The UK’s new trading relationships & the developing world

We are now two weeks on from the vote to leave the European Union. Whilst I supported staying in the EU, we have to accept that the UK will leave and therefore I am keen to look at the possibilities, both positive and negative that leaving the European Union will mean for our trading relationships with other countries around the world. On the trade side, there are a significant number of potential trade agreements and new relationships that the UK needs to develop. For over 40 years all our trade relationships have been governed by DG Trade in the European Commission. In general, they have done a good job. According to Grant Shapps,  http://www.huffingtonpost.co.uk/grant-shapps/brexit-uk-economy_b_10747900.html  63% of UK trade is covered by free trade agreements. However this is not as good as some other parts of the world. For example, 80% of Norway’s exports are covered by free trade agreements along with 69% of Canada´s and 77% of Australia’s.

So although we have the very pressing concern of how to access European markets, which will need to be addressed urgently, leaving the EU does offer us some significant opportunities to increase our access to markets across the world. According to Heat Street, http://heatst.com/uk/11-countries-gearing-up-to-strike-trade-deals-with-britain/, 11 countries are already queuing up to open negotiations with us.

The reality of trade is that the UK is a large market, the 5th largest economy in the world which absorbs significant imports and has a significant trade deficit with the rest of the world. Other countries are going to be very keen to get into our market as a result. In addition, the rather depressing fact, evidenced by our trade deficit, that the UK does not produce that many goods which other countries want to buy means that they are likely to offer significant access to their markets in order to get into our markets, safe in the knowledge that in the short term at least, UK exports don’t pose a significant threat to local industries. This is a key difference between us and the EU. When the EU as a whole negotiates, third countries are wary about offering too much access to a continent which is one of the world’s leading exporters. The UK is not in the same boat, so for many countries a deal with the UK could be win win.

At the same time, greater access to these markets, especially in areas where the EU as a whole is unlikely to get the same access due to the strength on manufacturing industries in many European countries, could provide a shot in the arm for our manufacturing heartlands which the EU simply cannot provide.

However, our existing trade relationships are far more complex than just free trade agreements. They involve a bewildering array of different agreements with different parts of the world, all of which will need to be updated. I heard recently that the European Commission has 600 trade negotiators, the UK by contrast has just 20 and this shows the scale of the work which is ahead of the new Department of Trade.

However, before work can start on new trade agreements, our existing trading arrangements will need to be updated and a good place to start is with our future relationship with the developing world.

Currently the EU trade relationships with the developing world are covered by the Generalised Scheme of Preferences (GSP), http://trade.ec.europa.eu/doclib/docs/2012/december/tradoc_150164.pdf,  - this scheme encompasses relations with 92 of the poorest countries in the world. There is a lot of misunderstanding about this scheme and I have often heard people say that “Eu tariffs hurt the developing world” The reality however is completely different. The GSP scheme offers preferential access to EU markets through reduced tariffs or for the poorest of these countries, complete duty and quota free access. The GSP scheme is focused only on tariff reduction and has a specific exemption from the WTO “Most Favoured Nation” principle, which means that these tariff reductions can be applied to GSP recipient nations without having to be applied to all WTO members.

The scheme has three elements to it.

Everything but Arms (EBA) is the arrangement for the Least Developed Countries (LDCs) and this offers full duty free, quota free access for all products except arms and ammunition. 49 countries benefit from this, all of them in Africa.

General Scheme of Preferences (GSP) which reduces tariffs on 66% of product lines. 30 countries currently have this status including Ghana, Sri Lanka and Vietnam.

Special Incentive Scheme or (GSP+) - which gives zero duty access on the 66% of product lines which benefit from reduced tariffs under the GSP line for countries which ratify and implement core international human and labour rights, environment and good governance conventions. Currently there are 13 countries which benefit from this agreement.

These benefits afforded by the EU are not reciprocal, so there is no pressure on these countries to afford the EU similar tariff free access and they only apply to tariff reductions, they don’t apply to other problems faced by developing countries accessing the EU market. Countries lose these benefits if they negotiate a free trade agreement with the EU and they also lose the benefits as they get richer as the benefits are designed for the poorest countries.

So the question for the UK is how are we going to deal with the countries which currently benefit from this preferential access to the UK market. The challenges here are great. Firstly, are we going to develop a similar system for developing countries to continue accessing the EU market. If we are what will it be? Will it go further than just tariff reductions and address some of the non tariff barriers facing developing countries when they try to export to the UK? Would it reduce tariff barriers and increase the number of products eligible even further than the EU has? Would it include the incentive on human and labour rights? Would we ask for some reciprocal access to their markets? Will we be able to negotiate an exemption to the WTO MFN principle for our scheme in the same way that the EU has for it’s scheme?

The benefits of the GSP scheme are that it ensures developing countries have immediate access to the EU market without the EU having to do a series of individual free trade deals. It provides a development path through trade for developing countries and it allows consumers in the EU a wide range of potential products from around the world. These benefits are substantial and I have no doubt that the UK will want to keep them, particularly as many of the current beneficiaries are Commonwealth countries.

However this scheme doesn’t provide much for the EU or the UK at the moment. We do not gain access to these markets as a result, which is why the EU has embarked on seperate free trade deals with some of the current beneficiaries such as Vietnam. However such a scheme will normalise our trade relations with a large part of the world at a stroke and I fully expect the UK to embark on a similar type of scheme once we have left the EU.