Shanker Singham: The Dimbleby food plan would wreck Britain’s trade policy

18 Jul

Shanker Singham is CEO of Competere. He is a former adviser to Liam Fox when he was Secretary of State for International Trade, and to the Office of the United States Trade Representative.

There have been a couple of important independent reports published recently on the subject of trade and agriculture.

In March of this year, the report of the Trade and Agriculture Commission (“TAC”), an independent commission staffed by a secretariat from the Government (primarily the Department of International Trade), was presented formally to the Secretary of State for International Trade.

Yesterday, another independent report (Part Two of the National Food Strategy (“NFS2”) was published. This report was commissioned by the Government, but was an independent review whose lead author is Henry Dimbleby, the co-founder of Leon restaurants.

I was privileged to serve as a Commissioner on the TAC. NFS2 covers many areas, but touches on trade policy aspects of food and agricultural trade, and it is here that its recommendations overlap with those of the TAC, whose primary focus was to study the interaction between trade and agricultural policy issues.

NFS2 correctly draws attention to the unanimous proposal from the TAC regarding the interaction between the UK commitment to trade liberalisation in the form of a zero tariff and zero quota policy, and its recommended approach to deliberate deviations from agreed core standards in areas like labour and the environment.

The TAC report regarded such deliberate deviations from agreed standards in the FTA as potential anti-competitive market distortions, for which a mechanism to impose a tariff could be legitimately crafted.

It is certainly true that gaining such a consensus was a significant achievement from the TAC, and in particular its chair, Tim Smith. However, it does a disservice to that delicately poised consensus to mischaracterise the TAC recommendations in the way NFS2 does.

The TAC report was very clear in its recommendation that, in exchange for a commitment to zero tariffs and zero quotas, the UK would propose a mechanism whereby, whatever core standards were agreed in FTAs, any deliberate deviation from them for trade gain would constitute an anti-competitive market distortion (ACMD). Provided the aggrieved party could show this and its effect on competition, as well as causation and damage, it could request a corrective tariff to offset the artificial cost reduction gained by the deviation from agreed standards.

However, and crucially, those standards have to be agreed. The TAC was careful to ensure that any policy proposed by it would comply with both the letter and spirit of WTO rules on sanitary and phytosanitary issues (SPS rules), as well as the WTO rules on Technical Barriers to Trade (TBT rules). These require a commitment to sound science and non-discrimination and constrain unilateral action.

It was absolutely clear from the TAC report that the UK could not unilaterally assert these standards, but that any tariffication mechanism would come into play only when there was a proven deviation from agreed international standards, or from those expressly agreed in the FTA

It was also axiomatic that this tariffication would be an ex-post event only if all the elements could be proved. I knew that even this proposal would raise eyebrows in capitals around the world. I backed it because I could see the justification for it, and that it was rooted in a normative framework that recognises the interaction between competition and trade policy.

I believed then and do now that many countries could be brought round to this way of thinking, and would not simply assume that this was a protectionist gambit by the National Farmers Union. Proof of this is that we are seeing variants of it emerge in the UK-EU Rebalancing Mechanism, and in US proposals in the WTO.

In addition to completely mischaracterising the actual recommendations of the TAC, NFS2 goes on to publish a table comparing the food standards of the UK’s key trading partners and geo-strategic allies.  It assumes without any analysis that rules that are more restrictive and burdensome automatically mean that standards are higher. It does this even if practices that have been found to violate the WTO.

NFS2 mischaracterises and simplifies the TAC recommendation to the point of absurdity. It will be rightly regarded with deep hostility by capitals around the world. It is to be hoped that the careful consensus obtained in the TAC, and understood by our trading partners, will not be shattered as a result.

It is certain that when our trading partners read NFS2, they will regard it as the type of wild assertion of protectionism that they have come to expect from the EU’s agricultural trade policy. They will also note with horror that NFS2 goes far beyond what even the EU has dared to suggest. Far from being the free trade superman of Boris Johnson’s Greenwich speech, this policy would turn the UK into an international trade pariah state, even worse than the mini-version of the EU that many of our key trade partners such as the US, Australia, New Zealand and Singapore fear, and even more of an outlier.

If these recommendations were to be applied to our imports from the EU, we would immediately be in litigation with them, and they would rightly invoke the rebalancing mechanism to slap tariffs on UK exports. As for the rest of the world, let us not forget that the EU’s sanitary and phytosanitary rules have unified both the developed and developing world against it in the WTO. If implemented, thee proposals would compound the pain inflicted on the global poor in developing countries at a time when the UK has also just announced a cut in its aid budget. This is not trade or development terrain that the UK wants to occupy.

Our trading partners are rightly concerned about which side of the table the UK will eventually land on. Our agricultural trade policy will be a strong indicator of where that will be. If we are even more of an outlier than the EU in these areas, we will be dismissed into irrelevance.

