28 March 2017

CEPR Policy Insight: Post-Brexit trade and development policy

Authors suggest that the time is ripe for the UK government to embrace a new trade and development agenda that demonstrates that post-Brexit Britain is a confident, outward-looking country ready to play a key role on the world stage.

This proposal walks on two legs.

• New, pro-development trade and investment policies focused initially on African and the Caribbean.
• Domestic policies aimed at ensuring that the gains and pains of progress are shared, i.e. that British trade policy is truly in the service of British society, not just in the service of free trade.

Why the focus on developing nations? This is easy. Under WTO rules, Britain can offer preferential trade terms to developing nations without having to first negotiate trade agreements. Offering preferences to, for example, the US or Canada, would require negotiation and ratification of a WTO-consistent Free Trade Agreement – a process that takes years even in the best of cases. Moreover, most advanced countries will be reluctant to open talks with Britain before the main outlines of its eventual relationships with the EU are clear.  Thus even though such deals will be commercially far more important, they are many years down the road. This is not true when it comes to developing nations.  

We should note that we are not alone in these judgements. An excellent eBook edited by Mendez-Parra, te Velde and Winters (2016) presents a wealth of specific ideas and analysis as does the the thought-provoking essay by Lande and Matanda (2016).

Making UK trade policy work better for development

For over four decades, UK trade policy has been decided jointly with all other EU members. This has not always gone well. Trade policy designed to serve 28 different national interests has, to say the least, not always been in the best interests of development. In particular, the EU’s trade policy with respect to developing nations has not been particularly pro-development due to compromises that were made to oblige geostrategic and protectionist interests. For example:

• Continental EU members tend to favour agriculture protectionism – including on tropical goods – since they have significant domestic production to protect.

This has been bad for farmers in poor countries, and bad for British consumers.

• The same is true when it comes to protectionism in clothes and other labour-intensive goods which are still produced in some Southern and Eastern EU nations.

This reduces opportunities for industrialisation in poor countries, and is bad for British consumers.

• Britain has consistently advocated less protective trade policies, but has been outvoted by other EU members.

A Britain in charge of its own trade policy can do better. UK now has an opportunity to rethink its trade policy with respect to developing nations in a way that would demonstrate Britain’s global leadership in the trade and development arenas.

Unilateral trade policy with respect to developing nations is the first target of opportunity for the government. Since it is decided unilaterally, this is an area where Britain can immediately demonstrate its vision. We suggest British preferential trade policy with respect to developing nations be guided by a few basic principles. The trade policies should be:

• Simple in design and generous in nature;
• Respectful and based on mutual advantage, rather than power and mercantilism;
• Based on existing ‘global best practice’, rather than re-inventions of the wheel; and
• More liberal and more pro-development than EU policy.

Given that distance still has an enormous influence on natural trade flows, Africa and the Caribbean should be the first focus of the new policy initiatives.

As part of this, one bold move would be for the UK government to make a political commitment to, for example, at least double the tariff-rate-quotas allowed to Sub-Saharan African nations in ‘sensitive products’ like sugar, tropical fruits, cotton, etc.

The final pillar that is now wide open for a bold British initiative concerns the global stage.

A bold, global British-led initiative on trade: Updating trade and development policy to match 21st century realities

Today’s world trade governance ‘space’ is filled with a vacuum. For various domestic reasons, world leaders in North America, on the Continent and in large emerging economies are deeply reluctant to present bold visions for global commerce. Yet the nature of international commerce has changed radically in recent years, in particular with the Global Value Chain (GVC) revolution. A rethink is needed to update trade and development policy to match 21st century realities. The door is wide open for Britain to return to its centuries’ old leadership of global free trade.

• Britain should lead the push for rethinking trade policy at the global level (specifically at the WTO, G20, World Bank, and regional development banks).

This new initiative could give an impetus to ideas that were caught up in the Doha deadlock. It could also seek to add new dimensions to the discussion related to the changed nature of international commerce and the GVC revolution.

Making UK trade policy work better for the British society

Trade liberalisation creates winners and losers. As Pascal Lamy, ex Head of the WTO, said about trade opening: “It works because it is painful. It is painful because it works.” But globalisation in recent years seems to be affecting societies with a finer degree of resolution; it is not just sunrise and sunset sectors anymore. Because globalisation is now driven more by advances in communications and information technology, it is more individual, more sudden, more unpredictable, and more uncontrollable (Baldwin 2016). In short, no matter what job you have and no matter what sector you work in, you cannot really be sure that your job won’t be the next to suffer or benefit from openness.

The British government should recognise that the globalisation is acting in new ways and this requires new domestic policy responses. Specifically, since it is much harder to identify who will win and lose, and since it is basically impossible to determine precise causes (globalisation, demographics, immigration, robots, technology, climate change, etc.), a new social compact needs to accompany Britain’s new trade policy. Education, infrastructure, regional, technology, and industrial policies all need to be more nuanced, nimbler, and more tightly focused on helping losers adjust. The key is to focus on helping workers adjust; to protect workers and communities, not particular jobs and sectors. [...]

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