By Jeffrey Kucik
The underappreciated value of trade deals isn’t that they promote trade. It’s that they aim to promote market stability. Trade deals are designed to harmonize economic policies and prevent the introduction of new trade barriers among the members. The upshot is that a more stable policy environment should lead to smoother, more predictable trade.
The five years since the Brexit referendum show what happens when the rules break down and uncertainty reigns. When the referendum cast doubt over the future of economic cooperation, the impact on British traders was immediate and significant, leading to a sharp drop in exports from the United Kingdom in 2016. Over the subsequent five years, firms struggled to adapt. In turn, there was much more volatility in British trade relations than in recent decades, marked by shorter, sharper fluctuations in trade flows. More recently, UK exports to the EU were down markedly in the first months of 2021—and not simply because of the COVID-19 pandemic.
Given the costs already incurred, CTA ratification may bring welcome relief to the firms—and the workers—hurt by the last half-decade of uncertainty.
The deal does contain some good news. One of its most important features is a commitment to keeping trade in goods tariff- and quota-free. Maintaining the free movement of goods wasn’t inevitable. If a deal had not been reached last winter, the United Kingdom would likely have traded with the EU under World Trade Organizations rules that apply to other partners like the United States and China. That would have meant higher tariffs as well as lengthier delays negotiating specific commitments. CTA ratification evades those two traps.
However, it’s important to remember that tariffs are only one of the many ways in which government protect their markets. There are a litany of other trade-related policies over which the EU and United Kingdom still disagree.
Take sanitary and phytosanitary (SPS) measures. SPS is a fancy name for health and safety regulations pertaining to animal and plant products, such as the EU’s (in)famous limits on GMOs. SPS is a complex area of trade law that comes under frequent debate among countries at the World Trade Organization. The EU and United Kingdom will now maintain their own SPS standards, which is a small political victory for British officials who wanted greater autonomy. In the UK’s view, independent standards could provide greater leeway when negotiating future deals, particularly with the United States, which has longstanding disagreements with the EU’s SPS regime.
Yet maintaining two SPS regimes also means additional bureaucratic headaches for agricultural firms. The president of the United Kingdom’s National Farmers Union noted that “new checks, paperwork, and requirements on traders will add costs and complexity” to doing business across the Channel. And, in the first months of 2021, there have already been supply chain delays as businesses try to navigate the new regulatory environment relating to a product’s origin and other technical barriers.
Then there is the much-discussed level playing field. The EU originally wanted firm commitments on competition policies like government procurement rules and labor regulations. This includes policies like subsidies, which are controversial because subsidies are often viewed as trade-distorting, providing an unfair competitive advantage to the firms who receive them. While there is some agreement on subsidies, the deal also includes flexibility for the United Kingdom to make its own determinations. This has already led to disagreement and raised questions over enforcement of the rules moving forward.
The disagreements over SPS and subsidies are just two examples. Doubts also surround fishing rights allocated to EU members, the movement of labor within the region, access to financial services, and the rules governing Northern Ireland trade, just to name a few.
In all these areas, the EU’s preference for policy harmony continues to conflict with the United Kingdom’s demand for autonomy—hence last week’s tough talk. Most notably, European Commission President Ursula von der Leyen’s warned that the EU “will not hesitate” to use retaliatory measures if the British fail to honor their end of the deal. Those sentiments were echoed by some member countries, including France, that threaten “reprisals” over fair market access. It’s clear that the process is far from over.
None of this is to say that the old trade rules were perfect. There is a growing consensus that global trade rules need updating—if not a full-scale overhaul. At the same time, doubts about the enforceability of many CTA provisions are nothing new. Enforcement problems are endemic to most areas of international law, including trade. Just ask the EU and the United Kingdom, which have both faced their fair share of trade litigation to iron out disagreements over the rules.
Long, costly disagreements are precisely what most trade deals aim to avoid. However, given current tensions, there may be many more disputes before we see the greater stability.
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