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Britain and America suffer from similar delusions on trade

Posted by hkarner - 28. Juli 2017

Date: 27-07-2017
Source: The Economist

A special relationship with reality

NO TWO countries are doing more to strain the fabric of modern trade than America and Britain. President Donald Trump wants to rewrite the terms of America’s trade relationships with everyone from Mexico to South Korea. After its vote to leave the European Union, Britain faces having to negotiate fresh trade deals with both the EU and countries beyond.

The pair’s tone on trade is different: one wants to put “America First”, the other to create a “global Britain”. But both visions are predicated on the idea of striking swift, bilateral deals, and each has identified the other as the perfect partner. At a meeting of G20 leaders this month, Mr Trump spoke of a “powerful deal, great for both countries”, which would be done “very, very quickly”. On July 24th Liam Fox, Britain’s international trade secretary, met his American counterparts to start talks about a post-Brexit agreement. A day later the president tweeted his excitement: “Working on major Trade Deal with the United Kingdom. Could be very big & exciting. JOBS!”

An agreement between Britain and America would be a good thing in principle. Tariffs are already pretty low, although Mr Trump may have his eye on a 10% tariff on cars imported from America. But differences in rules and standards impede the flow of goods and services, worth $227bn in 2016, between the two countries. In practice, however, Mr Trump and, especially, the Brexiteers suffer from several profound delusions.The first concerns speed. Mr Trump’s desire to move fast is all very well, but no deal can get done without the say-so of Congress. The American legislature has already slowed him down on plans to renegotiate the North American Free Trade Agreement (NAFTA), and an agreement with Britain is not on its agenda. Much more binding are the constraints on Britain—its government is not legally allowed to sign anything until it leaves the EU. Mr Fox can swan around the world as much as he likes, but there can be no real negotiations with third countries before Britain has worked out such fundamental questions as whether it is part of a customs union with the EU.

Politics will also slow things down. Mr Trump seems to have little understanding that other countries have voters; as a slogan, “America First” tends to resonate less with non-Americans. Brexiteers have been equally complacent about what the British public is prepared to swallow to strike new deals. Mr Fox spent much of this week fending off questions about whether Britain would end its ban on chlorinated chicken in order to satisfy America’s farmers.

A second delusion common to both countries concerns the value of bilateralism. The big barriers to trade are regulatory: for EU-American trade as a whole, differences in rules on business and financial services have a trade-dampening effect equivalent to a tariff of 30%. In general, the most efficient way to dismantle such barriers is by harmonising rules, not multiplying them. In some cases Britain will have to choose between freer trade with America and unimpeded access to Europe. If Britain were to deviate from EU norms in a deal with America on genetically modified foods, for example, it would risk tougher customs checks with Europe, including at the border with Ireland. More limited access to the EU would also diminish its appeal to America. Until Britain has settled on a new regulatory relationship with the EU, what might seem like a bilateral negotiation will in practice be a multilateral one.

Don’t count your chlorinated chickens
Finally, both sides seem to have forgotten how much geography matters to trade. The EU accounts for 44% of Britain’s exports, America for just 19%. Economists have estimated that a hard Brexit would hammer exports to the EU by 25%. To offset this loss, those to America would need to rise by an improbable 58%. Similarly, it would be bizarre for America to prioritise Britain given the renegotiation of NAFTA. Mr Trump says of Britain that “there is no country that could possibly be closer than our countries”. American firms, whose supply chains weave across Canada and Mexico, may beg to differ.

Plenty of people in Britain and America understand all this, of course. It suits Mr Trump and the Brexiteers to show that they have choices of trade partner. But the inconvenient facts are these: trade deals take time and have most impact when they involve lots of countries or ones that are right next door. A UK-US agreement is neither imminent nor a priority.

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