Editors' note: This column first appeared as a chapter in the VoxEU ebook, Brexit Beckons: Thinking ahead by leading economists, available to download free of charge here.
Brexit means Brexit. Consequently, the UK must now formulate and execute an independent trade policy for the first time in over 40 years. The purpose of this column is to summarise the catalogue of failure that has been the governance of the world trading system in the 21st century, done with an eye to extracting lessons for future UK trade policy.
For sure, there have been a few bright spots but, in its essentials, the governance of world trade has not taken a major step forward since the accession of China to the WTO in late 2001. Regional trade deals have yet to provide a template to update the current set of global trade rules that were agreed back in 1994, over 20 years ago.
While trade negotiators talk and talk, the world has moved on. Business has not stood still – some continue to expand supply chains (Baldwin 2012), while others are localising production to overcome new protectionist barriers (Bhatia et al. 2016). Many governments have acted unilaterally too, revisiting their commitment to a level playing field in the wake of the Global Crisis (Aggarwal and Evenett 2014).
These days the cold, objective reality is that trade deal-making is not where the action is – governments are chartering their own course, making little reference to an out of date, under-enforced global trade rulebook.
It is said that failure is an orphan. This is true of failed trade talks. Negotiators, ministers, even prime ministers and presidents like to gloss over disagreement (just take a look at the spin in any number of G7, G8, and G20 communiqués on the WTO's Doha Round talks that dragged on for 14 years). For some involved in trade policymaking, the glass is never half empty – hope always triumphs over experience.
Scholars are equally culpable, preferring to focus either on the deals that do get done, on imagining what new deals could look like, or in deifying the global trade accords of the now distant past. In contrast, it is remarkable that there are only two economic models of the deadlock in the current WTO talks (Bagwell and Staiger 2012, Evenett 2014). What, then, are the lessons for UK trade policy of a result-oriented assessment of attempts to reform 21st century trade governance?
The WTO in abeyance
Since its creation in 1995, the WTO has not been a forum where nations have managed to strike major new trade deals. It took six years for governments to agree to launch global trade talks, and another two and a half years to agree on the negotiating agenda in July 2004. A trade negotiation that put promoting economic development on the same pedestal as traditional commercial horse trading ultimately failed. At present, the Doha Round is a zombie – everyone knows it is not alive, but it just will not die.
During the Doha Round talks it became evident that the biggest players were simply not willing to reform sensitive policies in legally binding trade deals. The negotiating agenda was sufficiently wide to accommodate all sorts of trade-offs but, for a variety of significant domestic political reasons, no landing zone was reached in this negotiation. Interestingly, smaller deals have been possible in the WTO in single areas – such as IT products and government procurement – where there were still enough gains from traditional commercial horse trading. Meanwhile, a deal to streamline customs houses is well behind its implementation schedule. So much for the WTO as a negotiating forum.
The WTO's legally binding dispute settlement mechanism is falling into disuse and disrepute. Given the widespread resort in recent years to subsidies in tradable sectors, the number of cases brought on these matters is suspiciously low. Old hands will recognise the phenomenon. After all, some areas of WTO rules are never brought to dispute settlement, such as the rules relating to regional trade agreements.
Where cases do occur, litigants have taken steps to defang the system. The collusion between Australia and the US in the automobile leather dispute to avoid setting a tough precedent on subsidy repayment being a case in point. Elsewhere, with a former senior WTO official, I have documented other end runs around the WTO's dispute settlement procedures (Evenett and Jara 2014). Lastly, the US has been widely condemned this year for politicising the appointment of WTO judges (Financial Times 2016).
That the WTO's dispute settlement system is falling into disrepute should not surprise analysts with an understanding of the history of the world trading system. The current system was created once diplomats had perfected end runs around the previous system. The incentives to circumvent mechanisms designed to hold governments to account have not gone away and no one supposes that today's diplomats are any less creative – so is there any wonder that after 20 years of operation the current system's flaws have become apparent?
