ (ensuring a product can only be labelled ‘Champagne’ in South Korea if it is from the French region) and on public procurement.

Theresa May knows India will seek to link concessions on trade to a relaxation of the UK visa regime. For the UK, this means that if the Government approaches trade as an isolated issue, it will be repeatedly frustrated in its attempts to sign deals.

3. Trade deals take years to negotiate and complete

The EU-Canada trade deal took seven years to negotiate. The EU-Singapore deal took four, and the negotiations with Japan have been running for three years.

While the EU is not always the most fleet-footed negotiator, these timeframes are not atypical for major economies: the US-Japan deal (Trans-Pacific Partnership) has taken seven years.

It took six years for India to go from signing its ‘Framework Agreement’ with the ASEAN countries to agreeing the final deal. Trade deals with countries like India are likely to be many years away. The UK is also several years away from even starting these negotiations, being unable to formally negotiate while it is still a member of the EU. Potential partners will also be limited in their appetite for informal negotiations, waiting to see what kind of relationship the UK will establish with the EU first.

4. There is more to trade policy than trade deals

While countries can sign deals to lower barriers to trade, they can also put up temporary barriers to trade if they think that other countries are not playing by the rules. This is known as trade defence policy. The EU currently has six ongoing trade defence investigations into India.

One of the most prominent triggers of trade defence policy is ‘dumping’, when the price at which the good in question is exported is below its ‘normal value’. For instance, the European Commission recently placed a tariff on imports of certain types of ‘heavy plate’ steel from China, stating that China had produced an oversupply of steel. This meant that prices for steel from China dropped 25%, allowing it to unfairly increase its share of the European market from 5% to 15%.  

0.5% of EU imports are currently affected by some kind of trade defence measures.

The Department for International Trade knows that it needs to be prepared to run its own trade defence policy from the moment the UK leaves the EU. For the UK’s trading relationship with countries like China, its approach to trade defence may be more important than whatever ambitions it holds to sign a trade agreement. 

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