Britain’s prime minister is the first foreign leader to visit the new American president, Donald Trump. They have lots to discuss – international security, immigration, “the special relationship”. There is also much talk of laying the ground for a US-UK trade deal.
Much of the talk of a trade deal, however, misses some of the fundamentals of what trade deals actually are and what they involve. They are agreements over the extent to which countries will agree the scale and scope of access to each other’s markets. These may be reciprocal: “We agree to trade in cars in both directions with a 10% tariff.” Or they can be quotas, limiting the quantity or value of certain goods that can be traded.
Alternatively they can be multi-faceted: “We agree to have no restrictions on you exporting gin to us if we can export bourbon to you on the same terms.” They are not, as most politicians seem to think: “We agree to buy £100m worth of stuff from you if you buy £100m worth of stuff from us.”
So why does the UK need these deals at all? It could simply have free trade with everyone – and some people have made the case for this. In practice, this would mean offering other countries free access to its markets and hoping that they would reciprocate. Countries would only agree to this where they think it is in their interests – where they assume they will sell more to us than we will to them.
In this situation, comparative advantage dominates. This means that production (all those manufacturing jobs) gravitates to the location with the lowest costs. This is often politically unacceptable, as governments generally look to protect jobs and tax revenues, as well as to protect activities that fund innovation.
The difficult bit
This is why there is so much talk of trade deals going on. But the difficult part of a trade deal is not the negotiation itself; it’s figuring out which industries will gain or lose from a given deal, and what the overall outcome will be, given the knock-on effect for various sectors of the economy. Equally, they must take into account how businesses will respond to a given agreement and what lobbying they will they do in advance.
Negotiators are essentially like barristers that put forward arguments based on the analysis that they are given.
A closer look at how the much vaunted UK-US “trade deal” would work shows what’s really involved. In order to ascertain whether this will be “good” for the UK, you have to start with an understanding of what the nature of comparative advantage is between the UK and US – what is the UK better at than the US, and what is the US better at than the UK. Then you have to work out how this relates to goods and services that each wishes to trade.
For example, one could argue that the UK has comparative advantage in whisky, and the US in bourbon. But just because the imported products become cheaper after a reduction in tariffs, does that mean that the UK will actually import more bourbon and, if so, might that actually be bad for the Scotch whisky industry?
Then it’s necessary to work out the overall effect on each economy – by combining the comparative advantage for all sectors (from agriculture to pharmaceuticals), and work out if the deal is a good one.
A lack of experts
The UK used to have “sector experts” who knew everything about their sector to figure this out. But it hasn’t needed them for 25 years, as the EU has performed this role on the UK’s behalf. As a result, the civil service has neither the capacity or the skills to fill this gap. Equally, many private sector firms had economics departments – Unilever, British American Tobacco, Ford among them – whose job it was to figure out what would happen to their sector if certain tariffs were agreed (or not). But neither the private nor public sectors have had those skills for a generation because they have not been needed.
The large professional service firms are circling to do the job – at £2,000 per person per day – but they are generalists. They don’t know any more whether we will import statins and export heart pills under a given deal with the US any more than the editor of the Daily Mail or the prime minister.
Without an in-depth analysis of relative production costs, spillovers between sectors and the multiplier effects associated with sectors expanding or contracting, this is all simply conjecture – which is essentially what has been happening since this debate over Brexit started.
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