Our Brexit negotiations deserve better thinking about the new globalization according to top economist and globalization expert Richard Baldwin. His new book The Great Convergence argues that the 20th century view of trade – goods that were made in one nation and sold in another – is deeply misleading in today’s world.
Today, trade is very much about know-how, ideas and factories crossing borders, not just goods and services crossing border. British firms need a well-functioning trade policy to help them make things, not just sell them. Brexit negotiations must take account of this New Globalisation, or Global Value Chain reality. The nine power laws of the New Globalisation to factor into our negotiations for a successful Brexit are (in brief):
(1) Avoid thinking that UK’s new trade deal with Europe is mostly about tariffs and the customs union
(2) Worry about sequencing
(3) Don’t forget that Brexit will lead to pains and gains, so the new arrangement should be accompanied by a package of social measures to assist those that will lose from Brexit
(4) Do not fall into the trap of thinking about the EU as a single negotiating partner
(5) Trade in manufacturing is very different than trade in services when it comes to Brexit (indicates trouble ahead for financial services exports)
(6) Don’t forget that the EU’s internal budget talks will collide with Brexit talks
(7) Don’t make the mistake of thinking of British competitiveness as a national thing
(8) Look beyond Europe for role-model agreements
(9) Don’t think that a new agreement with the EU will be fast
(1) Avoid thinking that UK’s new trade deal with Europe is mostly about tariffs and the customs union
Since trade is now about factories crossing borders as well as goods crossing borders, the new UK-EU trade relations must include disciplines that go far beyond low tariffs, if UK manufacturing is to maintain its position in “Factory Europe”.
(2) Worry about sequencing
21st century trade agreements are highly complex since they must underpin ‘factories crossing borders’, not just goods crossing borders. As such, they necessarily touch on a wide range of policy that seem – from the 20th century, Old Globalisation perspective – to be unrelated to trade. To support (i.e. underwrite) international production networks, the agreements have to provide assurances on cross border movements of capital, services, know-how, and skill personal as well as goods.
The problem is that the UK’s trade partners do not know which policies will be fully under the control of the UK government.
(3) Don’t forget that Brexit will lead to pains and gains, so the new arrangement should be accompanied by a package of social measures to assist those that will lose from Brexit
The Great Convergence points out that changes in international economic engagement is affecting economies with a “finer degree” of resolution. For example, if the UK leaves the Single Market, two types of adjustment will result. First, some manufacturing jobs will shift to the Continent, and second the relative cost of British workers will fall relative to those of EU workers. The relative wage reduction – part of which has already happened due to drop in the value of the pound against the euro – will help reduce the loss of manufacturing, but it will fall most heavily on certain British citizens.
Likewise, if the UK does not manage to maintain equal access to the EU for financial services produced by UK-based companies, a good number of British citizens will lose out when the City downsizes and shifts some jobs to the EU27 – and not just the high-income bankers. The government should prepare a comprehensive package of social policies to help citizens adjust to the economic pains and gains from Brexit.
(4) Do not fall into the trap of thinking about the EU as a single negotiating partner
The EU is a “union of states and of peoples” and as such it has complex, and formalised decision-making procedures. When it comes to negotiating new trade agreements that involve far more than tariffs, the procedure requires unanimous agreement of all EU27 nations, and the European Parliament will insist on having its say as well.
These nations differ strongly on all sorts of matters – especially the free movement of labour (e.g. some are net importers of workers, others are net exporters of workers) – and in their dependence on the UK market (over half the EU27 nations depend on the UK market for less than 5 percent of their total exports).
Given the need for unanimity, and the vast differences among them, the only position the EU is likely to be able to agree quickly is the status quo, i.e. where the Single Market is a take it or leave it proposition.
(5) Trade in manufacturing is very different than trade in services when it comes to Brexit (indicates trouble ahead for financial services exports).
