How to be a trade champion

A guide for busy politicians

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By Peter Ungphakorn
NOVEMBER 21, 2017 | UPDATED NOVEMBER 21, 2017

By Abraham Storck - Public Domain, https://commons.wikimedia.org/w/index.php?curid=1147660
Size counts: the more you trade, the bigger your clout in the WTO

International Trade Minister Greg Hands has again proclaimed the UK is a global trade champion only needing to “reclaim our position at heart of global trading system”.

I have written a longer piece on this. Here are some key points for busy readers. I’m using the WTO as the context since that’s where “the heart of the global trading system” is.

How to be a trade champion
  1. Have a policy
  2. Sort out the UK’s WTO membership terms
  3. Be large(-ish)
  4. Have a position that resonates with others
  5. Either
    a. be constructive so everyone likes you
    or
    b. be stubborn so everyone has to put up with you
  6. Have a good supply of skilled diplomats and trade officials
  7. Accept that you still might not be at the top table

The WTO operates a consensus system, which means a decision is reached when no one objects.

In theory all 164 members should have the same decision-making power. In practice, there is an unofficial power structure, even though consensus is ultimately needed: the power structure influences the consensus outcome.

At the top: these days it’s the G5 — the US, EU, Brazil, China, India.

Next level down: the “Green Room” or equivalent — 20 to 30 members because of their influence or because they represent constituencies. They include the G5 plus Canada, Japan, Switzerland, Australia, Argentina, and others representing various groups of developing and least developed countries.

This is roughly how they got there and what the UK would need to join them

1. Have a policyBack to top

Obviously. But when politicians talk about the UK being a champion of trade, they are also advocating the UK being much more of a free trader than it is now, particularly in agriculture. This has not been debated properly and is certainly not the official policy of any of the main British political parties. In particular, this government has promised to continue to support farmers at present levels, at least for a time. Moving away from that would involve some substantial changes that have barely been discussed.

If the UK ends up in a customs union with the EU, then its trade policy for goods (not services) will be more or less the same as the EU’s. If it doesn’t, it may have a freer hand, but a lot also depends on how it aligns its regulations. Even though a customs union is not government policy, some still advocate it. Other policies are also still up in the air.

2. Sort out the UK’s WTO membership termsBack to top

The UK (and EU) have only just started talking about establishing their separate commitments in the WTO on tariffs, “tariff quotas” (explained here), farm subsidies, and on opening services and public procurement markets. It’s taken months just to prepare data for the tariff quotas and the real negotiations haven’t yet begun.

These commitments will be needed by Brexit day, March 29, 2019, so that the UK’s WTO membership terms are clear, and it’s going to be hard work. There’s no harm in having a long term vision, but for now the focus should be on the more urgent nitty-gritty.

3. Be large(-ish)Back to top

A key reason for being either in the G5 or the Green Room is economic size, particularly the share of world trade. As a rough guide we can look at WTO figures for goods exports.

Among the G5, the EU would be top if counted as a single entity, followed by China and the US. But the WTO ranks EU member states individually (Germany 3rd, the Netherlands 5th, etc) and this puts India 20th and Brazil 25th.

Among countries in the Green Room, with their ranking, are: Japan (4, after Germany), Canada (12 after a number of EU states, Hong Kong and South Korea), Switzerland (15), Australia (23), and so on.

And the UK? Tenth, putting it well inside the Japan, Canada and Switzerland group.

The factors that affect trading size include the size of the economy (population size and per capita income), the value of products (which goes some way to explaining Switzerland’s high ranking), and also having a large port (as with Hong Kong and Singapore, and to some extent the Netherlands).

4. Have a position that resonates with othersBack to top

Size is not the only reason Brazil, China and India are in the G5. They each speak on behalf of different groups of developing countries. Brazil tries to bridge the differences between agricultural free traders (Thailand, Uruguay) and those wanting to protect their poor farmers (India, Indonesia, Kenya). In different ways China and India sometimes speak on behalf of weaker developing countries.

At the next level are coordinators of various coalitions of shared interests. Australia represents agricultural free traders. Switzerland coordinates a group of more advanced but more defensive agricultural producers. Others represent the African Group, the least-developed countries, and so on.

If the UK sticks to its present trade policy, it could find that the EU still best represents its position even after Brexit.