Regional trade agreements: More heat than light
Once a global trade deal was no longer on the cards, the larger players turned to negotiating regional trade agreements (RTAs). For the US this meant accelerating its programme of Competitive Liberalization (Evenett and Meier 2008). For the EU this meant launching a new trade strategy in 2006 titled Competing Globally, under the leadership of Peter Mandelson (Evenett 2007). In both cases expectations were high – they were not met. My focus here is on the trade talks that matter most for UK trade policymaking.
The biggest deal the US has signed is the Trans-Pacific Partnership (TPP), which involves 11 other nations including Japan. In addition to real concerns as to whether the US Congress will ratify this deal, it is worth bearing in mind that, according to the latest estimates from analysts sympathetic to this 'gold standard' deal, TPP is expected to raise real US income by 0.1% in 2020 and by 0.5% in 2030 (Petri and Plummer 2016). The long implementation lags and the fact that the US refuses to undertake sensitive reforms in its trade deals accounts for the TPP's tiny effect on US living standards.
Experience also demonstrates that negotiating RTAs with foreign policy allies does not guarantee satisfactory outcomes. The free trade agreement offered by the US to Australia, an ally in the second Gulf War, offered so little extra market access for key Australian exports that Australian negotiators recommended their government reject the deal. The Australian prime minister at the time could not bring himself to do that to an ally (Capling 2004).
Of the ten biggest foreign markets identified by the European Commission in 2006, ten years on trade deals have been concluded with just two. One of those deals – with Canada – is now in jeopardy as the European Commission capitulated to opponents and raised the bar on ratification. In addition, analysis has revealed just how poorly the European Commission enforced its trade deals (Evenett 2016).
The transatlantic trade talks were already in trouble before Brexit, attracting unprecedented civil society opposition in Europe as well as failing to address key demands to reform regulations, which was supposed to be at the heart of the deal (Aggarwal and Evenett 2016). Anticipating a negative reaction from the US Congress, European Commission proposals for an Investment Court face sustained opposition from US officials.
UK officials have long shown interest in a free trade deal with China. The Chinese RTA with Switzerland is instructive. Concluded in July 2013, independent analysis has shown this deal to be one-sided in almost every respect, with the Chinese refusing to reform their intellectual property rights law or (beyond securities trading) to open up their financial services sector to the Swiss (Wenfei 2013). Since then, signals from Beijing suggest an even greater reluctance to reform in the context of trade deals.
In sum, regional trade agreements generate few meaningful economy-wide benefits, on timetables well beyond any politically meaningful time horizon, and run into the same constraint faced at the WTO – namely, at this time, large players are not willing undertake sensitive reforms to their economies in trade deals. Given the UK's strong service sector which would benefit from reform of the relevant foreign regulations, the latter really matters. Moreover, with the rise of populism in many societies, the politically viability of these economic minnows is being called increasingly into question.
The Ten Commandments
The implications of this dispassionate tour de horizon of the world trading system can be crystallised into ten guiding principles for an effective, independent UK trade policy. The principles call for a focused trade policy, unswayed by historical attachments, or by any desire to spread British values or to do good in the world (development policy). The head must rule the heart.
In the cold, hard world of trade policy, pursuit of anything other than national commercial interest results in lost opportunities, delayed negotiations, or weak deals. The past 15 years are littered with examples of trade ministers and EU trade commissioners who thought they could be the Henry Kissingers or Mother Theresas of the world trading system. History will record their failures. To avoid their fate, UK trade ministers should be guided by the following Ten Commandments:
1. The sole legitimate objective of an independent UK trade policy is to raise British living standards.
Don't let other objectives – development, national security, etc. – unduly influence UK trade policy.
2. Unilateral trade policy matters most.
In an era in which the large players won't seriously reform their economies in binding trade deals, UK policies towards openness and the promotion of competition in its own economy will have the biggest impact on British living standards.
3. Trade rules always lag protectionist policy innovation.
Although protectionism has a bad name, protectionist pressure never goes away – so expect trade partners to implement seemingly benign policies in a beggar-thy-neighbour manner.
