Stephen Booth: To reach a best in class trade deal with New Zealand and Australia, we must liberalise on agriculture

1 Oct

Stephen Booth is Head of the Britain in the World Project at Policy Exchange.

While the Brexit negotiations with the European Union have grabbed the headlines, the Department for International Trade has been quietly working away at the UK’s trading relationships with non-EU countries. Much of the work to date has been relatively uncontentious and therefore largely passes under the political radar.

In part, this is because the trade deals concluded to date have focused on securing and maintaining existing market access provided for by EU trade agreements, the UK’s access to which falls away at the end of the Brexit transition period on January 1. For example, the recent successful conclusion of UK trade negotiations with Japan built upon an existing EU-Japan agreement. While the UK and Japan were able to go further in some important areas, such as digital services and visas for business travel, the EU-Japan deal provided the template for much of the agreement on goods and tariffs.

However, the UK is also prioritising its negotiations with the United States, Australia and New Zealand. A trade agreement with the US presents the bigger immediate economic prize, but the negotiations with Australia and New Zealand are nonetheless strategically important. They are not only essential stepping stones towards the UK’s medium-term objective of joining the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) – a trade bloc of 11 countries around the Pacific rim and the third largest in the world. They are also like-minded countries with which the UK can hope to influence others.

The negotiations with Australia and New Zealand should be simpler than those with the US but all three negotiations are truly novel, requiring the UK to break new ground. As a consequence, trade policy is likely to move up the political agenda as the Government seeks to manage the competing interests an independent UK trade policy inevitably needs to reconcile.

For example, last week, the House of Lords amended the Agriculture Bill to stipulate that any agricultural imports must “match or exceed” the UK’s own welfare and production standards. The amendment is supported by industry-led and celebrity-backed campaigns, urging MPs to “save our standards”, and the Bill is expected to return to the Commons later this month.

Of course, maintaining and promoting high standards is a legitimate aim and an important objective for UK policy. However, as we leave the EU’s regulatory system, we need to balance these objectives against the way the world outside the EU operates in practice. Not only might trade partners accuse the UK of using standards as a cloak for protectionism. As the National Food Strategy’s recent report argued, we cannot realistically expect to unilaterally force our standards on others at the same time as we are seeking trade agreements with them.

The crux of the trade negotiations with both Australia and New Zealand is likely to be the extent to which the UK is prepared to liberalise on agriculture in return for a high-quality agreement on trade in services, data and investment. The UK should use these negotiations to push for the best in class FTA on these issues, going further than the commitments contained in the CPTPP because, ultimately, if the UK joins the CPTPP, it will have access to these benefits anyway. Australia and New Zealand are both supportive of the UK’s bid to join and, like the UK, view the bilateral negotiations as important staging posts.

60 per cent of UK exports to Australia are already in services sectors and this could be boosted further by reducing barriers to professional and business services, such as the mutual recognition of qualifications, opening up procurement markets and liberalising visa regimes for business people. Both Australia and New Zealand have requirements on inward investment that are higher than the UK’s and higher than the OECD average. The UK will be looking to reduce some of these requirements in order to ease firms’ ability to invest in those economies as a base for exports into the Asia-Pacific region.

In return, both countries expect the UK to offer greater market access for their agriculture exports. Both countries traditionally seek complete tariff elimination in their FTAs. This is unrealistic, given that the UK is largely maintaining the EU’s tariffs on agriculture products. