A possible trade agreement between the UK and the US has become a controversial issue in the UK elections. The Labour Party alleges that the UK’s National Health Service (NHS) is on the table in negotiations. (In Northern Ireland, at least, the NHS seems to be on the floor, and in general is delivering no more than average results in European terms. Nevertheless it is much prized in the UK) . For the Conservatives, a trade agreement with the US is a big priority after Brexit. The US Secretary of State, Mr Pompeo, had earlier said that this will also be a priority for the US. The then US National Security Advisor, Mr Bolton, suggested that there could be a series of partial agreements on individual sectors. But this was a bad idea for lots of reasons. Let’s take just three of them. Firstly, no US-UK agreement, even partial, can be finalized until the nature of the future UK- EU relationship is clear, and those negotiations have not yet begun. Secondly, the tendency is always in modern economies for sectors to become more and more interrelated, and so it’s harder and harder to treat them separately. Thirdly, statisticians will recognise the related question of ” degrees of freedom”: making a number of partial agreements ends up by putting an impossible burden of adjustment on the final sector to be negotiated.
Sending goods by sea is the norm. And, if you’re worried about CO2 emissions, you’ll initially be glad to hear that according to the World Shipping Council “Maritime shipping is the world’s most carbon-efficient form of transporting goods – far more efficient than road or air transport.” . They give figures of 10 grammes of CO2 to move a tonne of goods one kilometer. To do the same by rail (diesel train) takes 21, truck and trailer 59, and by air the figure is 470 grammes. But of course an electric train, depending on the source of the electricity, might do better, as might an electric truck in the future. The main problem is that world trade is so big that, even though most of it goes on ships, the total CO2 emissions are enormous. (So are other pollutants: the fifteen largest ships produce more Nox and SO2 than all the cars in the world).
What can be done? The International Maritime Organisation, a UN specialised agency, has a target of reducing CO2 emissions from world shipping by 50 per cent by 2050. Continued technical progress in ships, engines, and fuels will all play a role. But there are also big benefits from ships going more slowly. This has been an increasing trend in any case as a cost saving measure, but it also reduces the CO2 emissions. An obvious additional step is to start taxing maritime fuel, which at the moment, like aviation fuel, is not taxed at all. The IMF has been looking at this and is quite excited about it:” In short, maritime carbon taxes are an economically and administratively promising instrument”
Further steps to take include the electrification of rail lines, which opens up the possibility of using alternative energies in rail freight. What about trade wars? New tariffs on trade and “bringing the jobs home” should cut down on international sea freight, shouldn’t it? Well, producing locally of course reduces the need for imports and thus for freight. But it is almost certainly not the most efficient way to go. Tariffs impose a cost on consumers and they hinder growth and this means that there will be fewer resources for combatting climate change or for anything else.
There’s another development, an unfortunate by-product of climate change that may actually be useful. With global warming, new sea routes are opening up in the Arctic, the fabled Northwest and Northeast Passages. They could halve the time of sea freight voyages between some big markets.
In anticipation of Brexit, the United States has outlined its objectives for a trade agreement with the UK. Among other things, it wants to see access for its agriculture to the UK market. But US agriculture includes products such as chlorinated chicken, banned in the EU. Will the UK let these chickens in, if it “takes back control” and can make its own trade agreements?
For the US, the EU ban on chlorinated chicken is seen as a protectionist measure rather than a health protection measure. The US ambassador to the UK in an angry article in the British newspaper “Daily Telegraph” has attacked the EU approach : “Inflammatory and misleading terms like ‘chlorinated chicken’ and ‘hormone beef’ are deployed to cast American farming in the worst possible light…..It is time the myths are called out for what they really are: a smear campaign from people with their own protectionist agenda.” Even a moderate US journal such as “The Atlantic” states that “The European Union banned antimicrobial baths in 1997. That ban created a protected market for European and British chicken producers.”