Or will its trade policy change? For now, that’s unclear. To be a leader of any kind, it would have to develop a new separate policy of its own, and one that would resonate with other members. But the field is already crowded. In agriculture, the UK might have to accept the leadership of Australia or Switzerland, depending on which direction it chooses, or be a lone voice with no followers.

5a. Either be constructive so everyone likes youBack to top

One way of winning friends and influencing people in the WTO is to help break a deadlock by proposing a compromise that everyone likes enough to want to work on it. This requires knowledge, skill and subtlety. It means understanding what might and might not be acceptable to others and the creativity and imagination to produce something new.

Countries rarely do this on their own. In the past few weeks, China has produced a new proposal on disciplining fisheries subsidies on its own, but the paper essentially reflects a Chinese concern and will need to be negotiated. By contrast, the EU and Brazil approached the negotiations on curbing farm subsidies from different directions and proposed a draft compromise. Whether that succeeds remains to be seen.

5b. Or be stubborn so everyone has to put up with youBack to top

India has a decades-old reputation in the WTO for being a blocker although it would argue that it is defending the weak and vulnerable. Most recently, it held up a new agreement on streamlining border procedures (“trade facilitation”) in order to push a separate proposal that would free public stockholding of food from WTO subsidy disciplines.

Anyone can be stubborn. From time to time the US and EU have been too, so size counts as well. There’s no doubt that a large and vocal India was difficult to ignore.

An anecdote. In 1986 the US and EU wanted to launch a major new round of negotiations. Some hardline developing countries led by India, Brazil and Argentina opposed the move. Finally two smallish countries, Colombia and Switzerland decided to take matters into their own hands. They produced a joint compromise proposal (appropriately nicknamed “café au lait”). More and more countries signed on, and that eventually became the basis for launching the “Uruguay Round” talks, which created the WTO.

In that example, constructive compromise trumped stubbornness.

6. Have a good supply of skilled diplomats and trade officialsBack to top

If you’ve read this far, the need is obvious. Trade is technical and political. If a country is to operate effectively and credibly it needs skilled officials who can understand both the technicalities and other countries’ concerns.

Right now, the UK is in the early stages of rebuilding its capacity to negotiate trade. Its initial focus will be on sorting out its trading relationship with the EU, then on negotiating or renegotiating bilateral free trade agreements with other countries.

Those deals will be important for the UK, but they are not enough to make it a trade champion on the world stage. For some time to come, they will also draw British resources away from work in the WTO.

7. Accept that you still might not be at the top tableBack to top

In fact there is really little chance that the UK will be in the G5 or whatever evolves next. A proper analysis of how countries fit into the power structure is bound to show that.

There is no shame in this. Constructive middle-level roles in the WTO — such as by Canada, Australia, Argentina, Japan, Switzerland, etc — are vital for the trading system. They are all realistic about what they can achieve and they get on with it.

The UK should do the same. Misguided self-importance will only backfire.


Updates: None so far
Photocredits:
• Harbour scene by Abraham Storck, public domain


What WTO leadership means and where the UK would fit in

People who should know better keep talking about the UK becoming a leader in the World Trade Organization. What exactly does this mean and what are the chances?

By Peter Ungphakorn
NOVEMBER 8, 2017 | UPDATED NOVEMBER 8, 2017

Brexit will allow Britain to lead the World Trade Organization (WTO), the Legatum Institute claims in a new paper published on November 4, 2017.

The paper, “The Brexit Inflection Point: The Pathway to Prosperity”, is new but the claim is not — not entirely.

“Britain stands ready to take a leading role within the WTO,” International Trade Secretary Liam Fox said in a speech at the WTO almost a year earlier on December 1, 2016.

Major General Wellesley (mounted, the future Duke of Wellington) commanding his troops at the Battle of Assaye (J.C. Stadler after W.Heath) Public domain, National Army Museum
No invisible hands here: the British East India Company won monopolies and trading power partly through war such as at the Battle of Assaye in 1803

And further back in September 2016, Fox talked about “corralling coalitions of the willing” in a speech at Manchester Town Hall:

If other nations are hanging back, then the UK will happily lead the charge for global free trade. We will corral coalitions of the willing who share a belief that a more open and free trading world is the one which will provide the brightest economic future for our citizens.

The UK is a full and founding member of the WTO, though we have chosen to be represented by the EU in recent years. As we establish our independent position post-Brexit, we will carry the standard of free and open trade as a badge of honour.

