History And Timeline
When the UK voted to Leave the EU in June 2016 it had not been an independent trading nation for more than forty years. All trade policy and any Free Trade agreements (FTAs) with non-EU countries were managed by the EU with minimal UK input. Consequently, our trade negotiating expertise had dwindled almost to nothing. Thus, when in July 2016 PM Theresa May appointed Liam Fox to set up the new Department for International Trade (DIT) he was literally starting from scratch. In 2017 Dr Fox pulled off what has turned out to be a masterstroke by appointing New Zealand’s former Chief Trade Negotiator – Crawford Falconer – to build up the department. While there have been three more Trade Secretaries after Dr Fox – Liz Truss 2019-21, Anne Marie Trevelyan 21/22 and Kemi Badenoch 2022 to date – Falconer has stayed throughout and been a key factor behind the UK’s Free Trade drive*. The UK now has a team of more than 200 trade negotiators (I will use the acronym UKTNT for this team from now on) who have already accumulated much experience at the sharp end.
The protracted and tortuous process of securing a Withdrawal Agreement (WA) with the EU was only ended after Boris Johnson’s landslide election victory in December 2019. However, this delay had the fortunate side-effect of giving the DIT time to build resources and expertise and do foundational work for the coming negotiations. The UK could not enter formal trade negotiations for new FTAs while still in the EU, but it could begin negotiating and signing agreements to “roll over” the EU’s 68 FTAs (mostly with small economies). Work on these so-called Trade Continuity Agreements had begun before the WA was reached. When the UK finally left the EU on the 31st of January 2020 the terms of the WA gave the UK/EU negotiators an 11-month transition period to either achieve an FTA or for the UK to leave without a deal and trade on WTO terms. The Remain campaign had warned that securing an FTA with the EU would take up to 10 years, if it was achievable at all, so this timetable was generally regarded as absurdly short.
These negotiations were led by PM Johnson and David (now Lord) Frost, with Falconer and the UKTN providing significant input. The UK’s hardline and consistent insistence that “no deal” was better than a bad deal – which Remain campaigners constantly tried to undermine – proved triumphantly successful as at the 11th hour the EU caved in. The resultant Trade and Cooperation Act (TCA) was the first FTA in history to be both tariff and quota free. It did mean increased non-tariff barriers to UK/EU trade – increased paperwork, more inspections etc – but as previous B4B articles have shown, these impediments have made little material difference to the trajectory of UK exports to the EU. Predictions by opponents of Brexit of a collapse in UK/EU trade proved very wide of the mark.
The TCA took effect on January 1st, 2021. This meant that all 68 of the EU FTAs had to be rolled over by then if trade discontinuities were to be avoided. This was also derided as an impossibility, but the UKTNT again defied the pessimists. With the TCA completed and trade continuity assured the negotiators then focused on three main tasks. Firstly, to secure entirely new FTAs with key countries. Secondly, to gain accession to the giant Asian trading bloc CPTPP (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership). Thirdly, to enhance the existing FTA’s, especially by adding coverage of the vital services sectors, most notably financial services and digital trade. The EU’s FTAs almost entirely exclude services, a big disadvantage for the UK economy whose exports and GDP are more than 80% services. To be fair to the EU the failure to cover services and digital trade had been a weakness of nearly all trade negotiations. This was an opportunity for the UK to break new ground and lead the world, an opportunity it has seized with relish. The UK has made great progress in all three tasks:
New FTAs and Accession to the CPTPP
The USA was initially chosen as the first target for a new FTA, as the world’s largest economy and our largest trading partner and with encouragement from the then President Donald Trump. Much preliminary work was done but the election of President Biden put this target on the back burner, given his negative attitude to free trade initiatives. The US Trade Representative recently presented a “foundational” 11- chapter document to Biden that could form the basis of new UK/USA talks, which the President rejected.
The UKTNT sensibly changed strategy to target agreements with individual US states with pro free trade attitudes and dynamic economies. Most trade regulatory powers are held at state rather than federal level. To date the UK has signed Memorandums of Understanding (MoM’s) with seven US states – Florida, Oklahoma, Indiana, North Carolina, South Carolina, Washington, and Utah. These states have a combined GDP of about $4 trillion, equivalent to the 4th largest economy in the world! The UK is negotiating with other states, including the two largest, Texas and California. These MoM’s are not full FTAs but agreements to remove obstacles to mutual trade and investment wherever possible.
The UKTNT’s targets then became Australia and New Zealand. Negotiations began in 2019 and the first post-Brexit FTA was signed with Australia in December 2021, closely followed by New Zealand in February 2022. These FTAs took effect in May 2023.
New FTAs are now being negotiated with the Gulf Cooperation Council (GCC) – Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the UAE– and most crucially with India. Talks with the GCC are at an early stage, but the talks with India have proceeded through 13 rounds and are far advanced with agreement in principle on 24 of the 26 chapters (according to the Indian press).
Most impressively of all, the UK gained accession to the CPTPP in July 2023, with the agreement taking effect later in 2024. This trading bloc almost as large as the EU and contains much more dynamic economies. The agreement includes modern and ambitious digital and data provisions and new markets for service providers.
The UK’s first enhanced trade agreement – that is additions and improvements to FTA’s inherited from the EU – was the UK-Japan Comprehensive Economic Partnership Agreement (CEPA), which added a chapter on digital trade and came into effect on 1st Jan 2021. The UK has subsequently also signed several important defence and security agreements with Japan.
The UK then reached a more advanced digital trade agreement with Singapore, signed in December 2021 and taking effect in June 2022. Described as the “world’s most innovative trade agreement”, it covers the digitised trade in goods and services across the whole economy in a deeper and wider way than any previous trade agreement and provides an invaluable global template for future trade agreements. The UK reached a similar agreement with Ukraine in Nov 2022, effective June 2023.
