10 Tips for Trade Negotiators ... & How to Help Scotland

August 10, 2016

 

 

 

 

 

The UK's Department for International Trade (DIT) needs to resolve complex policy questions quickly: should UK pursue Free Trade; should finance take precedence over industry; what protection is UK willing to negotiate away? The faster the UK re-thinks its political economy the better.

.       

  • Trade negotiators need clear political and commercial objectives 

  • Scotland's £5 billion whisky industry battles high tariffs in India & the Gulf 

  • UK’s top performers are vehicles, machinery and creative exports

     

     

To give best effect to Brexit, DIT has to negotiate new trade agreements with UK’s major trading partners outside the European Union. But UK's negotiators face a conundrum. The value of these new trade arrangements to UK’s partners will not be clear until UK’s terms of entry to the World Trade Organisation (WTO) are finalised. But the UK needs at least outline trade agreements that can come in to force as quickly as possible after UK formally leaves the EU. 

 

Consequently, DIT will need to work in strange half-light for some time: crafting putative trade deals based on assumptions. So what should be the DIT’s guiding principles during this period? What priorities should it establish such that its teams of analysts and negotiators inspire the most confidence, and achieve the best results in the shortest possible time?

 

Tip 1: Decide on a clear objective

The new trade ministry needs to decide what success looks like. Is it lots of trade deals in place for the day UK leaves the EU, or is it a long-term increase in non-EU trade? If the objective is to grow trade, should DIT prioritise UK jobs or export volumes? Is balanced growth important, or is UK willing to move into deficit on its extra-EU trade.

 

Inevitable, the most taxing question will be: should UK preference the needs of goods exporters over services? For example, trade negotiators need to know if terms that suit car manufacturers in the Midlands are more politically valuable in a free trade agreement (FTA) than deals that suite banks or insurance companies in London or Edinburgh.

 

Then there’s tactics. For Free Traders, the ability for UK to break out of the EU tariff wall holds the prospect for more competitive inputs to UK economy and lower prices. But if that’s a primary objective, should trade agreements be a lever to lower trade partners’ barriers to entry? If so, how secondary is that objective? Theresa May wants UK to be a leader in Free Trade, but the role can be taken to different levels of seriousness. 

 

And last, trade deals will exact a real or notional price on UK industry. So the question will keep presenting itself: which UK activities should be exposed to greater competition? Withdrawal from the EU customs area and freedom to dismantle EU non-tariff barriers (NTBs) gives UK considerable negotiating leeway. But to identify the optimal trade prospects, analysts need clear guidance on what areas of the UK economy the government is happy not to protect.

 

Ultimately, these are deep questions of political economy, with which UK has not grappled since 1973. May’s government has clearly indicated it wants an economy that works for the semi-industrial areas of the Midlands, the North-west, and the North-east that voted enthusiastically for Brexit. This implies prioritising lower tariffs on UK vehicle exports over, say, the City’s interest in acquiring banking licences.

 

Then again, Theresa May has tied UK policy to the notion of Free Trade, without qualifying how 'free' or even unilateral she means it to be, or how it will fit in with an industrial policy that 'works for everyone'. If the government wants UK trade to contribute to strategic economic goals, then this knot in the future political economy of UK will need to be unravelled. Only then can negotiators can be given clear objectives and priorities. 

 

Tip 2. Give the Union a hand

While FTAs can help specific industries, they could also help the constituent nations of the United Kingdom. The EU’s trade deals achieved little for Wales, Scotland and Northern Ireland — and how could they, with so many interests to project? But by seeking out terms that specifically benefit Scots, Welsh and Irish industries, the UK Government will show that in international trade at least, Westminster is more valuable political entity than Brussels.

 

The most obvious example is the Scotch Whisky industry, a £5 billion-per-year enterprise that comprises 117 distilleries and supports an estimated 40,000 jobs — mostly in Scotland. The only significant trade agreement the EU signed that helped Scotch exports was the FTA with South Korea, which eliminated that country’s 30% duty.

