One of the great fallacies of our time is that firms desperately wish to slash red tape and burdensome rules in order to trade, writes Matthew L. Bishop. He argues that the British government is displaying an abject grasp of global trade politics; ironically the EU red tape the Brexiteers wish to burn is the very basis on which the ‘free trade’ they hope for rests.
This fiendishly complicated cornucopia of bilateral and multilateral agreements is often referred to as a ‘spaghetti bowl’, a term coined by Jagdish Bhagwati in the mid-1990s. That is, a web of overlapping – and sometimes conflicting – rules and regulations that determines, in the most arcane ways, how and where goods or services can be produced before moving into different markets. The more trade we desire, the more these rules proliferate, because the fragmented and infinitely complex nature of modern production, distribution and consumption requires ever-more esoteric and finely grained forms of governance.
This sits utterly at odds with the way pro-Brexit politicians and commentators seem to think about the subject: for them, it is the slashing and burning of such regulation that will allow trade to flourish. This is, of course, a major impulse for leaving the EU. But they are wrong, and dangerously so.
nostalgic conservative narratives about ‘trade’ are still rooted in eighteenth-century imagery of ships taking cotton or steel to the colonies
Such a problematic view stems not only from the fundamental apparent lack of comprehension that I described in the first part of this blog, but also because nostalgic conservative narratives about ‘trade’ are still rooted in eighteenth-century imagery of ships taking cotton or steel to the colonies and coming back laden with spices and fabrics. I often wonder if it is this unreconstructed worldview that explains the hubristic post-imperial delusions of grandeur that infect the proclamations of so many English ‘leave’ politicians and pundits on trade. To quote one example: as a supposedly ‘great trading nation’, Britain could unilaterally slash all of its tariffs to zero and reap the astronomical rewards that will inevitably follow.
Even if we take these ideas on their own terms, they are deeply misguided. The liberal myth of free trade is exactly that. The now-rich countries only ever reduced their tariffs after they had enjoyed significant growth and created highly competitive industries. Comparatively few of Britain’s industries are today operating at the innovation frontier, particularly in the higher value-added segments of the new growth sectors. From railways to renewable energy, Britain is overwhelmingly dependent on foreign investment and technology, and many firms are engaged in lower value-added activity. As others at SPERI have pointed out frequently – especially Colin Hay – the UK growth model is essentially bust.
Most tariffs on goods are already at historic lows and those that remain are often in the most sensitive sectors (agriculture being the most obvious, and contentious, example). So, were Britain to unilaterally cut them – and, presumably, any related quotas or subsidies – it is more likely that it would lead to a weakening of the economy than a boost in trade as the few key industries that rely on a degree of protection would become uncompetitive. The government would also be throwing away some of the few cards that it can bring to the table in any future negotiations. Given how finely poised the world trading system is – because of the tightly wound spaghetti bowl of regulations – such a rash move could also lead to retaliatory measures by EU countries and litigation from other World Trade Organisation (WTO) members.
Moreover, if Britain plumps for a ‘hard’ Brexit, it would have to renegotiate WTO schedules and quotas that were painfully constructed over decades – and are therefore rarely messed with – on just about everything, so any unilateral action that has not been properly thought through could have untold unanticipated consequences. One wrong move, and entire sectors of the economy could be seriously undermined.
For example, Ian Dunt has shown brilliantly how just dealing with one seemingly innocuous product, lamb, is fraught with problems that could take many overworked negotiators many arduous years to resolve. It boggles the mind to consider how overstretched a civil service that has not employed trade negotiators – let alone negotiated an agreement – for decades might be when dealing with thousands at once. What is actually more likely, as Dunt also notes, is that we will probably not change a great deal because it will be too difficult, complicated and laborious – not to mention damaging – which rather begs the question: why bother with so much expensive and unnecessary upheaval if it is, ultimately, all just to achieve limited change?
Yet Britain’s problems run far, far deeper. This is all intrinsically challenging, but extricating such a distinctive economy from the EU is also probably more difficult and potentially destructive than it would be for almost any other country. As The Economist put it when discussing the May government’s approach to Brexit: ‘This is not some hermit state, but one of the most globalised and internationally interdependent economies on the planet. It rises and falls on its relations with the outside’. It also has a widening balance of payments deficit and a still-growing public and private debt mountain. Any British ‘trade’ strategy, therefore, has to be far more concerned with ensuring continued inflows of investment capital than, say, the German or French equivalents.
This is what renders the archaic view of international trade propounded by the Brexiteers so frustrating. They are blithely gambling with the livelihoods of generations of people in a country that is considerably (and terrifyingly) more exposed to the vagaries of the global economy than any of its European partners. Many reasons exist for this dependence, of which three are worth briefly assessing.
Firstly, the Global Value Chains (GVCs) in which Britain operates are overwhelmingly in services, which depend even less on the tariffs that feature in the vapid pronouncements by Brexiteers regarding prosecco or cheese, and even more on the kinds of deep ‘behind the border’ regulation typified by the EU single market and new generation trade agreements like TTIP. Our key industries and ability to attract investment, particularly at the higher value-added end, are dependent on more, not less, regulation. Anything less than full EU membership is, by definition, second-best, and a ‘hard’ Brexit does not bear thinking about.
Secondly, because Britain trades so many ‘invisibles’, these rely to a greater extent on human capital as an input than other forms of industrial production. In a country where the skills base has deteriorated, any tightening of immigration rules will deter investment, as firms will not be able to successfully operate. It is also far easier for firms to subsequently move elsewhere because the plant, which essentially consists of offices, computers and clever people, is relatively straightforward to shift.
