UK's Global FTA Voyage: How to Navigate Rough Seas

August 10, 2016

 

 

 

With just two years to scope out post-Brexit trade deals and limited expertise to hand, UK trade negotiators are in an exceptionally weak bargaining position. But UK could dramatically strengthen its hand by creating a competitive evaluation process for trade deals.                          

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  • UK could extract best FTA terms by getting countries to compete

  • Evaluation would make best use of scarce negotiating resources

  • Down-selects would ensure FTAs are signed in time for formal EU exit

 

As it faces up to the task of signing scores of new trade agreements, the biggest challenge facing Liam Fox isn’t the lack of trained negotiators or the hideously short time-spans. The key challenge is a weak bargaining position. The Department for International Trade (DIT) will face trade delegations that know UK’s time is short, and its political and economic needs imperative. Of course they will take advantage.

 

In trade-deal terms, this puts UK in a uniquely vulnerable position. If UK isn’t careful, it will begin its post-Brexit, Free Trade future with the most one-sided set of bilateral deals achieved by any major economy in recent history.

Change the terms of the FTA game

But the UK could transform its bargaining position, if it can turn the country’s unique circumstances to its own advantage. Let’s suppose DIT were to face potential trade partners and say something like:  

 

“Guys, we have limited time, and very limited negotiating resources. We need framework FTAs in place ready to sign as soon as we legally exit the EU. Therefore, while we are very eager to lower tariffs and negotiate as many trade deals as possible, we will only be able to take a limited number forward – perhaps half what we would like – for entry into force on immediately after we exit the EU. We look forward to receiving your best outline proposals at the earliest possible date.”

 

By forcing putative trade partner into a competitive tender process, then instead of taking advantage of UK’s urgent situation, UK’s trade partners will find themselves competing to provide UK with the optimal deals. The tactic may not be friendly, but it is necessary. In the torturous process of FTA negotiation – with all the vested interests at stake – countries will never concede greater access than they absolutely have to, and rarely do it faster than they care to.

 

Fortunately, the UK economy will prove an attractive FTA proposition to most economies — so long as UK doesn’t negotiate World Trade Organisation (WTO) entry at ultra-low tariff rates, or adopt a unilateral free trade policy. Besides lower tariffs, employment visas and agricultural access, UK can offer freedom from a swathe of non-tariff barriers (NTBs) and restrictions that have built up within the Single Market. Once outside the customs wall, the UK’s £85.3 billion EU trade deficit should be an open goal for UK’s non-EU trade partners.

Set a time-table and stick to it

Let’s suppose that in January, David Davis’ Brexit Ministry triggers Article 50, and sets a deadline of December 2018 for completion of Brexit negotiations, and UK’s exit from the EU. What DIT could then do is publicly announce a three-stage FTA selection and framework negotiation process:

  • Stage 1. From January to July 2017, UK trade teams will confer with as many representatives from around the world as possible. The objective will be to define the offensive and defensive interests of each country, establish the broad outlines of potential deals, and quantify the potential commercial benefit.

  • Stage 2. In August 2017, DIT will competitively evaluate all submissions according to pre-declared criteria, and select, say, the 30 most promising deals. These deals will then proceed to detailed negotiation.

  • Stage 3. In May 2018, DIT will make a final down-select of 15–20 of the most promising deals. The UK would keep, say, four in reserve in case any of the finalists fail to complete, sign and ratify their FTAs in the immediate aftermath of UK's legal departure from the EU.  

At one stroke, the UK would dramatically foreshorten the typical FTA process, make maximum use of its limited trade expertise, and extract the best conceivable terms from future trade partners.

 

For this approach to work, the UK would have to temporarily hire large numbers of clued-up industry analysts, trade experts, lawyers, strategy consultants and business people with overseas experience, who have the drive and nouse to spot and seize trading opportunities. The finer points of FTA drafting would have to be completed with trained negotiators - possibly from Australia, Canada and New Zealand - acting as consultants.

 

DIT would have to make clear to potential trade partners that these teams were a temporary resource, that they will be disbanded at the end of the two-year period, and that thenceforth, all negotiations would be completed at a more leisurely pace, with a residual, professional staff.

