Thursday, 21 December 2017

Regulatory protectionism is the real issue

During last year's referendum campaign I argued back and forth with liberal minded folk about the impact on trade of leaving the European Union. Quite often the neoliberal and Lib Dem types would argue that Brexit would lead to a more protectionist trade policy and a notable expansion of the jurisdiction of the British state. Given the focus on borders and reinvigorating British industries, I thought this was a reasonable argument.

Of course, back then I knew very little, but what I did know was that the EU - and particularly its Customs Union - was protectionist. Markedly, in fact. I don't like the Customs Union for this reason. Its purpose has always been to act as a precursor to political union and nothing much more. I maintain that other than ironing out a Rules of Origin hurdle, it doesn't have a hugely positive influence on our trade or economy. If we protect the Single Market, all we need is a customs agreement covering RoO and agri-food tariffs and we can move on from it quite seamlessly.

It is here worth remembering that whilst in principle a Customs Union facilitates tariff-free trade within itself, in the case of the EU this does not apply. In 1994, the Single Market took control of this particular competence by means of Article 10 of the EEA Agreement, which states: "Customs duties on imports and exports, and any charges having equivalent effect, shall be prohibited between the Contracting Parties." The only residual feature of the Customs Union, therefore, is the external tariff wall.

My point to those people worried about protectionism was that we could lower tariff rates outside the Customs Union, which is perfectly true (I carried this vein of argument through the campaign and out the other side, before realising earlier this year where our real priorities lie). Post-referendum this sentiment has grown into a quasi-obsession. The idea must be to unilaterally drop tariff walls otherwise we will not get the benefits of Brexit. I am of the view that in this we are setting the bar remarkably low and, in actual fact, focusing entirely on the wrong thing.

The problem with the argument is that it is based on something which is pretty insignificant. Protectionism is most commonly deployed through regulatory means and not with duties. Regulatory protectionism is interesting in that it is widespread but largely ignored, creating a kind of perfect storm scenario. In any given sector, the focus is always placed upon fiscal protectionism and not the wider issue. The broad ignorance of trade issues in Britain is reflected heavily by its pointless tariff fixation. It has to stop.

Michael Gove yesterday warned that he is not in favour of unilateral free trade as far as agricultural imports are concerned and would protect farmers if a WTO fallback was essential after Brexit. He told the DEFRA Select Committee: “My assumption and my preference would be we would maintain tariffs in order to ensure we did not have the sort of change occurring in agriculture which would lead to disruption which would be unhelpful for reasons of continuity of supply and health in the industry."

Leaving the Customs Union may allow for a lowering of tariffs but certain industries may find themselves exempt from the prospect. The DEFRA Secretary, whomever it was, was always likely to protect the interests of farmers at the expense of the consumer. Broadly speaking, what we have here is a situation in which the few are being prioritised ahead of the many. A part of me thinks this will never change, just as it hasn't changed in France, historically the European country most forcefully behind the idea of protecting agricultural industry from outside competition.

The Adam Smith types are right when they decry high tariff walls. Discrimination in favour of domestic producers may have electoral, social or soft-power benefits, but ultimately these all come at a higher cost for consumers. The result is that by tinkering with tariffs, some lose out and others win. Finding the right balance will be crucial and I think it is best to disregard the unilateral free trade types going forward. In principle I favour lower tariffs on agricultural imports, but there are bigger issues at play.

Gove spoke in the context of WTO fallback arrangements. This does not mean a no deal Brexit. It simply means leaving the Common Agricultural Policy, unless we can build something from within the transition period. The complexity and breadth of the CAP is such that policy reconstruction will take in excess of eight or nine years, and this is largely separate from the question of maintaining existing regulatory architecture. Initially, at least, we will need to shadow the EU CAP domestically in order to provide stability and avoid creating potentially harmful trade barriers.

What interests me is that there are currently no existing policy models that can be of any real use to UK negotiators. Existing European relations are important to consider because a huge proportion of our agricultural trade revolves around the continent. The EEA Agreement, and therefore the EFTA position, does not include any substantive provisions on tariff-free trade in agri-food with the EU. The CAP is not relevant to the body of the EEA acquis thanks in part to comparatively large agricultural subsidies from Norway and Iceland which exceed 50%, and this will appear to continue.

The Swiss arrangement has the same problem, again stemming from much higher subsidies which present the EU with a problem of unfairly aided competition.  But subsidy alignment aside, for duty-free access to the Internal Market Brussels also demands a high degree of regulatory equivalence in order to ensure a level playing field for its producers. In the case of Turkey, the exclusion of agricultural goods from their EU Customs Union agreement is largely the result of minimal regulatory alignment. This will need to be carefully considered when UK policy is redesigned.

This is regulatory protectionism, a far more potent obstacle to what we call 'free trade'. Post-Brexit, DEFRA will need to ensure continuity as regards our degree of regulatory symmetry with Europe if we want substantive access to their market. Without it, we will need to turn to the United States, who will be keen to flood our domestic market with chicken and beef produced cheaply and in enormous quantities. We could not compete on this front and consumers would increasingly find themselves with no financial alternative but to opt for American produce. Our farmers would lose out.

Here we see one of the main reasons for the regulatory disconnect between the US and the EU. Meat in particular is produced to distinctly different standards, with hygiene often cropping up as a highly politicised issue. These kinds of barriers are most prominent in the agricultural and automotive industries, as we have discussed before, and are useful examples of the usage of regulation as a protective device. It is more difficult to spot and more difficult to change. My point here is that those concerned about protectionism ought to be focused on regulation, not tariffs.

Regulatory protectionism is more important than tariffs because it has a much larger negative economic impact upon the costs of trade and because in many cases it actually prohibits trade. A tariff is a duty on an import, paid by the importing firm to the relevant customs authority. That is it. Global tariff levels have plummeted, including full rate tariffs, and we even have tariff rate quotas to ease the relatively small impact of these duties. Import tariffs are being lowered through multilateral and bilateral mechanisms all the time and present us with minimal cause for concern.

By contrast, non-tariff protectionism, which normally takes the form of regulatory barriers, represents a much more significant boost to the costs of international trade. It is also becoming trickier to navigate past. In 1995, the WTO received 386 formal notifications of NTBs. By 2013, this had risen to 2,137. A study published by the European Commission in 2009 found that non-tariff measures added more than 20% to the costs of international trade. A recent WTO tariff brochure concluded:

"Global trade in goods has been boosted by the reduction in import tariffs over the past 20 years. Even when countries have negotiated high ceilings for their tariffs on joining the WTO, they have consistently reduced the tariffs they have actually applied to their imports since becoming a WTO member."

The big picture here is that as one issue has receded, another has grown and taken its place. The increased reliance on regulatory protectionism comes as a result of a number of factors. Economic globalisation has increased access to goods and made producers more sensitive to external competition. There have also been legal mechanisms deployed at global trading forums to harmonise and restrict tariff measures, such as principles of equal treatment. Existing defences against regulatory barriers are agreed upon at the WTO and passed down to nation state level.

As regards post-Brexit agriculture, it appears to me unwise to worry too much about our tariff walls. It may even be the case that on a sectoral basis we replicate the CET in order to ensure the Irish border remains as soft as possible. The protectionist issue of significance is avoiding diminished access to the EU's Internal Market, where most of our agricultural exports are directed. Despite the widely-acknowledged economic sense behind tariff reduction, continued fretting about import tariffs unfortunately completely misses the point.

No comments:

Post a Comment