Thirdly, the UK has a far higher penetration of foreign capital than comparable economies, with much infrastructure and plant, both public and private, owned by outside interests. This investment is also highly financialised, and its ‘national’ character is weaker than elsewhere, giving it less incentive to remain – and the state fewer levers through which to induce it to do so – when times are tough.
one of the great fallacies of our time is that firms desperately wish to slash red tape and burdensome rules
In sum, one of the great fallacies of our time is that firms desperately wish to slash red tape and burdensome rules. Yet for most UK firms it is the advanced, extensive regulation provided by contemporary trade agreements that actually confers on them market power by raising the barriers to entry for weaker competitors. So, if a post-Brexit UK wishes to participate in the highest value-added segments of GVCs in the kinds of services it is currently adept at producing, then it will have to accept a significant degree of labour and capital mobility, as well as having its hands tied to some extent when it comes to permissible forms of regulation.
What this means is that, ultimately, the kind of bonfire of EU red tape that Brexiteers have long fantasised about will, if it ever comes to pass, undermine, not facilitate, the free trade that they claim to stand for. Put simply: if you get rid of the regulation, you inherently rid yourself of the right and ability to participate.
If Brexiteers do not grasp this – despite endless warnings that their fantasies are exactly that – they are arguably incompetent and unfit to be negotiating Brexit. If they do, then they need to start displaying some intellectual honesty, explain how they intend to achieve the impossible, and assuage the fears of those of us who are petrified that they appear to be taking the country down an irresponsibly reckless path from which it will be fortunate to ever recover.
This article first appeared on SPERI and gives the views of the author, and not the position of LSE Brexit, nor of the London School of Economics. Image by Editor5807 (Creative Commons Attribution 3.0 Unported).
Dr Matthew L. Bishop is Associate Fellow at SPERI & Senior Lecturer in International Politics, University of Sheffield.
I thought your first post world-class. This one I have a few problems with. First, how does dropping tariffs invite retaliation from other WTO members? Second, the UK’s adoption of EU third country most favoured nation tariffs is not only (in my view and that of the government) merely the adoption of its current commitments, but also not legally controversial. Yes, third country exporters of component widgets used for UK gadgets exported to the EU 27 will suffer if those gadgets lose their market access. But that is just bad luck: EC – Bananas (Art 22.6). As for the TRQs, these are important for exporters, particularly NZ. But note since the NZ-China FTA since 2009 NZ has not filled this quota, and since 2012 only about 75%. Of course, there will be negotiations, but that is why countries have trade negotiators. Importantly, these negotiations hold up precisely nothing of importance. Yes, certification of the UK’s independent schedules will be delayed, but what it says goes until then, and there is no dispute as to the mfn tariffs, and no reason to believe that the UK would be very wide of the mark in figuring out its share. More likely, I think, other countries will want to challenge the existing country specific TRQs (NZ lamb and the totally unused dairy quota being prime targets) for violating Art XIII GATT. The worst case scenario is that a WTO panel has to interpret the UK’s TRQ obligations. Again, disputes are a hassle, but that’s why governments have lawyers. Of course, only time will tell what will happen. But this is my prediction. The real action will be with the FTAs, not the WTO.
This is more good stuff, like your first article on this blog.
As the central argument of the Brexiteers is about trade, it is surprising how out of touch they are with the modern “Spaghetti Bowl” model of international trade. Even after leaving the EU, the UK will be caught in a web of international links which it is fiendishly difficult for one country to control. Even the EU with 500 million citizens finds it difficult; imagine how worse it will be for a nation of just 65 million. This explains why various supra-national bodies have emerged in recent decades (e.g. Unasur, the African Union, the EU, ASEAN, APEC).
Donald Trump is trying the same trick in the US at the moment (by withdrawing form the Trans-Pacific Partnership, renegotiating NAFTA, etc.). Early indications are that he is creating such contradictions that everything will come crashing down sometime soon.
What is going on that the two countries (the US and UK) that did most to create a free co-operating world order after the Second World War are now the biggest threats to international co-operation? China was the star of Davos this year (with the US and UK awkward spectators).
Why does only Ken Clarke among Conservative MPs oppose the invocation by the UK of Article 50? What has happened to the party that nurtured the EU Single Market under Margaret Thatcher 30 years ago?
Isn’t the point that the Brexiters are making that currently UK businesses are obliged to follow EU regulations even when they only operate in the domestic market? This accounts for nearly 75% of GDP so leaving should allow a reduction in the total amount of red tape that collectively they face.
Also, exporters aren’t necessarily dependent on the existence of the “spaghetti” that you describe. They can simply meet the regulations laid down for their target market.
ps there’s a rather nasty split infinitive five paragraphs before the end.
This article brings us again to what seems to me to be the central mystery of the Brexit phenomenon. How is it possible that a significant part of the British elite is able to talk with such confidence about how post-Brexit Britain is going to flourish in an open, free trading, deregulated world, in which it will quickly and easily make advantageous free trade agreements with a wide range of countries? Many writers have examined how many ordinary people voted Leave because of socio-economic grievances entangled with nationalist ideas, tendencies to blame foreigners and protest against the establishment. I think similar attention needs to be devoted to explaining the ideas and motivations of the pro-Brexit elite – the politicians, journalists, businessmen and academics who support Brexit. Consideration should be given to what sort of people they are in social, educational and cultural terms. What distinguishes them from pro-Europe members of the educated, professional part of British society?