Brexit negotiators must beware the hidden threat to free trade

Brexit negotiators must beware the hidden threat to free trade

According to the Lib Dems, the forthcoming Richmond Park by-election is a referendum on having another referendum. To the rest of us in the real world, Brexit is here to stay and what we really need to focus on is how we can get the best deal for Britain in the negotiations – which will start next year.

The discussions on a UK-EU trade deal will take place against a background of a government drive to expand exports. Number 10 wants to see the volume of exports rise to £1 trillion by 2020 and the number of exporters to increase to 100,000. As most exporters will tell you, the barriers to successful and sustainable exporting are many – but the threat of import duties isn’t at the top of the list. Far more disabling is overcoming a hidden threat: so-called non-tariff barriers – yet this seems hardly to merit a mention in Parliament or the press.

In the early days of the then European Community it was assumed that non-tariff barriers were of limited importance compared with actual duties. It was not until the recession of the 1970s they increased, as European nations sought to protect their short-term interests even against fellow member states. Typically made up of import quotas, subsidies, customs delays, technical barriers, qualifications and rules of origin, they were all designed to impede trade. In even as late as 2005, I found it easier to open and run and operate a business in the US than in Germany.

With the present-day cost to UK business at some £33 billion a year, it is not surprising that the government is keen to dispense with as many non-tariff barriers as possible, releasing the stranglehold they have on much of British business. But even if we manage to scrap these, we do need to start thinking about the regulations that will need to be met for access to the single market as non-members.

The fact is, whoever you are, to sell into the EU you need to comply – as you do with any trading group or single country. Presently the requirement is for convergence of laws with EU member states that allow regulations to be enforced, and the establishment of governance arrangements for ensuring compliance. That, however, sounds like a lot of bureaucracy for a relatively small number of exporters.

However, any such thinking intuitively goes entirely against the trend of globalisation. Traders and manufacturers prefer working to global, rather than national (or even regional) standards of conformity. In fact, in what is described as the “Brussels effect”, export-oriented EU firms – having incurred the adjustment costs of conforming to common European standards – want to see these same standards institutionalised globally. And they are succeeding. Look at the equivalence arrangements being agreed with non-EU companies in certain industrial sectors such as organic farming. In these cases, both parties agree to recognise as compliant each other’s organic production rules and control systems as equivalent under their respective rules, after pressure from business.

As trade has globalised, so has regulation – and we won’t be able to turn the clock back on that for our exporters. What is emerging is a global trading system somewhat biased against the single nation trading without the benefit of regional trade agreements. In short, EU regulations and standards are an export in their own right and we will come up against them in many of the export markets we explore.

That is why securing Free Trade Agreements sooner rather than later is crucial to support our export ambitions, not just because of the threat of import tariffs, but more importantly for the non-tariff barriers which, as yet, seem unacknowledged on the political negotiating ‘to do’ list.

When we do address the issue, we have a strong hand to play. The UK is in a good position to secure a successful outcome on overcoming non-tariff barriers. In fact, we have the opportunity to kill two regulatory birds with one stone.

First, given our current regulations and processes are born out of the EU it should not be such an overwhelming challenge for negotiators to ensure that access to the single market can be smoothed. We currently match EU compliance needs, and will therefore just need to demonstrate how we can continue to do that to ensure non-tariff barriers do not ferociously kick in. Uniquely, unlike every other country in the world seeking to win new agreements with the EU on the same issues, the UK does not have first to persuade Brussels that they can meet and match compliance needs. We are cut from the same cloth in this respect as we helped develop and use the very same standards of compliance and convergence.

Second, if we have any chance of meeting our national export target, our companies will need to be selling into countries where non-tariff barriers are genuinely reduced by striking agreements with those countries. Rather than see the past efforts of the EU’s attempts to harmonise high standards of compliance as a negative, we should harness the experience and use it to both speed and smooth negotiations with new trading blocks and countries to deliver early FTAs. With the EU, we should resist the temptation to throw the “baby” out with the gallons of bath water.

The trade-off might be that we can’t throw out as much regulation for our exporters as we would like. The brutal reality, however, is that more regulation is coming whether we like it or not, with both our current and future export partners. In fact, as the Institute of Economic Affairs rightly reminds us at home: “Successive governments have promised to reduce business red tape, whilst doing nothing about it”. So as global trade expands, why on earth do we think for exporters it can reduce now, having failed for decades?

Ultimately, resolution of the long-standing issue of non-tariff barriers has huge global implications. These barriers to trade are as significant at the global level as they are in the European markets, if not more so. Therefore, a longer-term objective would be to look at global solutions rather than to focus on EU relationships and the threat of EU standards being globalised. What can be resolved in global forums can also ease trade at regional levels. Britain, free of the EU and as a free-trading nation can and should lead that cause to which it is so well suited.