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Britain is embracing free trade just as the world turns to protectionism

November 8, 2016

In pointed contrast to President Obama, Donald Trump has promised Britain that it will be at the front of the queue for a free trade deal should he triumph in this week’s presidential election. Yet whether a President Trump, or indeed a President Clinton, would be minded to expend political capital on any trade deal has been thrown into doubt by a campaign that has at times been aggressively protectionist both in rhetoric and in policy.

Meanwhile, a seemingly straightforward Canada-European Union free trade pact threatened to come unstuck last month by the veto of the Belgian state of Wallonia. It is hard now to imagine the more substantial TTIP negotiations can be successfully concluded, let alone ratified by each of the 28 EU member states and in Washington.

Unfortunately for the UK, our historic decision to leave the EU means that we are gearing up to make a substantial global trade pitch at the same time as protectionist instincts prevail. In truth, the US presidential race is the bitterest example of an economic nationalism that has been creeping into public consciousness ever since the 2008 financial crisis. Between 1990 and the onset of the crisis, global trade expanded at twice the rate of world GDP growth; since then these two indices have risen more or less in tandem. The effect of the global economy hitting the buffers was that ailing governments found it ever more difficult to resists domestic pressure to shield their own companies and workers from the recessionary tailwinds.

The independent monitor in this field, Global Trade Alert, estimated in 2010 that discriminatory measures applied internationally in the year or so after the financial downturn had resulted in a ten per cent reduction in global trade. More worryingly still the same organisation in its current report estimates that protectionist measures are back in vogue – up by fifty per cent between 2014 and 2015 and at their highest level since the global recession hit in 2008/09.

What ought to alarm UK policymakers more is that this trend shows clear signs of disrupting the smooth flow of Foreign Direct Investment, so critical to our post-Brexit fortunes. The volume of overseas investment in the UK economy is already under threat in the event that we dilute the benefits of the Single Market – as we now know Chinese, Japanese or Indian companies seeking to invest long term in the UK are attracted to these shores by our being a gateway to a market of some 500 million EU consumers. Whilst it is surely important to recognise that the UK’s Brexit deal will likely include substantial single market access, it will be followed by a protracted process of renegotiating our own bespoke trade deals with sixty nations worldwide. All those companies exporting to or importing from the UK will probably face tariffs with the EU as well as an array of export subsidy and anti-dumping rules.

The fact that most of our trading partners are signed up to the World Trade Organisation (WTO) is reassuring. However, governments the world over have become increasingly skilled at bypassing the WTO’s free trade impulse by imposing all manner of non-tariff barriers to protect their own home suppliers. Paradoxically it has been the EU Competition Commissioner who has often come to the rescue of UK businesses under pressure from state aid, public procurement and the imposition of other contrived regulations. Non-tariff barriers often provide highly effective barriers to entry to markets. This applies not just to small start-ups, or most notoriously within agriculture, but also in the services sector. No one needs reminding how critical open markets will be in this sphere if Britain is to thrive in the years ahead.

Currently the EU single market in services is imperfect, to put it mildly; nevertheless it is an arena where tremendous opportunities await the UK, even post-Brexit, provided some practical accessing arrangements are negotiated. I need not tell professionals such as lawyers, accountants or insurers just how difficult it is for UK firms to set up in India or China where foreign competition is strictly managed, even in what might euphemistically be called ‘joint venture’ arrangements. So whilst in an ideal world these markets have the potential to blossom rapidly and fruitfully for UK exporters as we emerge from the EU, I fear inward-looking protectionism remains the order of the day for some time to come.

Why has this come to pass given the tentative signs of recovery in global trade earlier in the decade? Partly the phenomenon that we see close to home – the world economy is made up of an increasingly dismayed middle class whose living standards have stalled and whose instincts are that the rules of global capitalism are now skewed against their interests. In coming to terms with global trade wars, we also need to face the longer term impact of the overarching struggle between nations with trade surpluses, on the one hand, and countries with trade deficits on the other.

Whilst China and Germany have enjoyed export-led growth that allowed them to accrue vast reserves, much of the rest of the developed world were deficit countries enjoying cheap goods and easy money. Over the past decade there has been an uncomfortable realignment of expectations, which has led to constrained spending despite the almost limitless attempts at central bank stimulus. However, as we now see with the rhetoric of the US Presidential debate there is extreme reluctance for the West to continue to provide a dumping ground for cheap exports and burden future generations with vast debt simply to maintain free trade to the benefit of export nations. This is the foundation of the economic nationalism and the more mainstream allure of protectionism.