JUMP TO
In Legatum’s extraordinary words
WTO leadership: from Quad to G5
Next level leadership
Liberalising agenda
Why?

SEE ALSO
How to be a trade champion:
a guide for busy politicians

This should be a minor distraction. It isn’t. Although Legatum’s paper deals with a wide range of issues, it makes leadership in the WTO an over-riding objective, determining for example whether the UK should be in a customs union with the EU and what kind of regulatory system it should adopt.

Legatum is forever optimistic — nothing wrong in that so long as the optimism is justified. Its paper covers a wide range of topics including regulations, standards, customs cooperation, options for an interim or transition period for Brexit, and so on.

Much of it has been questioned. That includes a number of Twitter threads, for example by barrister George Peretz, law professor Steve Peers, and commentator Frances Coppola. And then there’s pro-Brexit Richard North, who wrote on his blog that Legatum was confused about regulations, standards, mutual recognition and conformity assessment. And Martin Sandhu in an FT article, who called the paper “a confidence trick”.

Many of the criticism are about the details. More broadly Legatum is also accused of painting a picture of a future that is too rosy and a past that was not as glorious as it claims — certainly not a model for modern trade:

A century ago, Britain was the “free trade nation”, a cause that brought crowds of tens of thousands to the streets in its defence, being vital both to the livelihoods of Britons and to the economic miracle Britain gave the world in the century to 1914. But in the century since, our trade — and the world’s — has been subsumed into a restrictive system that creates poverty. The global economy is essentially stuck (page 5).

Many have commented that much of the UK’s trade dominance was actually acquired by force and empire-building. As for the future, “free trade is not an unalloyed good, and we do have to consider the costs as well as the benefits” said Frances Coppola in an exchange on her Twitter thread.

She echoed a more general assessment by Friends of the Earth’s Sam Lowe, who tweeted in May 2017 that Legatum’s papers are “all upside, little acknowledgement of the down. The remotely possible portrayed as plausible.”

I’m not saying the paper is all wrong. Far from it. But I’ll leave it to others to debate the rights and wrongs of other details. Many of these are either beyond my expertise or are based on debatable assumptions about the future, about how the EU and others will react to particular positions.

What follows here is about that over-riding objective in the paper, leadership in the WTO, developed from my own Twitter thread.

In Legatum’s extraordinary wordsBack to top

There is a subtle difference between taking “the lead” in the WTO (Legatum) and “a leading role” (Fox). What did Legatum mean, and what other leading roles might be available to the UK?

These are some extracts from Legatum’s paper. It calls for much more than simply “a leading role”. In fact, what it proposes is pretty extraordinary.

It says that one of the UK government’s immediate actions should be:

Taking the lead in World Trade Organisation (WTO) membership and explaining why the UK and WTO members now share a trade liberalising agenda. (Page 4, and similar on page 10, my emphasis here and in other quotes).

Suddenly, it seems, according to Legatum, the UK can be at the peak of the WTO’s power structure. (Who is currently there? We’ll look at power politics in the WTO in a moment.)

But more than that, the UK will “explain” why all of a sudden Britain and all other WTO members “now share a trade liberalising agenda”.

Legatum does not clarify how, simply because the UK is leaving the EU, this remarkable change can take place. It could not possibly do so. After all, “WTO members” includes the EU and its member states (for now including the UK) as well as the 135 non-EU, non-UK WTO members. Brexit doesn’t change that.

There’s no earthly reason why the diverse agendas of all the 164 members (including the EU’s) should suddenly align once the UK has left the EU and “explained” the need for a different direction.

The idea of UK leadership is repeated through the paper, for example this on a customs union and the European Free Trade Association (EFTA):

Interim proposals are now being floated to remain in the Customs Union, part of it, or join EFTA and accede to the EEA Agreement. This is very dangerous: the EU will use such uncertainty to maximise its leverage, while other trading partners will re-focus their energies on the EU. The UK will lose its opportunity for trade leadership at the WTO, and the consequences will be serious. (Page 7)

And this on regulations:

The UK must therefore be able to regulate differently from the EU in areas like standards and regulatory issues. If it is locked into the EU regulatory model, it will not be able to make the adjustments necessary in order to sign comprehensive free trade deals with other countries, nor will it be able to lead in the WTO and other multilateral fora. (Page 21, and similar on page 23)

And this on tariff commitments and again a customs union:

Without control over tariff schedules [ie, lists of commitments in the WTO], time in the Customs Union prevents UK leadership within the WTO. (Page 29)

Also repeated is the notion that the UK’s role in the WTO is to “explain” what the world should do:

Beginning at the WTO, the UK needs to frame its case by explaining that making the global economy more prosperous over the long-term requires the urgent liberalisation of world trade. (Page 9)

Before Fox considers “corralling coalitions of the willing” in the WTO — or taking up Legatum’s fantasy of the UK leading and explaining — he might like to look at the many coalitions that already exist and how power is structured in reality in the organisation.