The NFS2 recommendations in trade policy will drive a coach and horses through the UK’s external trade policy, any improvements it could make in terms of domestic reforms in the agricultural sector, and render the seminal Johnson Greenwich speech on free trade into “sound and fury signifying nothing”.

Trade policy matters, and policy recommendations must be carefully calibrated if they are to have any chance of success. NFS2’s trade policy recommendations do a material disservice to the hard won gains and consensus developed in the TAC. They should be comprehensively rejected.

Shanker Singham: Breaking the Gordian knot of agricultural trade negotiations. How the TAC has risen to the challenge.

2 Mar

Shanker Singham is CEO of Competere. He is a former adviser to Liam Fox when he was Secretary of State for International Trade, and to the Office of the United States Trade Representative.

Agricultural trade is one of the most difficult areas to negotiate, and has long been the bugbear of international trade negotiations. The lack of liberalisation in developed country markets has done significant damage to developing countries and is a profound source of friction between developed and developing worlds.

In its report for the Secretary of State for International Trade, the UK’s Trade and Agriculture Commission might have just come up with a way of breaking the Gordian knot of agricultural trade negotiations.

I was privileged to be a TAC commissioner, and while, as commissioners we came to the subjects with very different perspectives, we have, I believe managed to resolve the tensions in a way that makes a major contribution to trade policy. We have done so on a unanimous basis – a credit to my fellow commissioners and our chairman.

The heart of the TAC report’s import policy contains an innovative proposal that attempts to simultaneously promote a trade liberalising agenda in agriculture, while at the same time protecting the UK’s high standards in food production and ensuring the UK fully complies with WTO rules on animal and plant health, as well as technical regulations that apply to food trade.

This proposal includes a mechanism to deal with some of the most difficult issues in agricultural trade which relate to animal welfare, environment and labour rules. The heart of this mechanism is the potential for the application of a tariff in cases where an aggrieved party can show that a trading partner is violating agreed standards in an FTA.

The result of the mechanism is a tariff based on the scale of the distortion which operates like a trade remedy. The mechanism can also be used offensively where a country is preventing market access by the UK as a result of the market distortion, or defensively where a distortion in a foreign market leads to excess exports from that market.

Unlike the UK-EU TCA rebalancing mechanism with which it has some similarities, the tariff would be calibrated to the scale of the distortion and would apply only to the product category in which the distortion is occurring. The advantage of this over a more conventional trade remedy is that it is based on cost as opposed to price and is designed to remove the effects of the distorting activity. It would not be applied on a retaliatory basis in other unrelated sectors.

In exchange for this mechanism, the UK commits to trade liberalisation and, within a reasonable timeframe, zero tariffs and zero quotas. This in turn will make the UK’s advocacy of higher standards in international organisations much more credible, another core TAC proposal.

The TAC report also notes that behind the border barriers and anti-competitive market distortions (“ACMDs”) have the capacity to damage UK exports and therefore suggests a similar mechanism or set of disciplines could be used offensively. Certainly, where the ACMD is being used to protect a particular domestic industry, using the ACMD mechanism to apply a tariff for the exports of that industry would help, but this may not apply where the purpose is protective, and the industry does not export much.

I would argue that in this case, it would be important to ensure that UK FTAs include disciplines on these ACMDs which if breached could lead to dispute settlement and the potential for retaliatory tariffs for sectors in the UK’s FTA partner that do export. This is certainly normal WTO-sanctioned practice, and could be used here to encourage compliance. It is clear from the experience in dealing with countries that engage in ACMDs for trade or competition advantage that unless there are robust disciplines, mere hortatory language would accomplish little or nothing.

But this sort of mechanism with its concomitant commitment to freer trade has much wider potential application than just UK agricultural trade policy. It could also be used to solve a number of long standing trade disputes such as the US-China dispute, and indeed the most vexed questions in trade involving environment and climate change in ways that do not undermine the international trading system itself.

This is because the mechanism is based on an ex post tariff as opposed to an ex ante one which contains within it the potential for protectionism, and is prone to abuse. Because the tariff is actually calibrated to the cost advantage which is secured as a result of the violation of agreed international standards, it is much more likely that it will be simply limited to removing this cost advantage as opposed to becoming a punitive measure that curbs ordinary trade flows.

It is precisely this type of problem solving and innovative thinking that the international trading system needs as it faces a range of challenges that threaten liberalisation itself and the hard-won gains of the post war GATT/WTO system itself. The TAC report represents UK leadership that has been sought after since the decision to leave the EU. It has much to commend it.

Shanker Singham: Let’s use the freedoms that this trade deal gives us to create wealth – not destroy it

29 Dec

Shanker Singham is CEO of Competere. He is a former adviser to Liam Fox when he was Secretary of State for International Trade, and to the Office of the United States Trade Representative.

