Global trade war mars Britain’s Brexit plans

Trade wars are always bad news. But to get one just as Britain prepares to leave the EU is particularly rotten timing.

Just like with any other type of war, there’s never a convenient time for trade wars.

Trade wars usually start when a country slaps tariffs (aka taxes) on imports.

Tariffs make the imported products more expensive for domestic consumers, and make domestic producers’ products cheaper by comparison.

Next up, the country whose exports have been taxed will levy a tax of their own in retaliation.

In the worst-case scenario the tariffs get bigger and bigger, which crush international trade.

Nobody wins in a trade war because trade is a win-win game.

Whether a country is exporting more on aggregate or importing more on aggregate is irrelevant, because it’s still better off than it would be in the absence of international trade.

Trade wars are bad news. But the one that’s evolving at the moment is particularly bad for Britain.

By March 2019, Britain will have to go out and negotiate free trade deals with third countries. That’s when its current deals as part of the EU will become void.

International Trade Secretary Liam Fox has long relished the prospect of Britain getting its own trade deals that are better tailored to the country’s needs.

But in this climate of decreasing trust and willingness among countries to sign free trade deals, Britain will find it much harder for these ‘better deals’ to be signed and sealed.

“Mr Brexit” foils British plans

“They will soon be calling me MR. BREXIT!” Donald Trump tweeted right after Britain’s EU referendum result became known.

A lot of Brexit supporters were counting on Britain’s “special relationship” with the US to get a favourable deal.

Trump, after all, viewed Brexit as more positive than Barack Obama and Prime Minister Theresa May’s initial rapport with the US President seemed promising.

By now, however, it’s quite evident that Trump is doing the British Brexit cause more harm than good.

Under President Obama, the US was close to negotiating comprehensive trade deals with the EU and the Pacific Rim. The TTIP and TPP deals would have considerably fostered trade with 39 countries.

But his successor takes a different approach.

One of Trump’s first acts in office was ripping up the TPP agreement. Now he looks willing to start a two-front trade war with the EU and China.

The US may even tear up the North American Free Trade Agreement (NAFTA) with Canada and Mexico before its 25th anniversary.

“President Trump has an aversion to free trade. He’s opposed almost every free trade deal the US has signed since World War Two,” says Dr Tom Wright of the Center on the United States and Europe in Business Insider.

That doesn’t bode well for Britain. Despite Trump’s obvious “America First” agenda, many Brits had hoped the US would make an exception for the UK. That’s now proving to be a fantasy.

“The Trump administration is pursuing a predatory policy towards Brexit,” Wright stresses.

“It believes the UK needs free trade deals and so is in a weak position. The US is maximising its leverage to exploit that weakness. The timing for the UK is awful.”

And then there’s US Commerce Secretary Wilbur Ross who says “even our best friends have to play by the rules”.

He means their rules. The clear implication being that Britain would have to accept US standards if it wants a deal. Hopes of a quick, mutually-beneficial trade deal with the US are therefore illusory.

But it’s not just the US that’s going to be less than welcoming towards opening trade talks. If a global trade war should unfold, other countries may also be more reluctant to sign new deals.

No deal is better than a bad deal

For Britain this might mean it needs to buy some time to make Brexit a success.

A transitional arrangement with the EU to keep things the same for a few more years after March 2019 could work in the country’s favour.

This will feel counterintuitive to the government’s most ardent Leavers.

Indeed, former Brexit Secretary David Davis and International Trade Minister Liam Fox want Britain to start signing its own free trade deals as soon as the country leaves in March 2019.

Former Foreign Secretary Boris Johnson has insisted a transition period shouldn’t last “a second more” than two years.

But delaying Britain’s departure from the EU may prove crucial in making Brexit a success in the long run.

Right now, the conditions for negotiating trade deals are the worst in decades. Mr Fox would have to go cap in hand asking for new trade deals precisely when global tensions and trust is unravelling. It’s just not good timing.

“In an increasingly protectionist world inheriting the EU’s old trade deals and winning new ones will be tougher than ever,” as Sean O’Grady has put it in the Independent.

There is the argument that Britain can simply go back to World Trade Organisation (WTO) rules on tariffs, but that looks increasingly risky.

The Trump administration isn’t a fan of the WTO. It’s currently imposing tariffs on trading partners counter to WTO rules out of “national-security concerns”. That’s alarming for global trade in general, but even more so for Britain.

If Britain leaves the EU without a deal or transitional arrangement in place, then it will have to rely on WTO rules to trade with other countries. In order for that to work, those rules need to be universally respected.

The US ignoring the WTO wouldn’t just make free trade with the US more difficult, it could also lead other countries to bypass the system.

“[The US threatens] to unravel arrangements that have successfully insulated the global economy from chaotic trade wars for 70 years,” writes Simon Nixon in the Wall Street Journal.

“If respect for WTO rules and jurisprudence vanishes, the UK may face an anarchic world economy,” Robert Basedow of the London School of Economics warns.

Britain had better sign a transitional agreement so its current trade deals with the EU remain valid, while waiting for things to settle down globally.

It makes sense for Britain to buy more time anyway so it can first focus on getting a mutually-beneficial deal with its biggest trading partner, the EU.

By the time both parties have agreed on the least disruptive way for Britain to leave the EU, global trade conditions may well have improved again.

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