How to judge?

Whatever approach DIT takes, it will need to evaluate potential trade deals according to their theoretical value and the probability they will be signed and ratified on time. By clearly communicating its evaluation criteria and the deadlines involved, DIT will also mitigate the single biggest risk of trade negotiations — that they lapse into endless haggling.

 

From Australia’s experience, principally in the Asia-Pacific, UK could frame its FTA evaluation criteria around the following questions:

 

1. Is the potential deal genuinely valuable or will it achieve definite political objectives? Trade analysts need to identify which countries’ current WTO rates constitute real barriers which it’s worthwhile trying to negotiate down. If UK’s principal objective is increased exports, then outline deals need to cater to genuine demand on the part of UK companies. Alternatively, deals will have to deliver clear political advantage, for example, better access for scotch whiskey.

 

2. Do partners have a genuine offensive interest in the UK market? UK is in a relatively strong position because its most obvious FTA partners – say, Canada, Australia, and New Zealand – have efficient agricultural sectors that can readily displace UK’s high-priced agricultural imports from the European Union. But in ranking trade deals, DID should rank the likely gain of potential trade deal partners. UK should be confident its counterparts are serious.

 

3. Can UK give what potential trade partners are asking? Some countries display consistent and specific interests in their FTA negotiations. For example, China has a huge appetite for investment access, especially in major infrastructure projects. In its FTA agreements with Asia, Japan seems anxious to secure investment thresholds, presumably to secure long-term financial security for its ageing population. Knowing counterparties’ neural points early means DIT can quickly calibrate the costs or benefits to UK, and so rank UK’s political ability to meet trade partners’ objectives.

 

4. Do trade partners have the resources to commit to rapid negotiations? Others’ trade expertise is limited too. When looking for FTAs in Asia, the Subcontinent and South America, UK may quickly hit negotiating capacity constraints. India, for example, is currently negotiating 14 FTAs with a trade negotiation team that is smaller than Australia’s. At the same time, its teams are embarked on a huge regional trade pact. When ranking potential trade deals, UK should note which countries trade teams are already stretched.

 

5. How long does a specific country typically take to complete an FTA? Track record will tell DIT everything. For example, India has a reputation for prolonging trade negotiations. China on other hand, with 163 deals to hand, tends to rattle them off. There is also the question of which departments get involved. In China, for example, trade deals are subject to the input of the State Council Tariff Commission, the Ministry of Finance and the Ministry of Commerce. The question will be: does UK’s FCO have an understanding of and leverage over the bodies whose agreement is needed for an agreed deal to be legislated or ratified.

 

6. What’s the political risk of upset? Trade deals are political, and not just in developed countries. For example, Australia’s protracted negotiations with India were derailed by Australia’s refusal to sell uranium to India, and attacks on Indian students studying in Australia. When down-selecting potential trade deals, DIT should engage professional political risk analysts to identify what events could jeopardise a deal, and the probability that they will occur.

Know your strengths

Although the UK will be anxious to prioritise ‘big’ deals with large economies, DIT should also take stock of its strengths. UK’s trade with the United States is already impressive: the US is UK’s biggest trade partner, exports are growing crisply at 3.3% per year, and UK runs an overall trade surplus (in goods and services) of £34.1 billion per year. There’s no urgent need to disturb that trading relationship more than WTO accession requires.

 

And a warning if UK does get to the front of the US queue, it will face the biggest and most experienced trade-negotiating team in the world.

 

China is also an interesting case, because UK has an excellent hand to play. UK currently has a £19.6 billion trade deficit with China, and since UK is simultaneously negotiating access to the WTO, the UK will never be in a better position to demand improved access to China’s services industries, in particular banking and insurance licences, and majority ownership of Chinese companies.

 

Every country knows UK is desperate to scope out major trade agreements in the next two years, which it can sign thereafter as rapidly as possible. But UK can exploit the one-off nature of the Brexit situation. By asserting the intention to competitively evaluate tentative deals, UK can maximise the productivity of its scare negotiating resources and get better terms than most countries would achieve in decades.

 

 

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