 

With the power to negotiate FTAs and preferential trade agreements (PTAs), the UK’s potential to change the global prospects for Scotch exports are vast. Whisky exports currently attract an average WTO tariff rate of 35.5%. But key markets are even more-heavily protected: India – the biggest consumer market in the world – slaps a 150% tariff on imports; Pakistan has a 90% tariff; and Qatar, UAE and Oman a 100% tariff. There are big opportunities in Asia, too: Thailand has a 60% rate and Japan a 15.7% rate.

 

If DFIT can agree preferential access to big whisky and aquaculture markets before formal EU exit, then Scottish voters will face with the proven fact that UK delivers export opportunities for Scottish business that independent EU membership will never match.

 

3. UK manufacturing is not dead

UK manufacturing is far more competitive than some pro-Brexit economists believe, including the free-trader Patrick Minford. The UK exports a greater value of machinery and mechanical appliances (£27.3 billion) to non-EU markets than any other single product category[1]. Covering everything from servers to jet engines to sewing machines, this sector has huge potential, and UK need not see it as a defensive interest:

  • The UK already exports twice the value of Chapter 84 goods to non-EU countries as EU (£14.8 billion)

  • UK’s non-EU trade in Chapter 84 and in vehicles (Chapter 87) is balanced and has been favourable since 2011

  • UK’s defensive interests in the two big industry categories – machinery and vehicles – will be confined to EU trade, with deficits of -£10.5 billion and -£28.6 billion respectively.

To get a glimpse of how successful some UK manufacturing is, just review Jaguar-Land Rover, whose vehicle sales rose 16%, 6%, and 13% in each of the last three years. The company exports approximately 80% of production, and between 56% and 62% is sold into markets outside UK and EU. While tariffs on cars are generally low – the MFN tariff on a 2,500cc car exported into U.S. is just 2.5% [2] – the impact on removing them would be big, due to the price-sensitivity of the market.

 

What’s more, it appears likely that competitive advantage in some areas of manufacturing is swinging back towards developed countries. For example, the growth of personalised design and connected, sensor-enabled devices, means tech companies will likely become huge disruptors in established manufacturing sectors. Whatever transpires, UK manufacturing is still UK’s biggest export earner, and industrial workplaces, work culture, and management standards have changed out of sight since UK sought refuge in the European Union.

 

Tip 4. There’s more to service exports than finance

According to UK’s Office of National Statistic, finance delivers just half of the UK services industry’s quarterly surplus: £10.3 billion of the £21.1 billion surplus in Q4 2015[3]. The rest is predominantly made up insurance, professional services – such as consulting, law and accountancy – and creative services, which include everything from software engineering to entertainment.

 

Of these, the fastest growing is creative services. Although they constitute less than 10% of UK’s services industry, creative industries generate £17 billion in exports. Just under half of this is IT, software and computer services, and the rest is evenly split between TV, Film and broadcast content, and music and the arts. The CBI estimates that these industries will outpace growth in both professional and financial services during the second half of this decade.

 

Consequently, getting talent into UK and generating revenue from intellectual property (IP) are key UK trading interests. DIT needs to focus on getting verifiable IP protection in trade agreements. As UK formulates a post-Brexit immigration policy, it also needs the power to allocate UK employment visas as part of its negotiating arsenal.

 

Instinctively, UK will want to collaborate with U.S. Trade Department on IP protection, though UK should be highly cautious: for strategic reasons, the US software industry is often content with high levels of copyright infringement.

 

The biggest problem for DIT in quantifying services export interests is that the relevant statistics are unreliable. The massive growth of digital exports has gone largely unrecorded. For example, there is currently no way to monitor a digital agency in Liverpool that sells web design services to a client agency in Singapore. Similarly, multinational banks can choose which jurisdiction in which to book revenue.

 

It’s possible that free trade is performing its own magic on service exports, and the only thing DIT needs to do is nothing. But understanding service industries needs will require service industries expertise.

