There has been a lot of talk about Britain signing trade deals with far flung countries once it has formally left the EU in 2019. Talk is cheap, but trade deals won’t be…
The UK…will most likely copy the EU’s “schedules,” which set tariffs on goods imported from elsewhere. Once complete, the UK will not be allowed to increase tariffs beyond this level.
But here’s the catch. Countries like China joined the WTO with relatively high tariffs– around 15% on average, though they have dropped to 10%. The UK will join the WTO in 2019 with relatively low tariffs – around 2%, based on those currently applied by the EU. China will be able to trade with the UK on these terms, giving it a significant advantage, which may obstruct the creation of a bilateral trade agreement.
This is such a fundamental point that it’s amazing so little attention has been given to it. If China can already trade on good terms with the UK, it has less need for a free trade deal with the UK than the UK does with China. Why then, would China give Britain a good deal, either in terms of beneficial tariffs, liberalised service markets, assurance that British investors will be treated the same as Chinese?
China exports a wide range of products into the UK, with most of its major exports receiving an applied tariff of no higher than 2%. The UK charges 12% on sweaters, pullovers and vests, but these make up only 2% of China’s overall exports into the UK. By contrast, UK exports into China are heavily dependent on the automotive industry. Unfortunately, these receive some of the highest tariffs in China: 8.26% for internal combustion engines and 25% for completed motor vehicles. If China can already easily sell its goods into Britain, it has no reason to give Britain a beneficial trade deal.
The same is true of investment. Indeed, the UK is one of the most welcoming countries in the world to foreign investors, much to the chagrin of left-wing populistslike Jeremy Corbyn. On the OECD openness scale, the UK scores 0.1 (where 0 is completely open), significantly below the OECD average; China scores 0.4.
In both goods and investment, China already has significant access to UK markets. But despite this, the UK attracts a small fraction of Chinese exports – 2.7%, to be precise.
Some people suggest that the UK could get a better deal by offering political support to China. Right. Given the two countries hold polar opposite views on almost all political matters – from North Korea to human rights – it seems deeply unlikely that any agreement could be found.
So the UK’s post-Brexit strategy is a catch 22.
In the absence of real economic or political gains, China has little reason to agree to a trade deal with the UK, let alone offer serious concessions. The reason is clear. Having a liberal market economy is a blessing. But it also enables foreign businesses to trade with relative ease, stripping the liberal country of bargaining power. If Brexit Britain wishes to retain the liberal attitude to trade espoused by Michael Gove, it will have to accept that good free trade agreements might be difficult to find.