As the United Kingdom negotiates the terms of its divorce from the European Union, it would be wise for the country’s leaders to begin looking further into the future to determine what approach to international trade relations would serve it best.
Does the UK really want to hang its future on bilateral agreements with a long list of individual trade partners? Or would it be better off joining existing mega-regional free-trade agreements, while working to strengthen the global multilateral system under the World Trade Organization?
The bilateral approach would demand a huge amount of time and resources, with UK negotiators engaging in a series of discussions with each and every country with which they wanted to do business. The end result would be a tangled network of deals that would only exacerbate the balkanization of the international trading system.
This approach limits gains from trade. For example, the Inter-American Development Bank reports that the trade gains from Latin America’s 33 small regional trade agreements have been meager. The key to boosting those gains, according to the IADB, is to adopt a new strategy that expands access across and within markets.
This suggests that, for the UK, mega-regional trade agreements – which provide access to multiple markets, but entail lower levels of fiscal and regulatory integration than the EU – are the best way forward.
After all, it is this approach that would enable UK firms to position themselves in well-developed and integrated supply chains, serving much larger markets than those to which a bilateral agreement would grant them access.
The argument can be made that a multilateral approach is not just the better option; it is the only one. Consider the recent challenges faced by Bombardier, a Canadian multinational that produces 100-150-seat passenger jets using globally sourced parts, including wings made by Bombardier UK, the largest manufacturing employer in Northern Ireland.
Bombardier negotiated the sale of up to 125 of its jets to Delta Air Lines. But the American aviation giant Boeing challenged the sale, alleging that, enabled by subsidies at home, Bombardier was selling the jets at below-market rates, giving the company an unfair advantage.
Despite loud protests from Canada and the UK, the U.S. Department of Commerce now seems set to impose an extremely high import tariff of about 300 per cent. The effects of that duty will radiate throughout the supply chain, hitting the 4,200 employees of Bombardier UK.
This experience demonstrates the limitations of bilateral agreements, especially in a world where supply chains and markets extend far beyond the countries involved. The UK may negotiate a bilateral free-trade agreement with, say, Canada, but UK firms will secure few benefits, unless Canadian firms can sell products with UK components to their other trading partners.
The Bombardier episode also highlights the importance of engagement in – and reform of – the WTO, under whose rules the U.S.-initiated proceedings against Bombardier are taking place. The impact of WTO rules and resolution mechanisms is far-reaching, as 164 countries worldwide subscribe to them.
Yet WTO rules have their flaws. For example, they allow exporting countries to provide financial support and subsidies to specific industries; but they also give importing countries the right to use tariffs to offset these subsidies.
The WTO has heard countless disputes over its subsidies and dumping rules, and it is now sure to hear one more, over the Bombardier case, because the U.S. and Canada have different ideas about how to interpret these rules.
Though no one is happy with the current WTO rules, efforts to reform them have so far ended in deadlock. But recent high-value cases involving high-tech products like airplanes, semiconductors, and green technologies, including solar panels and biodiesel, make clear that the problem cannot be ignored. And the fact is that concerns over state aid and competition policy can be addressed only in a multilateral forum like the WTO.
Because the UK has historically shown far less appetite for industrial subsidies than its trading partners have, it stands to gain from clear international rules on industrial support and anti-subsidy tariffs. Given this, the UK has a strong incentive to engage with – and help to upgrade – the WTO.
Another multilateral forum that could prove invaluable to the UK is the Trans-Pacific Partnership, a mega-regional trade agreement that provides for duty-free trade and includes modest commitments in areas like state aid and competition policy, without requiring EU-level integration. Though the TPP suffered a setback last year, when Donald Trump withdrew the United States, last month the 11 Pacific Rim countries remaining in the deal committed to keeping it alive.
The TPP does not have to limit its membership to the Pacific; the UK could engage with it. Given its free-trade credentials and international stature, the UK could help to breathe new life into these and other trade negotiations that have been thrown into disarray by the Trump administration’s protectionist impulses.
With Brexit looming, the UK has no choice but to redesign its future trading relationships. As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains. That means pivoting away from bilateral deals, toward a multilateral approach that enables the country to rebalance and expand its trading arrangements around the world.