Brexit’s advance opens a new trade era


In the aftermath of World War II, the victorious Allies built an international order on the understanding that when countries swap goods they become less inclined to trade artillery volleys.

Britain’s departure from the EU is the clearest manifestation that this idea no longer holds decisive sway. It is not the only one.

Boris Johnson;s election triumph will likely lead to a Brexit, which means more trade deals are coming.Credit:AP

The traditional arbiter of international trade disputes, the WTO, is listing toward irrelevance as countries bypass its channels to impose tariffs. Its appellate body, which adjudicates disputes, has been rendered inoperative by the Trump administration’s blocking of new judges. The panel needs at least three judges to render verdicts but now has only one.

“The sense that policy moves in one direction, toward more liberalisation and more integration, has been replaced by recognition that policy can go backward as well as forward,” said Brad Setser, a senior fellow at the Council on Foreign Relations in New York.

The US and China together account for more than a third of the global economy, making their wave of escalating tariffs a cause for alarm about diminishing fortunes in nearly every country exposed to international trade, from Germany to South Korea to Mexico.

US President Donald Trump has put stock in the unrivalled scale of the US economy in seeking favourable trading arrangements. In his calculus, the US boasts the advantage in any bilateral trade negotiations and can tilt the rules toward American interests.

This was the logic that prompted Trump to renounce US participation in the Trans-Pacific Partnership, a trade bloc spanning a dozen countries. It was a project pursued by his immediate predecessor, Barack Obama, in part to press China to address long-standing complaints that it subsidised key industries, doled out credit to favoured companies and manipulated the value of its currency to gain advantage in world markets.

Delegates oppose the Trans-Pacific Partnership during the Democratic National Convention (DNC) in Philadelphia in July 2016.

Delegates oppose the Trans-Pacific Partnership during the Democratic National Convention (DNC) in Philadelphia in July 2016.Credit:Bloomberg

In taking on China, the Obama administration employed the multilateralist mindset that had guided US policy since the end of World War II. The Pacific trading bloc would set rules on investment, labour and environmental standards. Its members would profit through growing trade, and China would want in. To gain access, China would be forced to adopt the bloc’s rules.

But in Trumpian thinking, multilateralism is for suckers. Shortly after he was sworn in, declaring as his credo “America First”, Trump ditched the Pacific bloc and weaponised the US market: If China wanted access to the 327 million consumers in the richest country on Earth, it would have to buy more American goods and play fair.

Now Britain, in leaving the European bloc, embarks on a strategy aimed at securing bilateral trading arrangements with major economies, from the US and China to Australia and India.

Trade deals are complex and difficult. They entail prying open new markets for exports in exchange for exposing domestic companies to new competitors. Powerful interest groups complain. Deals take years.

A world economy dependent on bilateral trade deals will be a far more uncertain place.

A world economy dependent on bilateral trade deals will be a far more uncertain place.Credit:AP

Arithmetic reveals that no combination of trade deals is likely to compensate Britain fully for what it stands to lose in walking away from the European single marketplace, a territory stretching from Greece to Ireland.

Britain sends nearly half of its exports to the EU, a flow of goods imperilled by Brexit. Britain’s appeal as a headquarters for multinational companies will be undermined as it finds itself separated from the continent by a revived border.

The fraying of international trading arrangements and the rise of nationalist imperatives have been driven by intensifying public anger in many countries over widening economic inequality and the perception that trade has been bountiful for the executive class while leaving ordinary people behind.

In Britain, struggling communities used the June 2016 referendum that unleashed Brexit as a protest vote against the bankers in London who had engineered a catastrophic financial crisis and who then forced regular people to absorb the costs through wrenching fiscal austerity.

In the US, Trump’s political base has rallied to his trade war. In Italy, France and Germany, furious popular movements have fixed on trade as a threat to workers’ livelihoods, while embracing nationalist and nativist responses that promise to halt globalisation.

“The era of freewheeling markets and liberalism is ending,” said Meredith Crowley, an international trade expert at Cambridge University in England. “People are dissatisfied with the complexity of policy and this feeling that those who have the levers of policy are somehow out of their reach.”

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Since Britain shocked the world with its vote to abandon the EU, its political institutions have tangled themselves in knots trying to decide what to do with their nebulous mandate to leave. Businesses have deferred hiring and investments, awaiting clarity on future trading terms.

The uncertainty has already exacted significant costs, and far beyond Europe, according to a new paper by Tarek Hassan, an economist at Boston University, and three European accounting experts, Stephan Hollander, Laurence van Lent and Ahmed Tahoun.

Every year since the referendum, the average company in Ireland – which trades heavily with Britain – has seen its growth in investment reduced by 4.2 per cent, and hiring is 15 per cent less than it otherwise would have been because of uncertainty, the paper concludes. Yet even across the Atlantic, the average US company has seen investment growth limited by 0.5 per cent a year and hiring slowed by 1.7 per cent.

“There is already a significant drop in employment as a result of the risks of Brexit,” Hassan said.

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Some analysts suggested that the election enhanced the possibility that Johnson would pursue a softer form of Brexit, keeping Britain closer to the European market. His majority is so comfortable that he need not worry about alienating the hard-liners in his party who favour a clean break with the EU.

But some alteration now lies ahead. If Brexit uncertainty has been damaging, what replaces it is the near certainty of weaker economic growth and diminished living standards.

“It’s going to have massive implications,” Hassan said.

The New York Times

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