30 September 2016

Financial Times: They have come to bury free trade, not praise it

The discussion of British auto manufacturing’s worries that Brexit will increase trade frictions is a good illustration of the huge challenges Brexit presents and the naivete that characterises the government’s approach to solving them, writes Martin Sandbu.

Nissan’s chief executive, for example, has warned that its investments in the UK may be unviable if Brexit leads to trade barriers with the EU’s single market.

The government’s response has been that because German automakers export a lot of cars to Britain, the EU would refrain from imposing tariffs on UK exporters, and instead grant Britain continued zero-tariff trade after Brexit. Aside from the simplistic policies (the assumption that the car industry will determine Berlin’s positions regardless of its other considerations; and that Berlin will determine the EU position, regardless of other countries’ positions), this betrays a poor understanding of the economics and institutional functioning of cross-border trade. [...]

Fox and other Brexiters reassure us that the EU would not dare to introduce tariffs on UK goods. They seem to harbour the illusion that it would be for the EU, not the UK, to initiate the erection of trade barriers. But this is to get the situation completely backward. It is after all the UK that will leave the customs union, not the EU. And as a member of the WTO, the UK will then be under an obligation to impose the same external tariff on every WTO member with which it does not have a comprehensive free trade agreement. That means the UK, as a consequence of putting itself outside the customs union, will legally have to impose the same tariff on cars (and other products) on the EU. It does not have the freedom to choose whether or not to “retaliate”, whatever the EU does. What will this tariff be? Fox himself promised the UK will uphold its current tariff “schedules” in the speech to the WTO. But that is a commitment to impose the same as the EU’s common external tariff, or 10 per cent, on cars.

(The UK could of course unilaterally impose a zero tariff on everyone, but then good luck trying to get others to grant market access to a UK with no further concessions to grant in return. The EU is also obliged by the WTO not to give the UK better terms than those available to all WTO members — again, that means the common external tariff — until the two parties agree a comprehensive free trade agreement.)

Finally, Fox and many of his colleagues seem to define free trade as trade with zero tariffs. But that is an alarmingly old-fashioned view of trade barriers. Tariffs have not been the biggest obstacle to international trade since the 1980s, and today aiming for zero-tariff trade and nothing more is to place the bar awfully low. It would not deal with the huge costs to trade from having to clear customs and comply with rules of origin, which are significant even if there are no tariffs to pay.

Then there is the cost of multiple product standards, the elimination of which is the rationale behind the European single market, in which countries agree on harmonised rules, regulations and standards precisely to make it no more expensive to sell across borders as within them. Reintroducing any of these frictions will hurt British auto manufacturing hard, given how many times its supply chain crosses borders (just like the reduction of such frictions is why eastern Europe’s trade with Australia soared after EU accession). Not only are nearly four out of five cars exported, but many of the components are imported and may have crossed borders several times. The average UK content of a “British-made” car is only about 40 per cent, according to the industry’s trade association.

To commit this act of protectionist vandalism while singing the praises of free trade is to add insult to injury.

Full article on Financial Times (subscription required)

© Financial Times