In fact, the picture is a good deal more nuanced. In production terms, the EU is self-sufficient in poultry meat: from 2009 onwards production has always exceeded consumption. But the EU imports lots of chicken from other parts of the world, and exports a lot also. It imports chicken from Brazil, Thailand, the Ukraine, among others, to a total of 786 thousand tonnes in 2018, which is about 5.3 per cent of EU production, and it exports chicken to Ukraine, Philippines, Ghana, China (Hong Kong) and others, to a total of 12 per cent of EU production.
Looking at these other countries, the UN trade statistics tell us that the EU and the US are both selling them chicken in increasing amounts. Quite frequently, the EU is selling more. The EU outsold the US in Ghana (2015-2017), Japan (2014-2016), South Africa and Ukraine (2014-2017). Only in Hong Kong and the Philippines is the EU clearly behind the US, with sales at 56 per cent and 69 per cent of the US total in 2017. It’s also interesting that the EU chicken sometimes does quite well in price terms also, with the average price per kilo higher than that for the US product in the Hong Kong, Japanese, and South African markets in 2016 and 2017.
So, in third countries, where the EU and US are head-to-head, the EU chicken seems rather competitive. Which means that if the EU really were protectionist, it wouldn’t need to be.
First of all, Brexit doesn’t just mean that the UK is leaving the EU. It also means that the UK is leaving all the trade agreements that the EU made when the UK was a member, and we can assume that the UK had things to say all through those negotiations. For the partners, it’s also difficult. To understand why, think about how trade deals are negotiated. Lots of detail, industry after industry, commodity after commodity, the tariffs, the quotas, and the non-tariff measures. Tariffs are essentially taxes on the imports, and non-tariff measures are things such as technical regulations that can be used to block imports, or else impose painful testing on the imports to make sure that they conform to the rules. For the EU and its negotiating partners, a balance has to be struck, a balance between hope and fear: hope that they’ll be able to export more, fear that there’ll be more competitive imports from the other side. The important point to remember is that these agreements were based on hundreds of detailed calculations of costs and benefits, and the assumptions made on both sides were that the EU included the UK. Brexit has damaged the UK’s reputation for keeping agreements, and it has, in particular, undermined the logic of all the trade agreements that the EU has made up to now. This means that, even before the UK negotiates any new trade agreements with other parts of the world, there may already be negative perceptions of the UK on the other side.
Although the UK has managed to negotiate what are called trade continuity agreements with Switzerland, Chile, Israel, Eastern and Southern Africa, the Palestinian Authority and the Faroe Islands, it is a long way from replacing all the existing EU agreements, and even farther from more ambitious ones. Most recently, Japan was reported as being upset over the UK’s implied criticism of them for being slow in this regard. There was a suggestion that the UK saw it as a simple matter of “cutting and pasting” the existing EU-Japan agreement. (In fact “cutting and pasting” has been the general UK approach to all trade negotiations since they lack the human resources to renegotiate in detail).
As we have seen above, reaching a trade agreement requires the fine balancing of a lot of detailed considerations. For a third country, the calculations involved in reaching a deal with the UK cannot be the same as those that were involved in the negotiations with the EU. Those in the UK who supported Brexit tended to minimise the difficulties of replacing the EU’s trade agreements, and they have pointed to the possibilities of better agreements as a result of Brexit. But no such better agreements are yet in the pipeline.
A further issue is that of the UK’s future trade relations with the EU. To date there is only the “Political Declaration” which outlines in very general terms the priorities for the future. In the section on “Goods”, paragraph 20 states that “The Parties envisage having a trading relationship on goods that is as close as possible, with a view to facilitating the ease of legitimate trade”, paragraph 22 says ” the Parties envisage comprehensive arrangements that will create a free trade area…”, and paragraph 23 says “The economic partnership should ensure no tariffs, fees, charges or quantitative restrictions across all sectors”. Similarly, under “Services”, paragraph 29 states that “The Parties should conclude ambitious, comprehensive and balanced arrangements on trade in services and investment in services and non-services sector.” All these statements are positive, but none of them are commitments. The precise nature of the agreement that will be negotiated is not yet known. Third countries considering a trade agreement with the UK will wait until there is clarity.