The UK began the process of enhancing its FTA with Switzerland in 2019. A Services Mobility Agreement was secured in 2020, which improved mutual access for professional workers, a Mutual Recognition Agreement was reached allowing the easier flow of specified goods between the countries from Jan 2023, and just recently the Bern Financial Services Agreement sees mutual recognition of each other’s domestic laws and regulations on financial services. The latter agreement will substantially boost the already extensive UK-Swiss trade in financial services. Negotiations continue to convert these gains into a fully comprehensive UK/Switzerland FTA.
The UK is currently negotiating enhanced FTAs with Korea, Canada, Mexico, and Israel, and negotiations with Turkey are to begin later this year.
There are two main criticisms of UK trade policy over this period. Firstly, that the government’s own economic models estimate that these trade deals will have only modest impacts on economic growth. Government modelling on Brexit has a poor record. The earliest forecast was for a deep recession if the UK had the temerity to leave the EU, and subsequent modelling consistently underestimates UK economic performance in the view of BfB economists. The general equilibrium models currently used by the DIT are not obviously good at picking up the dynamic and self-feeding changes, especially in the services and digital trade sectors, which is precisely what new trade opportunities will generate.
Models that assume that trade intensity is strongly correlated with geographical distance are of diminishing relevance. This relationship had relevance in previous decades, when transport costs were much higher, and most exports were goods and bulk materials (grain, coal etc). This is much less relevant in a modern digitalised economy dominated by services and whose goods exports are low bulk high value products. Trade secretaries Truss and Badenoch were frustrated at these pessimistic forecasts and may have been right to do so. However, most agreements to date, including the CCTPP, are built on pre-exiting FTAs. The planned FTA with India may be the first to dismantle high tariff barriers. Most of the new agreements do have a potential for growth in trade that is missing from sluggish EU economies.
The UK now has a form of trade agreement with countries, or US states, accounting for more than 40% of world GDP. Deals with India and the GCC would put this figure close to 50%. Without putting numbers to it we can be reasonably confident that over time post-Brexit trade policy will significantly raise the UK’s potential growth rate.
The second criticism has been that in order to get early results the UK gave away too much ground in the negotiations, particularly in the Australian and NZ deals. This argument suffers from the common misperception among non-economists (and some economists!) that any agreement that boosts exports is good but anything that increases imports is bad. It is true that the UK reduced its tariffs on Australian and NZ imports much more than they did on our exports to them. However, that was an inevitable consequence of the high tariffs we had to start to start off with, due to our membership of the protectionist EU, whereas Australia and NZ already had generally low tariffs.
The dilemma for politicians is that domestic producers previously protected by tariffs complain loudly, while the millions of consumers (households and businesses) who will benefit from lower prices or costs remain silent. It therefore requires political courage and a grip on free trade economics for politicians to overrule protectionists. Fortunately, the PM at the time, one Boris Johnson, had both the grip and courage to back then Trade Secretary Liz Truss against the (large) number of protectionists in the bureaucracy and in Parliament. It was also crucial to gain momentum in the trade drive, demonstrating that the UK was a willing and serious potential trade partner as well as achieving crucial geo-political objectives such as improving economic security, diversifying supply chains, and countering Chinese aggression. Those first agreements with Australia, NZ and Japan undoubtedly helped pave the way for our rapid accession to the CPTPP. We can contrast this “visionary” free trade approach with the narrow “technocratic” I win/you lose approach of the EU in its negotiations, which results in multi-year trade talks collapsing in failure. EU/US trade negotiations broke down in 2017 after seven years of talks, while EU/India talks that began in 2007 broke down in 2013.
Does the possible election of a Labour government later this year pose a major threat these trade successes? Labour has said little definitive about future trade policy, but it has not opposed the trade deals thus far presented to Parliament and in principle supports a deal with India. In practise it would be an act of madness to halt the progress described above, much less reverse it, especially now that Labour proclaims higher economic growth to be its number one priority.
In the near term the most crucial task is to secure an agreement with India. India is already an economic powerhouse, has a still rising population and is set to continue growing rapidly for decades. If the UK were to achieve an FTA with India it would be the first major economy to do so, with huge potential for the UK’s services sector to sell to India’s rapidly expanding middle classes. The geo-political gains from pulling India away from its links to Russia and further into the democratic western world are potentially enormous. With the UK now in the CPTPP, could India in the long term be enticed to join? Boris Johnson aimed to reach agreement with India by Oct 2022. This timetable has slipped alarmingly, and the delay has run the talks into election years for both India and the UK. PM Sunak claims that “quality not speed” is his trade negotiating mantra. Has Sunak has shifted too far from the Johnsonian “visionary” approach to an overly narrow focus on haggling, one imbued with excessive political caution? Does Badenoch agree with this shift or is she frustrated by it? Given the degree of agreement already reached it would be an error of statecraft to fail now. The PM needs to lift his eyes to the horizon, summon political courage, and get the deal done.
In the longer term a deal with the USA is the next major prize, one that is more achievable than it looks at present. As noted already, much foundational work has been done. The MoM’s with individual states are another building block, as would be enhanced FTAs with Canada and Mexico. As in the potential case of India, could the UK eventually lead the way in persuading the USA to join CPTPP? These would be gains of great geopolitical and economic significance.
Robert Lee Jan 10th, 2024
*Crawford Falconer is currently Second Permanent Secretary in the Department for Business and Trade (the DIT was merged with the Business department in Feb 2023) as well as head of the trade negotiation profession in the civil service. He was very deservedly knighted in the 2024 New Years honours list, in which several other trade officials were also rightly given honours.