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Opinion

The rhetoric and reality of UK-US economic relations

Jeffries Briginshaw / Dec 2017

Image: Shutterstock

 

We have had two rounds of competence respecting UK-US trade dialogue in DC and London – most recently following Secretary Commerce Ross’s visit to London in early November. There was amongst other things progress made on defining a path to a trade deal, on themes like IP and Regulatory cooperation, and the communiqué will have ticked boxes where it matters. Even more encouraging perhaps is the ‘get on with it’ tangibility of a recently signed UK-US science research collaboration MOU.

But there is a gap between rhetoric and reality emerging on the bilateral trade deal, most notably on timing, on feasibility and on desirability. A US-UK trade deal certainly fits the post Brexit ‘Global Britain’ mantra, and the North America UK economic relationship is worth approaching 25% of UK exports - with two way foreign direct investment (FDI) of about 1 trillion dollars and a million plus jobs on either side. This is a trade policy lever definitely worth pulling, in theory at least.

In practice, business managing Brexit for mitigation is 'sapping the oxygen from the room ' leaving little time for thinking about trade policy opportunities, and some of their complexities. Then there are the implications of US-UK economic asymmetry to consider, and the realities of US trade policy perceived as being a one way street, all of which is making some question whether there are huge market access and tariff gains really likely to be on offer.

There’s a UK political feasibility problem as well. Winning legislative and public support for a trade deal in Britain’s divided and messy politics is a task which is being underestimated. This might make sustained UK follow through on bilateral trade policy less likely and less energetic than currently imagined.

These realities and further structural problems on UK trade policy will encourage officials towards ‘slower and better’ rather than ‘fast and furious’, notwithstanding political need for speed. I’m in the five years plus camp. Longer is wiser.

UK business may likely stay lukewarm on a US-UK bilateral trade deal and counter intuitively is probably more comfortable at an analytical level ‘riding’ a TTIP type horse. 

There are also some major structural issues affecting both future trade and investment promotion growth and future trade policy for the UK.

Lucky, then, that business by and large just gets on with things.

The structural problem that the UK has with its trade and investment promotion proposition is because it has declining productivity. Productivity is a key tool for export competitiveness. Alongside that the existing FDI base is being weakened already with loss of future EU Single Market access undermining opportunities for incremental investments.

With falling productivity the attractiveness of the non FDI sector to potential investors will decline and absolute levels of FDI will likely fall since investors generally don’t buy unproductive assets. This could put more pressure on exports, force greater reliance on currency devaluation and make the investment promotion proposition more reliant on unsustainable industrial policy sweetheart promises and marketing.

The UK structural problems on trade policy are that it lacks negotiating capacity, it doesn’t have a clear view of an industrial policy/game plan for what it actually wants on trade, and trade negotiations are proportionately much more difficult as a tool where the UK is strong eg in services.

The underlying structural economic weaknesses in the UK output model – such as low productivity - and generally low investment - is a blocker for a productivity driven ‘brave new world’ economic miracle or a ‘big bang’ neo liberal trade policy. And there are insufficient politics for any big bang' neo liberalism, so it’s not realistic to imagine a Singapore model or consensus in the UK.

You could also envisage a built in cost of differentiation implicit in the trade policy rhetoric to date. Every gain the UK might make with a third country - let’s imagine it’s the US - vis-à-vis EU trading terms by definition moves the UK away from day one EU UK equivalence.

This will ensure that the loss of equivalence with EU markets should ‘ratchet down’ on EU market access, without a guarantee of superior economic performance or returns in new trade deal markets. It seems inevitable that UK businesses will need to build additional supply and production lines to meet different regulatory expectations as a rule taker. That feels like more cost rather than an efficiency gain.

Non trade deal opportunities are arguably a better focus up to medium term, which means boosting export promotion with a boots on the ground, qualitative approach. I am a big believer in the potential for activist trade promotion strategies, but they are generally perceived as being less sexy and so get less attention.

But most of all, if we have well managed companies across the economy with happy, right skilled workforces making well designed products and services and then marketing them well and selling them at competitive prices: that is the economic equivalent of heaven on earth.

A country that can do that is a true master of destiny, even taking into account market distortions like protectionism. Apple I phones are an irresistible cross border force.

Externally the UK needs to find a productivity based trade identity that triangulates with the EU and institutionalises an 'equivalence ratchet' as a proactive principle rather than a safeguard mechanism that encourages trade disputes. This also implies giving EU countries access to benefits of any UK bilateral gains. TTIP revisited? Why not?

 

Jeffries Briginshaw

Jeffries Briginshaw

December 2017

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