 

Tip 5. Think small

Thirty years ago, to be an exporter you either had to be big or you had to make things. Now you don’t have to be either. With the ability to create a brand presence, then collaborate, market, deliver services, and gain payment via the internet, today it’s as easy for a small manufacturer or digital services company to sell in Hong Kong as in a local town.

 

This makes the analytical tasks facing the new DIT highly perplexing. While it’s tempting to form policy on the interests of UK’s biggest firms – who will come knocking anyway – gauging the interests of UK’s fast-growing small businesses will be harder, but more important. This is because small business is getting bigger all the time: currently it employs 48% of the UK workforce and 33% of private turnover.

 

All these companies are potential exporters, and the spirit of the age is with them. Today, ingenuity, and creativity find a natural home in small enterprise where they can generate value and get to market quickly. There is an enthusiasm for working in small companies that didn’t exist 30 years ago, simply because small companies with great ideas can be instantly world class.

 

The services side of this sector already enjoys free trade by default. But small physical producers – from premium foods to fashion houses – do not. This is where DIT will meet its biggest challenge: in working out where these companies’ market interests lie. It is possible – even probable – that both the structure and supply chains of small businesses are now sufficiently diffuse as to make their best interest a policy of global free trade.

 

Tip 6. Open the people trade

It shouldn’t need spelling out, but if the UK is a ‘knowledge economy’ then promoting trade in expertise will generate huge returns on the country’s most valuable commodity. Brexit provides UK with a great opportunity to develop its trade in skills, because UK will inevitably pivot its immigration policy towards English-speaking countries.

 

The UK can offer some trade partners a double opportunity. For example, Indian software engineers could make huge contributions to UK software industry, and it’s safe to anticipate that India would be anxious to enable home-grown talent to gain overseas expertise. In terms of employment visas, UK has a huge amount to offer trading partners.

 

On the domestic side, helping UK citizens to work abroad would also be hugely popular. In reality, freedom of movement across the EU provided asymmetrical benefits, since relatively few UK citizens spoke business-level European languages, or wished to acquire them. In contrast, the opportunity for trade deals to deliver preferential access to employment visas for US, Canada, Australia, Hong Kong, Singapore and New Zealand would create unprecedented opportunities for skilled workers.

 

At a technical level, the UK government should work with professional accreditation bodies in medicine and teaching to investigate mutual recognition of qualifications. For example, making it easy for Commonwealth surgeons, anaesthetists, nurses and teachers to gain employment in UK would bring world-class expertise and innovation into UK public services.

 

In medicine, the sure prospect of UK employment may stimulate re-alignment of examination standards among the professional colleges in Hong Kong, Singapore, Australia/New Zealand. Arguably the world is just on the cusp of a huge new trade in medicine and surgery: facilitating trade in medical expertise across countries that have near-identical standards could generate huge returns in the future.

 

Tip 7. Learn from others

Whilst in the European Union, UK took little notice of the trends in trade negotiations. Consequently, UK trade negotiators would do well to study what similar developed economies have achieved in the last few years — especially since the WTO Doha Development Agenda (DDA) stalled, and bilateral agreements started to proliferate.

 

Australia and New Zealand should be first port of call, as both countries have tried to gain preferential access to markets in the Asia-Pacific, where UK probably has most to gain.

 

The one observation that hits straight home is that UK may struggle to gain better services access to China, judging by that countries free trade agreements with ASEAN, New Zealand and South Korea[4]. Australia’s new FTA with China, signed in 2015, offers only promises of greater access for insurance and legal services firms, and a 49% limit on joint ventures in financial services.

 

Of course, with China, UK has a £19 billion deficit to play with, instead of Australia’s A$90 billion surplus, but this agreement is an excellent guide to what China won’t conceded (foreign owned financial services firms) and what it expects in return (increased freedom for Chinese direct foreign investment and work visas to accompany infrastructure projects).

