The Chief Economist’s Note

Trade deals are hard to do

Anyone hoping for clarity on the details or timeline of a “phase one” trade deal between the US and China would have been left disappointed by President Trump’s speech to the Economic Club of New York last week. The speech itself contained nothing we didn’t already know. A deal is apparently “close” but if one can’t be reached then the US would raise tariffs on China “very substantially”. In practice, it seems like talks are no further advanced than they were a few weeks ago.

Stepping back, I think two points are worth stressing. The first is that the difficulties in agreeing a “phase one” deal consisting of relatively minor tariff roll-backs and a commitment by Beijing to purchase agricultural products casts doubt on the ability of both sides to reach a wider agreement on the more thorny issues surrounding intellectual property, technology transfer and industrial policy. As we’ve written about extensively, while a deal on tariffs is possible, there has been a more fundamental fracturing of the US-China relationship that means the two countries will continue to move apart in other areas. Globalisation, as conceived by the Washington Consensus during the 1990s and 2000s, is dead.

The second point that’s worth stressing is that the difficulties in agreeing a relatively narrow “phase one” deal reflect a larger challenge – namely that trade deals in the modern era are hard to do.

Trade agreements necessarily require governments to make compromises that balance the competing interests of different groups. That’s become much harder in recent years because the complexities of the modern economy require deals to cover a much wider terrain. Countries no longer simply trade goods, meaning that trade deals are no longer simply about setting tariffs and quotas. They also need to cover issues like product standards, environmental and labour standards and rules governing market access for services.

This is a central but often overlooked aspect of the debate around Brexit on this side of the Atlantic. As things stand, the polls (and betting markets) suggest that next month’s election will produce a Conservative-led government in the UK. This comes with all the usual caveats about polling but, if it happens, there’s a good chance that such a government would be able to push a Withdrawal Agreement similar to the one reached last month with Brussels through parliament.

Yet the Withdrawal Agreement in its current form would expire at the end of 2020. This would give London and Brussels less than a year to agree a comprehensive free trade agreement covering everything from tariffs and product standards to rules governing market access for financial services and get it passed by national parliaments.

History provides some guide as to just how difficult this will be. The various rounds of trade talks that formed the early part of GATT were wrapped up relatively quickly. Most took less than a year to complete. But these early rounds were mainly about lowering tariffs. Trade deals in the modern era have taken much longer. The recent trade deal between the EU and Japan took more than four years to conclude. Trade agreements between the US and other countries have taken a similar amount of time to reach.

The key point for investors is that the UK is at risk of swapping one cliff-edge in January (when Article 50 is now due to expire) for another in December 2020 (when, if passed, the Withdrawal Agreement would expire). The Conservatives have campaigned on a message of “Get Brexit Done” – in practice it’s a saga that’s likely to run and run.

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