Global Britain Doesn’t Need Free Trade
Global Britain Doesn’t Need Free Trade
In late 2016, Liam Fox, then the UK’s secretary of state for international trade — a new job created in the aftermath of the Brexit vote — declared the birth of a “post-geography trading world.” With technology breaking down the barriers of time and distance, there was no need to fret about the UK leaving the European Union, the world’s biggest single market and free trade zone sitting at its doorstep. Whatever economists assumed were the gravitational benefits of being geographically part of Europe would be easily outshone by trade with other continents no matter how far away.
More than three years later, with Brexit now a reality, we’re still waiting for that post-geography, post-gravity world. A new Bloomberg Economics analysis of trade between the UK and EU shows that the 27-country bloc was by far the Brits’ largest trading partner last year, with 436 billion pounds ($567 billion) in flows of goods. On a single-country basis, Britain’s trade with Germany was almost on par with its US level. An analysis of 2018 data also shows that the EU is the top export destination for UK services. Whether because of time zones, face-to-face meetings, or the close relationship between services and goods, proximity still seems to matter for all trade.
This suggests a big economic incentive to keep a close post-Brexit trade relationship. Indeed, both sides have talked up the goal of “zero-tariff, zero-quota” trade as they embark on discussions to seal a new relationship. With less than 11 months to go to avoid reverting to bare-bones World Trade Organization terms, why would Britain bet on a “post-geography” world that hasn’t materialized? Boris Johnson has “got Brexit done,” won a majority in the UK parliament, and is enjoying an economic rebound. Sacrificing trade with the UK’s most important and closest partner looks like self-harm, especially when his government’s own 15-year economic forecasts don’t expect a US trade deal to offset the potential damage.
Yet UK negotiator David Frost this week painted a rather different picture of Britain’s incentives, which seem just as influenced by “post-geography” optimism as in 2016. He dismissed any notion that gloomy economic forecasts on post-Brexit trading barriers were being taken seriously in Whitehall, saying that number-crunchers had exaggerated the impact of non-tariff barriers (ie regulation) and custom fees “by orders of magnitude.” He said economists were predicting “implausibly large” effects on the island nation’s productivity, as a result of false causality. And he said the future upsides of increased trading with the rest of the world were being ignored.
The message from Frost isn’t just that old-school economists shouldn’t be trusted. It’s that even after 47 years of beneficial free trade with the EU as a member, the UK doesn’t seem to think the cost of reversing that is prohibitive — even with a return to WTO terms. The target of the message is the EU’s chief negotiator, Michel Barnier, who’s made painfully clear that if Britain wants deep access to the EU’s markets, then it must commit to a level playing field on environmental, labor and state aid rules. Frost signaled the UK would be incentivized to choose a distant trade relationship in response, and finally free itself from the regulatory alignment with the EU that Johnson once called a “moral and intellectual humiliation.”
It’s a viewpoint that begs questioning, even if it’s one that’s calculated to provoke. Frost may well be right that any prediction stretching out 15 years should be taken with several pinches of salt, and that the graveyard of bad economic forecasts is not yet full. But the determination to slay any skeptical economic analysis with optimism is starting to strain credulity. The worldview of “Global Britain”— the UK’s post-Brexit vision of a free-trading island — is now that geographical trade benefits are outdated, non-tariff barriers are manageable, and customs costs can be offset by the upside of “other factors.” It stretches the idea of being pro-free trade.
And while Frost isn’t alone in questioning the extent to which trade intensity directly affects productivity, his dismissive attitude is curious considering the UK’s recent state as a productivity laggard among G7 countries. As of last year, only Italy had delivered a worse productivity performance since the financial crisis. Johnson may be trying to tackle this by spurring more investment, but there’s a long way to go. “Britain is indeed an advanced economy, but it’s not at the technological frontier,” says Jamie Rush, Bloomberg’s chief European economist. Inviting more trade barriers seems counter-intuitive when you’ve argued so hard that going it alone will boost your economic growth and competitiveness.
There’s always a chance that the negotiations will lead to compromise — talk is cheap and losing trade is expensive. But there’s serious voter pressure on both sides to deliver more than just material benefits, with the EU worrying about unfair competition and Britain worrying about vassalage. Barnier, too, is being pushed to secure everything from access to UK fishing waters to the return of the Elgin Marbles to Greece, according to Bloomberg News. “We’re going to tear each other apart,” France’s foreign minister warned this week. With trade as a share of gross domestic product already in stagnation mode, the UK’s post-geography dream looks far off.