When the founding fathers of the emerging United States of America declared their independence from their British rulers, they were acutely conscious that the success of the American project would depend not only on the claim to independence but, critically, on how they actually exercised it.

The Declaration of Independence was just the beginning of the American story. It laid the foundations for the choices that would ultimately define who they were as a people. It is the US Constitution that answers the question of who Americans are as a people.

The UK-EU Trade and Co-Operation Agreement is, for the UK, that “declaration of independence”. It sets out how we can claim regulatory autonomy – crucial for our independent trade policy but also for our domestic regulatory choices. But how we choose to use that independence is up to us and how we interpret this agreement.

The question of why we need freedom was set out clearly in David Frost’s Brussels speech, which argued cogently that such freedom was not a tactic, but the whole purpose of the project.

I have argued for the last four years that, in order for Brexit to be a success, we must maximise the benefits while minimising the disruptions as best we can. The Agreement starts the process of minimising those disruptions.

There are gaps of course: in mutual recognition, in financial services and in many other areas. But the basic framework is in place. The key element of preserving the UK’s regulatory autonomy, so critical for both its external trade policy and its domestic regulatory improvements, has been successfully secured.

And no trade agreement marks the end of the story: they are constantly iterated with new versions, developing further liberalisations over time. It will be no different with this one. The non-binding declarations which accompanied the Agreement make it clear that on key areas such as financial services, there will be ongoing regulatory cooperation processes, for example.

The critical test of the agreement is whether the UK can execute an independent trade and domestic regulatory policy of its choice, or whether the Agreement prevents this. The most important articulation of such a policy was Boris Johnson’s Greenwich speech, which spoke to what we do with our freedom.

That speech and the Brussels speech contain the constitutional principles which will govern us as the ship of state sets out on the rough waters of global trade as a country with its own unique commercial policy.  In my view, the deal (and the devil is of course in the detail) suggests that those constitutional principles have been safeguarded. There is no EU legal order over ours, and no EU dispute settlement mechanism that overrides our independence.

The EU had a reasonable concern that the UK could distort its market through subsidy or regulatory distortion for trade or competitive advantage, and this has now been dealt with by the rebalancing mechanism based on the potential for tariffication if there is a significant divergence, which leads to a material impact on trade and investment (for more detailed analysis, see this Explanatory Note).

For the UK, this has been done without subjecting the UK’s economy to European legal order. This is a significant contribution by both parties to global trade policy. The trade policy world has been crying out for something like this for the last 23 years, since the failure to introduce the so-called Singapore issues of competition and trade which had been agreed in the eponymous round of 1997.

Those of us who have argued since the mid-1990s that trade theory can no longer ignore anti-competitive market distortions inside borders will be pleased that an agreement between these two major economies includes such a measure. Essentially, if the UK or EU do distort their markets through regulatory change or subsidy, and a significant effect on trade and investment can be shown, a tariff can be applied.

It is here in particular that the way in which a test is implemented is crucial. If it becomes about protection of competitors, and not the process of competition itself, this will be a bad result, damaging competition and leading to wealth destruction and economic contraction.

If, on the other hand, both parties are required to lower their anti-competitive market distortions as a result, the deal will lead to wealth creation, the lifting of people out of poverty, and a mechanism which can be replicated by other countries and, ultimately, in the World Trade Organisation.

I am encouraged that, because the Level Playing Field provisions are rooted in competition principles, a pro-competitive approach which seeks to avoid market distortions that have negative competition effects should be the guiding principle. The provisions of the Good Regulatory Practice (GRP) chapter are also very relevant, as this sets out the need for it to rely on proper impact assessments, and be bound by transparency and due process considerations in the promulgation of regulations. The EU is relatively new to GRP chapters, while other countries have been using them for years, so seeing one in the UK-EU CFTA is an important and positive development.

Administered properly, through the independent dispute settlement body that is envisaged for the agreement, the Agreement will itself develop a body of law that will ensure the parties improve the quality of their own regulatory systems, and also constrain each other not to introduce anti-competitive market distortions into their systems.

Compere has shown in other papers that the impact on the economy of the reduction of these distortions is orders of magnitude bigger than pure border barrier reductions (see here, here and here). But the core principles that are developed in the litigation that will surely follow are still to be fully decided, and what they are will determine the success of this agreement for the economies of both parties.

We must now, as a country, choose to use our freedom wisely. We must use it to create wealth, not destroy it – to be governed by competition on the merits as an economic principle, not intervention and government distortion. We must put consumers above producers, recognising that all producers are consumers of something.

If we choose this in the articulation of our domestic regulatory, trade policy and the selection of our trade partners as Liz Truss’ Department for International Trade has started to do; if we embrace pro-competitive regulation across the whole of government, rejecting policies that damage consumers, increase price and lower choice, then we can use our independence to secure a lasting prosperity for our people. The battle is won, but the war is far from over. We have our freedom. It is now up to each and everyone of us to make sure we exercise it well.