WTO leadership: from Quad to G5Back to top

Once upon a time, there was the “Quad”, occupying the summit of the power pyramid. They were the US, EU (including the UK), Canada and Japan, at that time the four largest traders.

Roughly speaking, nothing would be agreed if it couldn’t pass the Quad. But more importantly, if they could negotiate a breakthrough among themselves then the rest of the membership could be covered, provided some flexibility or opt-outs were included for smaller countries.

One historical breakthrough in November 1992 was bilateral, between the US and EU (the so-called Blair House accord on agriculture). Not even Canada and Japan were involved. Even in that structure, the UK on its own would hardly be the leader. But that structure no longer exists anyway.

The Quad dominated throughout the Uruguay Round — the 1986–94 negotiation that created the WTO in 1995 — and into the WTO’s early years. Then, as the century turned, trade was changing. By 2015, Canada and Japan had been jettisoned. In came Brazil, China and India.

At the peak, the Quad has been replaced by the “G5”, which was responsible for the breakthrough at the WTO Ministerial Conference in Nairobi in December 2015, when members agreed to scrap agricultural export subsidies.

Ironically, the UK was represented in that G5 — by EU commissioners Cecilia Malmström (trade) and Phil Hogan (agriculture). After Brexit, it’ll be on its own.

Next level leadershipBack to top

At a pinch the UK might have been able to get a seat in the old Quad beside Canada and Japan, but not now. In the WTO, the UK will be in the second or third tier of the power structure.

There’s nothing wrong with that. Many countries at that level play constructive roles and have won the respect of fellow-members.

However, none of them did it by marching in and proclaiming “I’m a leader now, let me explain.” Not even the US can get away with that.

Nor did they have to be major traders. New Zealand has supplied a succession of chairs in the crucial agricultural talks, its trade diplomats having acquired a reputation as professional, skilled, honest brokers.

(One of them, Crawford Falconer, is now a senior official in Fox’s department. He is also on Legatum’s Special Trade Commission, a move that did raise eyebrows.)

A more effective way of being heard in the WTO is to join an alliance. WTO alliances already have coordinators, so in another sense, the WTO already has lots of leaders.

Australia coordinates the Cairns Group campaigning to liberalise agriculture. Switzerland (an EFTA member) does it for the G–10, which is more defensive on agricultural trade. Brazil set up the G–20 group of developing countries. Taiwan (officially “Chinese Taipei”) coordinates a group of countries that recently joined the WTO. And so on. The WTO website has a long list of alliances in its trade negotiations.

What should the UK do? Take agriculture. If it really is keen on liberalising agriculture, it could join the Cairns Group, but not as its leader. Australia and the others would not appreciate that.

If on the other hand it wants to keep the more defensive policy it now applies as an EU member, it could join the G–10, but Switzerland, Norway and Japan would also not accept it as a leader.

Or, it could go it alone. Only the US and some countries with a minor interest in agriculture have done that, for example Singapore, Hong Kong and some Middle Eastern states. The UK would have a voice, but not a very loud one.

Coalitions in the WTO agriculture negotiations
Where would the UK fit in? The graphic is slightly out of date but it still shows how complex WTO power is, in just one subject (Click the image to see it full size)

But before it embarks on any of this, Britain will have to sort out what kind of trade policy it wants. Take agriculture again. What should the policy be?

Low import duties and low subsidies? Broadly speaking, consumers would gain, many farmers would lose (some would gain) and subsidies for protecting the environment might also be lost.

Continuing with present high duties and some subsidies? Food would remain fairly expensive but farmers would stay in business and British production would be sustained (although Brexit itself might affect that too).

Or something else? The discussion has barely begun.

The UK might face another struggle if it wants to be influential in the WTO. Several non-UK officials have remarked that the UK used to be respected as a sound, pragmatic player in trade and other issues. Brexit, they say, means the UK is now seen as confused, floundering and ineffective.