4. People who live in glass houses don't throw stones.
When the global economy is doing badly, most governments succumb to beggar-thy-neighbour activity and rarely invite retaliation by complaining aggressively about foreign protectionism. In these circumstances, global trade rules lose much of their force. G20 pledges to eschew protectionism never stood a chance.
5. Treat the WTO like the Royal Family – say nice things about it, even respect it, but don't expect much in the way of accomplishments.
Until the largest trading nations are willing to undertake sensitive reforms in the context of binding trade deals, Geneva will be a backwater for UK trade policy.
6. Always ask: What is the basis of a trade deal?
Reciprocity is at core of any sound trade deal – there's no room for charity in trade negotiations. If the Chileans, Mexicans, and Singaporeans haven't launched trade talks with a foreign government – or have abandoned trade talks – then this is like finding a dead canary in the mine.
7. Walking away from a weak trade deal is a sign of strength.
Just prepare the ground for the inevitable 'blame game' that will follow.
8. Develop the full range of trade policy tools – and don't become too enamoured with any particular tool, such as regional trading agreements.
If all you have is a hammer, everything looks like a nail.
9. Cultivate multiple sources of intelligence about policy dynamics in trading partners, their effects, and UK trade policy options – generalist ministers and civil servants will almost always be at an information disadvantage to highly informed, interested parties.
10. Accept the Serenity Prayer: God grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.
The formulation of an independent UK trade policy affords an excellent opportunity for fresh thinking and to break free of the missteps that have so hampered EU trade policymaking. In presenting ten guiding principles for UK trade policy, I hope to provoke as well to propose. Others may take umbrage at my list and want to counter with their own principles – in which case, fair enough.
What matters is that the UK government takes the time to sort out a medium- to long-term approach to trade policymaking that eschews the false sirens of hope in favour of painfully learned lessons of the 21st century, a clear understanding of the British interest, and a pragmatic understanding of what trade deals can really achieve.
References
Aggarwal, V. and S. J. Evenett (2014), "Do WTO rules preclude industrial policy? Evidence from the global economic crisis", Business & Politics.
Aggarwal, V. and S. J. Evenett (2016), "How far can TTIP go behind the border? Factors limiting the scope of mega-regional trade talks", mimeo, May.
Baldwin, R. E. (2012). "Global Supply Chains: Why They Emerged, Why They Matter, and Where They Are Going", CEPR Discussion Paper No. 9103.
Bagwell, K. and R. Staiger (2012), "Can the Doha round be a development round? Setting a place at the table", mimeo, 15 October.
Bhatia, K., S. J. Evenett and G. Hufbauer (2016), "Why General Electric is localising production", VoxEU.org. 21 June.
Capling, A. (2004), All The Way With the USA: Australia, the US and Free Trade, University of New South Wales Press.
Evenett, S. J. (2007), "Global Europe: An Initial Assessment of the EU's New Trade Policy", Aussenwirtschaft.
Evenett, S. J. and M. Meier (2008), "An Interim Assessment of the US Trade Policy of 'Competitive Liberalization'", World Economy.
Evenett, S. J. and A. Jara (2014), "Settling WTO disputes without solving the problem: Abusing compensation", VoxEU.org, 9 December.
Evenett, S. J. (2014), "The Doha Round impasse: A graphical account", Review of International Organizations.
Evenett, S. J. (2016), Paper Tiger? EU Trade Enforcement As If Binding Pacts Mattered, New Direction.
Financial Times (2016), "Washington threatens to undermine the WTO. The US is wrong to try to manipulate the dispute settlement process", 31 May.
Petri, P. A. and M. G. Plummer (2016). "The Economic Effects of the Trans-Pacific Partnership: New Estimates", PIIE Working Paper No. 16-2, Washington, DC.
Wenfei (2013). "A Practical Guide to the New Free Trade Agreement Between Switzerland and China", Beijing, December
