Brexit talks start in earnest this week with David Davis declaring it is “time to get to work”, and yet, infighting between the hard and soft side of the Conservatives has stolen the headlines.
It also means preparatory work on new trade deals can start with other countries, though nothing can be signed until the UK finally leaves the EU.
Pro-Brexit campaigners were quick to seize on Donald Trump declaring that a UK-US trade deal would be signed “very, very quickly” after Brexit.
No matter that Trump has a habit of not delivering on his pledges, but the actual practicalities of agreeing to a trade agreement between two countries is anything but quick – especially when the UK has not had to do a trade deal for more than 25 years.
Free trade for all?
The first question that one must ask is why we need such deals at all. We could, as Patrick Minford, of Cardiff Business School, and his colleagues at Economists for Free Trade have argued, simply have free trade with everyone.
But in this situation, comparative advantage dominates and production gravitates to the location with the lowest cost of production. This is often politically unacceptable as governments seek to protect jobs and tax revenues, as well as to protect certain production activities that fund innovation.
Trade deals are agreements over the extent to which countries will decide the scale and scope of access to each other’s markets. These may be reciprocal, i.e. ‘we agree to trade in automotive in both directions with a 10 per cent tariff’ or quotas – so many units in either direction.
Alternatively, they can be multifaceted; ‘we agree to have no restrictions on you exporting gin to us if we can export brandy to you on the same terms’. They are not, as most politicians seem to think ‘we agree to buy £100 million of stuff from you if you buy £100 million of stuff from us’.
So, what is needed in order to do trade deals? In such situations, the negotiators are essentially like barristers. They put forward arguments based on the analysis that they are given.
So, the difficult bit is not the negotiation, it’s figuring out which industries will gain or lose from a given deal, and what the overall effect is, given the impacts on related sectors.
Winners and losers
Equally, how will firms respond to a given agreement and what lobbying will they do in advance? Suppose, for example, the UK does a tariff-free deal in the auto industry with say the US, then the net effect in car production is probably quite straightforward to work out, but what about parts, plastic mouldings, glass, etc, who will gain – the UK or the US?
Then this has to be all put together, fed into the negotiators with a range of options – because the US will be doing this too. To complicate things further, firms from both countries will be figuring on some direct investment to support their exports, so will this move jobs away from the UK or bring them in?
Then, you need to try to work out the overall effect by combining this for all sectors, and work out if the deal is a good one. The UK used to have ‘sector experts’ who knew everything about their industry to figure this out.
But the country hasn’t needed them for 25 years; there is not the capacity in the civil service or the skills. In the distant days when the UK did trade deals in this way – in the 1950s and 60s – the old ‘board of trade’ employed a very high percentage of this country’s economics graduates, who became sector specialists, focusing on chemicals, cars, etc.
Equally many private sector firms also had economics departments – Unilever, BAT, Ford and so on – whose job it was to figure out what would happen to their sector if certain tariffs were agreed (or not). 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, trying to fill this gap at £2,000 per person, per day, but they are generalists; they don’t know anymore whether we will import statins and export heart pills under a given deal with the EU than the editor of the Daily Mail, the Brexit minister or the trade secretary do.
At a conservative estimate, to work this out the UK government will need every professor of international economics or international business in the UK, along with all their researchers, and all their PhD students, for at least three years – assuming, of course, we are all willing, and they are willing to spend about eight times the current Economic and Social Research Council’s budget just on this issue.
Without this analysis, it’s just more ‘making stuff up’ – which is essentially what has been happening since this debate started.
Nigel Driffield is Professor of International Business at Warwick Business School and has researched the impact Brexit will have on foreign direct investment into the UK.