Trade deals are good but unlikely to deliver major economic gains, argues David Henig
‘Economically, it’s peanuts.’ I am speaking with a very senior figure from the European Commission’s trade directorate about European Union and United Kingdom trade policy in the future. Unusually, he is not in an optimistic mood. His quote is about the gains from the Canada-EU trade agreement, but even the rather larger gains from the soon to be concluded EU-Japan agreement scarcely improve his mood. Rather he thinks that we may have reached a limit to the economic gains from free trade agreements, that therefore the time when they were the main instrument of a country’s trade policy may be passing, and that rather more fundamentally the World Trade Organisation may be under existential threat from United States president Donald Trump. It all adds up to the potential for future UK trade policy to be a story of frustration based on misplaced optimism.
It is worth starting with the numbers before moving onto the reasons why those trade agreements we can strike, while definitely a good thing, will not make huge differences to UK economic performance. In summary, with tariffs on industrial goods now fairly low around the globe, we now need to look at aligning regulations for goods and services, and this is politically difficult and therefore hard to achieve.
For the Ceta deal the EU’s upper estimate of the economic gain across the entire bloc is an annual increase of 0.09 per cent of gross domestic product. It is positive, so worth doing, but hardly dramatic. Sam Lowe, trade expert at the Centre for European Reform, has collated estimates for other potential EU agreements. The largest is for Japan, with an upper estimate of 0.76 per cent of GDP. But as he notes the majority of these gains are forecast in the areas of food, feed, and processed food, with much less coming from services. This is also the most optimistic forecast, the least optimistic has gains of 0.39 per cent. Forecasts for an EU-US agreement, unlikely as that now seems, come in around halfway between Japan and Canada.
These are EU-wide estimates, and those who look forward with optimism to an independent UK trade policy have used these figures to suggest that the UK could do much better negotiating our own deals which do not focus so heavily on agriculture. Those opposed to the UK leaving the EU argue that we would do much worse given our relative size compared to the EU. I would argue that both arguments have elements of truth, therefore economically cancelling each other out, and leading to the UK getting more or less the same figures as the EU. The reason for that is that trade agreements have become quite standardised over recent years.
Typically modern trade agreements eliminate all tariffs on non-agricultural goods, and Ceta does this. This is a straight economic gain, as tariffs protect high-cost incumbents against competition. It is not much of a gain however, as in Canada the average tariff for such products to other WTO members is 2.2 per cent. This is not unusual among the countries we would target for trade deals; the same figure for Australia is 2.7 per cent.
This is one of the reasons for a focus on agriculture in trade agreements, as applied tariffs are much higher, reflecting strong producer interests. In Canada the average applied tariff for agricultural goods is 15.6 per cent. Given this sensitivity not all agricultural tariffs are typically removed in trade agreements, but 92 per cent of EU agricultural exports will go to Canada duty-free under Ceta.
There are no tariffs for the provision of services, with restrictions coming instead in the form of nationality requirements for access to the market, such as the restriction on non-US owned vessels providing domestic maritime services. The most lucrative part of the services market would be those provided by the public sector such as health, education, and utilities, but foreign access here is always controversial, and typically as in Ceta both sides maintain restrictions.
Given that many other areas of service provision in foreign markets are already free of restriction this leaves a limited space for gains. Ceta opens up to a degree the Canadian maritime services market that the US continues to protect, and ensures that any domestic licensing regimes are run on a fair basis. It also guarantees that the parties will not give any other country a better deal (which may create problems for a UK-EU trade agreement), and commits to avoiding future restrictions. The largest potential gain comes from increased access to Canada’s public procurement markets, which could help goods and service suppliers. Overall the market access picture is positive, but it will not have a huge economic impact.
It is these limited market access gains now available in trade agreements that persuade some that the age of trade agreements is over, and others that the way forward is for agreements to look at the alignment of regulations. Selling the same product or service into two markets with one set of rules, whether that’s for a car or an accountant, is the goal. In the EU it led to clear economic gains after the advent of the EU single market, a project led by the UK Conservative government of the 1980s. Unfortunately, it is also incredibly difficult to achieve on any large scale basis.
Rules governing products and services typically do not exist to facilitate trade, but to protect the public, and the regulators or associations governing them take their responsibilities seriously. So in the case of professional qualifications for accountants or architects it is typically left to the associations to agree whether their qualifications are equivalent, and Ceta only provides a framework within which this can happen. Financial services regulators are typically set up deliberately at arms length from government, and are therefore unwilling to see this autonomy reduced in a trade agreement. As an emerging area rules around data may provide an opportunity – but this is as yet untested.
It is slightly easier in the case of goods. Ceta contains a provision allowing products for sale in the Canadian market to be tested in the EU and vice versa, which should help some exporters particularly in engineering products that are typically subject to such tests. There are also provisions to streamline approvals for agricultural exports, and spirits exporters will be happy with the abolition of Canadian requirements to blend imported bulk spirits with local spirits before bottling. There are then mechanisms in place to discuss how to align regulations in the future, though these are somewhat less strong than mechanisms the EU and US envisaged in Transatlantic Trade and Investment Partnership negotiations.
All these gains make the EU-Canada agreement worthwhile, as do strong rules chapters strengthening intellectual property rights and rules on government subsidies. It is hard though to see where further gains would be possible for a UK only agreement, particularly when we may need to consider regulatory alignment with one market against the many other significant markets to which we export. Some companies will benefit from Ceta, and that justifies the work put in by the UK government and the European Commission. But at the end of the day it is still not likely to deliver too much more than the forecast 0.1 per cent economic gain.
David Henig is the UK director of the European Centre for International Political Economy. He tweets @DavidHenigUK
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