 

Tip 8. Go for sub-treaty deals

Given the UK’s time and manpower constraints, DIT should strongly consider sub-treaty agreements. This particularly applies where UK trade analysts identify specific commercial opportunities with countries that have a track record of dragging out FTA negotiations.

 

For example, Australia continues to negotiate non-treaty agreements such as memoranda of understanding (MoUs) on multiple trade and investment issues, along with arrangements to facilitate mutual trade recognition processes and qualifications[5]. The objective is typically to resolve specific trade problems. These agreements don’t preclude the conclusion of full FTAs later on.

 

The UK should strongly consider this approach for expanding trade with India, for example. It would allow UK and India to pursue specific offensive interests in cars, visas, healthcare, tourism and pharmaceuticals without bringing highly sensitive areas into play. It would also play to India’s well-recognised ‘distributive’ negotiating culture, because concessions can be valued and traded off against each other.

 

Tip 9. Roll out the welcome mat to NGOs

While David Davis will be the prime target for anxiety-ridden industrialists, Liam Fox will inevitably gain his share of attention — and from an eclectic range of NGOs and interest groups. He should welcome them. The opportunity for UK to strike its own trade deals is also an opportunity for UK to help developing countries build sustainable industries.

 

By positively reaching out to NGO groups, the DIT can seize the initiative and keep it. It can also demonstrate post-Brexit UK’s increased capacity to be the good global citizen.

 

The most obvious candidates will be the countries now covered under the Lomé Convention, principally in Africa, and the Caribbean. Trying to preserve Lomé countries’ preferential access at the same time as winding down UK farmers’ price and direct support will be excruciating. But if the DIT can bring NGO interests on board – and instigate cross-department collaboration – then it will boost its own teams’ morale and generate great publicity.

 

How the Department for International Development and its £11 billion budget gets involved is more tricky. Combining aid and trade has a poor history. However superficially attractive, the strategy will always be corrupting, and be seen to be corrupting. The DIT will find its activities carry greater popular support – its internal morale is higher – if business is transacted with a clean, commercial conscience.

 

Tip 10. Hire skills, not experience

Nothing is more inspiring than working in new and talent-filled teams with dedicated professionals inspired by high ideals and tasked with near-impossible deadlines. Conversely, nothing is more sure to end in mediocrity than a team that lacks the energy and confidence to break conventions and rise to the needs of the hour.

 

Consequently, DIT should be extremely wary of building its trade-negotiating teams on the few trained trade negotiators that hold British passports. Many of these individuals will arrive demoralised from Brussels, and with a poor record for furthering UK’s trading interests in the outside world. Unless they passionately believe in UK’s post-Brexit trading prosperity, they are not the people to lead DIT’s negotiating teams. A consulting resource, yes; but leadership, carefull ...

 

The UK should instantly take up offers from New Zealand and Australia, and perhaps Canada and United States for the loan of negotiators who have a record of success. Some of these personnel are highly impressive: New Zealand’s China FTA negotiators achieved a doubling of trade with China, from 2010 to 2015, and turned a deficit into a modest surplus.

 

For the rest, DIT should staff its trade analysis and negotiating teams with lawyers, strategy consultants, academics and analysts who have worked overseas in international trade and provide them with temporary contracts and performance-related bonuses. If they can be formed into teams that, in some aspects, compete with each other, so much the better.

 

The people best placed to open world trade to post-Brexit UK are those who have seen what it can do for other countries, and believe passionately that world trade can transform UK’s economic prospects.

 

 

              

 

 

 

[1] Chapter 84, in HMRC categorisation. The attached spreadsheet is compiled from end-of-year HMRC statistics published each year in February.

 

[2] Pitney Bowles Global Trade Solutions. https://www.dutycalculator.com. This is a subscription service.

 

[3] Services surplus as reported by ONS show little variance from quarter to quarter.

 

[4] Trading Nation: Mike Adams (2014). pp 297-8

 

[5] Trading Nation: Mike Adams (2014). pp 326.

Please reload