The New Globalisation deep interconnectedness (factories crossing borders) creates a strong incentive to cooperate on both sides of the Channel. Manufacturing firms do not want to disrupt their supply chains and since the supply chains links are both deep and two-way, so there will be a clear interest in avoiding disruption.
This is much less true in services, especially financial services. Because face-to-face interactions are far more important in the production and (often) the sale of services, the New Globalisation has had much less impact on the services, especially financial services that are produced in the City. Indeed, services are much more like the Old Globalisation where putting up barriers to British finance services exports is likely promote financial services activities in the EU27 rather than destroy it (as in manufacturing).
(6) Don’t forget that the EU’s internal budget talks will collide with Brexit talks
The EU’s current long-term budget plan runs from January 2014 to December 2020. The UK government signed this 2014-2020 Multiannual Budget Framework in 2014, so the ‘divorce’ talks will have to determine what happens to the UK government’s commitments (on both the paying-in and receiving sides). These EU-UK discussions will collide with internal EU27 discussion on how to formulate the next long-range budget which will be fore 2021-2027.
If history is a guide, and budget negotiations start two and a half years before January 2020 start date, the Commission will start intra-EU27 discussion in June 2017 – just after the
Brexit calendar is started (supposedly in March 2017).
This time, the budget talks will be especially difficult since Britain is a net contributor to the budget. If Britain ceases to both contribute to and receive from the EU budget, the short fall will have to be made up elsewhere. If the UK is willing to pay, the shortfall will give Britain substantially more clout in the talks about the divorce and talks about future trade arrangements. If the UK’s stance is that it will pay nothing to and take nothing from the EU budget, then the negotiations on all aspects of access will be correspondingly made more difficult by the need for EU members to determine budget cuts in line with the drop of Britain’s net contributions, or rise in contributions.
(7) Don’t make the mistake of thinking of British competitiveness as a national thing
Under the Old Globalisation, where we could think of goods as being made in one nation and sold in another, competitiveness was a national concept. In the world of global value chains (GVC), competitiveness is much more of a regional concept. That is, the competitiveness of British manufacturing depends on the competitiveness of manufacturing in the EU (and vice versa).
The Great Convergence stresses the fact that the know-how British firms own is now much more easily moved abroad since British-based firms can easily and effectively monitor production abroad. This makes British manufacturing value added much more footloose than it was before the GVC Revolution in the last 20th century. Moreover, shutting off borders will not stop the outflow of know-how from British-based firms to the EU and elsewhere. The know-how is like as water and borders are like open fingers. The key point here is that when water is flowing through your hands, making a fist doesn’t halt the flow. To put it sharply, if the UK leaves the Single Market, UK firms can easily ‘vote with their feet’ to stay in the Single Market by combining their know-how with labour located in the EU27.
(8) Look beyond Europe for role-model agreements
Much of the debate has turned on Europe-based models for the new UK-EU trade relations. Economically, remaining in the Single Market would be best, but short of that, the UK should look to other 21st century trade agreements that support “Factory North America” (specifically the NAFTA agreement), and “Factory Asia” (specifically the Japanese trade deals with the large ASEAN nations such as Thailand and the Philippines). The US-Korea, and EU-Korea deals also provide important precedents. It is worth noting that none of these non-Europe agreement include free mobility of labour, although most guarantee that managers and technicians can easily travel for a short period between production facilities. The point is this is that the likely insistence of the EU27 on a take-it-or-leave it offer for Single Market access is based on politics and history, not economics.
(9) Don’t think that a new agreement with the EU will be fast
The US has an excellent cadre of trade negotiators and a well-oiled mechanism for generating politically guided negotiating mandates. Despite this, the average time between the start of talks and implementation for US agreements is almost four years. For more difficult talks – like the sort of talks that are necessary between the EU and UK – it can be much longer. It took almost six years for the US-Korea trade agreement to come to fruition.
The Great Convergence: Information Technology and the New Globalization is by Richard Baldwin Harvard University Press £22.95. Published in the UK on November 24th