If that reputation can be repaired, then the UK could find itself among over a dozen second-tier “leaders” in the WTO. It would not have a seat at the summit, but it could be invited to unofficial meetings of 20–30 members (sometimes called “Green Room” meetings) alongside the “G5”, Canada, Japan, Australia, Switzerland, Norway, Argentina, South Africa and whoever chairs various groups of developing countries.

To be clear, for a country of the UK’s size and clout, there would be no disgrace in joining that group. It would also be more realistic than talking of leadership.

Nairobi delegates scrutinise final declaration 19.12.2015
Is Doha dead? Is it alive? Delegates at the WTO’s Nairobi Ministerial Conference scrutinise the final declaration, December 19, 2015
Liberalising agendaBack to top

Tied in with idea of leadership is the notion that Britain outside the EU can launch its independent WTO membership by “explaining that making the global economy more prosperous over the long-term requires the urgent liberalisation of world trade.”

The truth is that in the WTO a call to liberalise trade is a meaningless cliché. The UK can “explain” as much as it likes but the real difficulty is that there is little agreement on how and what to liberalise, what the downsides are for a widely divergent membership, and how urgent the need is.

In 2001, sixteen years ago, the start of a new set of negotiations was agreed. They are unofficially known as the Doha Round or the Doha Development Agenda (DDA). Launching the talks, WTO trade ministers declared:

We are determined, particularly in the light of the global economic slowdown, to maintain the process of reform and liberalization of trade policies, thus ensuring that the system plays its full part in promoting recovery, growth and development.

Sixteen years later, WTO members have failed to agree on how to achieve that, except in a limited number of issues such as cutting red tape at the border (“trade facilitation”) and scrapping agricultural export subsidies (whose use is now dwindling).

Worse, WTO members cannot even agree on whether the Doha Round is over or not. This is what their ministers declared at their last biennial conference in Nairobi in December 2015:

30. We recognize that many Members reaffirm the Doha Development Agenda, and the Declarations and Decisions adopted at Doha and at the Ministerial Conferences held since then, and reaffirm their full commitment to conclude the DDA on that basis.  Other Members do not reaffirm the Doha mandates, as they believe new approaches are necessary to achieve meaningful outcomes in multilateral negotiations. Members have different views on how to address the negotiations. We acknowledge the strong legal structure of this Organization.

Given how diverse opinions and interests are among WTO members, the notion that they will take heed when the UK “explains” is bizarre.

Why?Back to top

There are a number of other questionable assertions about the UK and the WTO in Legatum’s paper.

They include a claim that other WTO members will want a say in a future UK-EU trade agreement (there’s no precedent for this because WTO disciplines on free trade agreements are weak, except for blatant violations).

And Legatum says the UK should talk to other WTO members alone, without the EU, when setting up Britain’s WTO commitments on tariff quotas (difficult to achieve since processes for the UK and EU are intertwined, and British officials are far less experienced than the EU’s in negotiating tariff quotas). In any case the two are already working together.

One of the problems with Legatum’s obsession with WTO leadership is that it diverts attention away from the real issues it should be considering.

For example, the question of whether the UK should be in a customs union with the EU is really about a trade-off. The benefit is smoother trade (in goods) between the two. The downside is that the UK would not be free to set its own tariff rates and negotiating free trade agreements with other countries would be almost impossible.

And the argument in favour of having a customs union temporarily during a transition period is to give business more time to adjust to the final UK-EU relationship.

Legatum ignores all of those arguments on the grounds that the UK needs to grab WTO leadership and to do so fast. It does not say what the benefit of leadership will be other than the questionable claim that it is needed so other countries can take the UK seriously. And of course that it will bring pride and the futile hope that the world will be spurred into creating a free trade paradise.

If this were just about a paper from an ill-informed institute, it would not matter much. The problem is that misguided jingoism is common in the debates about Brexit. Legatum’s line feeds straight into Fox’s preoccupations, for example.

There are real trade-offs and real dilemmas that have to be tackled. Talk of UK leadership in trade is unrealistic, unhelpful and a distraction.


Updates: None so far

Photocredits:
• Major General Wellesley (mounted, the future Duke of Wellington) commanding his troops at the Battle of Assaye (J.C. Stadler after W.Heath). Public domain, National Army Museum

• Delegates at the 2015 Ministerial Conference, in Nairobi, © WTO. Courtesy of Admedia Communication