Author: THOMAS COTTIER
Posted on: CIGI |March 12th, 2018
The United Kingdom can’t survive on bilateral agreements alone
There is little else Britain can do upon leaving the European Union: with 32 EU free trade and association agreements in force, 43 agreements provisionally applied and 19 agreements under negotiations, Britain is left with few options for trade post-Brexit. The United Kingdom needs to replace the European Union’s wide-reaching trade policy upon departure from the Customs Union.
Returning to balanced Most Favoured Nation relations based on the World Trade Organization’s (WTO) rights and obligations is a prime and safe option. Industrial tariffs are around four percent on average, albeit peak tariffs remain in some sectors, including the car industry. Tariffs on electronic equipment, however, were recently removed under the Information Technology Agreement. The Technical Barriers to Trade and Sanitary and Phytosanitary agreements offer solid foundations addressing non-tariff measures, as does the Agreement on Trade-Related Aspects of Intellectual Property Rights.
Commitments in services — which are of great importance to Britain — have remained modest under the General Agreement on Trade in Services and likely under the Trade in Services Agreement, but they have not been much enhanced in bilateral agreements either.
With quickly shifting trade policy in play, WTO law offers an important safety net for Britain post-Brexit. However, it will not be able to offset competitive disadvantages in comparison to the European Union and countries operating a substantial network of preferential trade agreements. Next to strongly supporting the multilateral trading system, the UK government therefore seeks to enter into a series of modern bilateral agreements with major trading partners. Old allies of the Commonwealth, such as Canada, Australia, New Zealand, India and the United States, are considered next to a trade agreement with the European Union, the European Free Trade Association (EFTA), China and other countries.
Britain seems to be repeating the same bilateral-focused trade system that other countries have adopted — since it has become clear that the multilateral avenues are increasingly difficult to navigate.
Countries like Switzerland have built upon such a bilateral approach. Within the EFTA or alone, Switzerland has 25 free trade agreements in force, four provisionally applied and nine under negotiations in 2011. Additionally, Switzerland has access to an extensive network of more than 130 agreements with the European Union.
Unfortunately, little is known about the economic impact of these agreements, short of those with the European Union. While these pacts gradually eliminated tariffs, they have not substantially enhanced commitments in services. And for non-tariff barriers, they essentially rely upon the law of the WTO. This process is echoed in the most recent bilateral gold standard: the Canada-European Union Comprehensive Economic and Trade Agreement. For complex issues, such as exceptions from national treatment and assessing policy space for non-trade concerns, these agreements essentially rely upon WTO disciplines.
Bilateral agreements only make sense for large markets that can export their own standards and rules. Only a small number of trading bodies — the European Union, the United States and possibly China — are in a position to impose their own rules in granting market access. Smaller trading nations do not have such privileges; instead, they need to adapt. For example, bilateral agreements between Switzerland and the European Union adopt EU laws and standards.
There is little, if any, room for earlier philosophies of equivalence; unlike nineteenth-century Great Britain, the United Kingdom is not in a position to impose its own standards — today, or post-Brexit. Rather, it will need to align with EU rules and standards in a future agreement, providing continuity established for producers under internal market rules.
The Department of International Trade’s 2017 paper explicitly states that “we would not bring into effect any new arrangements with third countries which were not consistent with the terms of our agreement with the EU.” It will use the same standards with the EFTA and other countries strongly aligned with EU law. But a trade agreement with the United States or China will adjust to American and Chinese standards, respectively. Agreements with other countries will need to align to one or the other set of standards; producing common standards applicable for just one bilateral agreement is unfeasible. As a result, British producers will face additional costs due to the need to produce for different markets under different standards.
The philosophy of bilateralism ignores that more than half of traded goods are components of a larger value chain, often taking place in several countries that do not form a single market or unit.
An increasingly integrated world economy needs common standards applicable to a large number of countries and producers. Modern challenges — including the internet and big data — cannot be addressed bilaterally, with the exception of agreements between major markets negotiating on par.
Bilateralism does not sufficiently consider these facts and is somewhat outdated. Given the critical importance of behind-the-border issues and the need to achieve mutually approached rules and regulations, modern trade policy efforts should aim to achieve such cooperation on the basis of plurilateral or multilateral efforts.
If staying within the internal market and the common commercial policy is impossible, Britain should continue to strongly support the advent of the Transatlantic Trade and Investment Partnership between the United States and the European Union. Ideally, it would envisage extending regulatory cooperation with Atlantic nations, including North America, the European Union and EFTA states in support of creating new globally relevant standards. Britain, Canada and Switzerland could seek to lead these efforts and to eventually create multilateral standards in the WTO.