The Problem With Post-Brexit Trade Deals

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.

Finish the article on Huff Post

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Huawei Leading The Way

One clear sign that the world economy is moving eastwards: Huawei…

Founded in the late 1980s as a telecommunications company, Huawei moved into smartphones in the late 2000s. By targeting the lower end of the global market, the company has acquired an 8.3% market share, coming in third behind Apple and Samsung. In the first quarter of 2016, it sold 10 million more units than the year before, as Apple saw decreasing sales.

And the secret to that success?

…some 80,000 employees have a direct stake in the company, receiving stock and dividends. Employees can get a greater stake for hard work, as long as they contribute to the company’s success. In a rare act of entrepreneurial charity, founder Ren Zhengfei has retained only 1.4% of his company.

Finish the article on Market Mogul

How NOT to Get Businesses Building

Much has been said of the Tories’ poor record in public services, but far too little on their business policy. A closer look at infrastructure suggests that Osborne and co. had little to no understanding of how business works:

Hoping to encourage more investment, the government launched two flagship programmes in the early 2010s: the Pensions Infrastructure Platform and UK Guarantees Scheme. Both have failed to meet their targets.

Each of these schemes illustrates precisely why the UK has failed to attract sufficient private sector investment. The Pensions Infrastructure Platform –  a scheme designed to pool the resources of UK pension funds in order to reduce the risk any individual fund takes on – has become the latest in a long line of ‘market reforms’ ignorant of the old adage: if it ain’t broke, don’t fix it. When investors do want to invest in infrastructure – as in Australia and Canada – they will find their own means to spread risk and pool resources. The government does not need to do this for them.

Closer to solving the problem is the UK Guarantees Scheme, which insures investors against the enormous risks they take on when building new railway lines and power stations. Inadvertently, however, it neuters the central benefit that private investment brings. By preventing the full transfer of construction risk, private investors lose the incentive to deliver on time and to budget. The government might as well fund the building itself.

Finish the article on Market Mogul.