By Peter Ungphakorn
NOVEMBER 8, 2017 | UPDATED MAY 8, 2019
Too busy to read this longish version? Here are the main points:
How to be a trade champion: A guide for busy politicians
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.
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.
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 overriding 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.
The 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 overriding objective in the paper, leadership in the WTO, developed from my own Twitter thread.
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.
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 political summit, 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.
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 was also on Legatum’s Special Trade Commission (list no longer available, see below), 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.
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.
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.
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: May 8, 2019 — Changed: link to the Legatum paper, “The Brexit Inflection Point: The Pathway to Prosperity”, now uploaded to the blog. The original link was broken since the author and his trade commission are no longer with Legatum. Removed: broken link to Legatum’s Special Trade Commission since it appears to have been disbanded.
According to this, the commission’s members were:
Former member: Crawford Falconer — up to June 2017 when appointed first chief trade negotiations advisor, and second permanent secretary, Department for International Trade.
Members (all male):
• Shanker Singham, Chair
• Alden Abbott, Deputy Director and Senior Legal Fellow, Heritage Foundation; former US government official; adviser to International Competition Network
• Razeen Sally, academic and adviser to governments, business and international organisations. Rresearch focus on trade policy in Asia, the WTO and preferential trade agreements. Chair of Sri Lankan Institute of Policy Studies, adjunct scholar at the Cato Institute and co-Director of the European Centre for International Political Economy think tank in Brussels. Member of the Mont Pelerin Society
• Francisco Sanchez, former Under Secretary for International Trade, US Department of Commerce (under Obama); chair of CNS Global Advisors; senior positions in two private equity funds
• Grant Aldonas, former Under Secretary for International Trade, US Department of Commerce (under Bush); adviser to Center for Strategic and International Studies; founder-MD of Split Rock International, a Washington-based trade and investment consulting firm
• John Weekes, former Canadian NAFTA negotiator and diplomat, Canadian Department of Foreign Affairs and International Trade; adviser at the Canadian law firm Bennett Jones; board member of the Canadian Agri-Food Policy Institute
• Luis de la Calle, former Undersecretary of International Business Negotiations, Ministry of Economy in Mexico; founder-MD of De la Calle, Madrazo, & Mancera (CMM); former adviser from 2012, Hill and Knowlton Latin America
• Alan Oxley, former Australian diplomat; advisory board member of European Centre for International Political Economy; MD of ITS Global, Consultants on Global Issues, Australia
• Lockwood Smith, former New Zealand diplomat and NZ High Commissioner, London
Special Trade Commission staff
• Victoria Hewson, Senior Counsel, Special Trade Commission; seconded from CMS Cameron McKenna; also part of Lawyers for Britain, a group formed in 2016 to campaign for Brexit
• Dr Radomir Tylecote, Senior Research Analyst, Special Trade Commission
• Rushmila Alam, seconded from Deloitte
• 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