Finally, consider the question of relative weights in negotiations. When the EU negotiates with most countries, it is usually the stronger partner because of its market size and economic clout. But if the UK is on its own, it is not necessarily in as strong a negotiating position. This is particularly so with regard to a proposed UK-US agreement.
Natalie Nougayrède from the Guardian newspaper had an article recently in which she talked about her encounter with the Austrian Foreign Minister at a public discussion on the future of Europe. She had criticised the Austrian minister for her participation in a government that includes a very right-wing party, the FPÖ, and she pointed that the Minister had refused to deal with the issue, instead focusing on the lack of participation by the French government ministers in recent EU Council meetings.
I was present at this discussion, and one of the things that depressed me was the Austrian Minister’s response to the question as to what Europe meant to her. She did not mention democracy, human rights, or peace: instead, she concentrated on the geographical and historical definition, emphasising that for her it included the Mediterranean, and even Algiers. What depressed me also were the remarks of two far more impressive speakers at the event: the former Foreign Minister from Croatia said that everything she had valued in Europe now seemed under threat, and the chairman of the Bundestag’s foreign affairs committee said that for the first time he believed that Europe could fail.
What has this got to do with trade and investment, you ask? Well, when this kind of discussion begins to preoccupy the leaders of the EU, economic questions tend to get put to one side. But unemployment, especially youth unemployment, is still high. Economic governance is far from complete. There is still a huge amount of work to be done to make the EU a true Single Market. And the external economic policy of the EU is very limited and needs to be enormously enhanced. All this means politicians working together to take action and give leadership.
As usual, the IMF World Economic Outlook has been published in connection with the annual meeting of the World Bank and the IMF. The new report has a special emphasis on the impact of changes in trade policy, which as we know has seen a lot of action in the field of tariffs, with sanctions also playing a role. The revision of the NAFTA agreement, involving Canada, Mexico and the United States, is a further factor.
Behind the world economic survey is a huge amount of data and forecasting work, which encompasses broad economic and policy variables, giving a detailed picture in macroeconomic terms of each country as well as its various aggregates, up to the year 2023 in the case of the current survey. This data is of interest in its own right, but it is also interesting to compare the forecasts made at a detailed level this year with those made last year. Looking at the NAFTA countries, it seems that Mexico has had its expectations increased quite a lot. Compared with last year’s survey, Mexico’s GDP is almost 25% higher in all the years from 2018 to 2022. Canada has had its forecast increased by something over half a percent in the later years. Apart from Mexico, a big beneficiary of the revision of the projections has been the United States, where the US GDP in 2022 is 6.8 per cent higher than the estimate made last year. China’s increases on the other hand, are pretty small, with the GDP estimate for 2022 being revised upwards by 0.1 per cent
At world level the picture is a negative one. The IMF now thinks that world GDP growth in 2022 will be 3.58 per cent, while a year ago it was forecasting 3.76 per cent. Eurozone growth in 2022 is now forecast to be 1.45 per cent (previously 1.49 per cent).
Do these IMF forecasts imply that the US will be a slight beneficiary of its recent confrontational trade policies, since the US GDP forecast has been revised upward and world growth forecasts revised downwards? Well, perhaps, but macroeconomic forecasts embody a lot of things, such as structural change, technological change, resource constraints and so on, some of which the forecasters themselves may be not even be aware of. In other words, trade policies may not be the only factors at work.
And even if you do think that confrontational trade policies benefit the US, you should also ask yourself whether losses for the rest of the world won’t reduce the impulses for US growth farther down the line. And you should consider how much better it would be if the US and its trade partners were reducing barriers to trade (and investment) rather than increasing them.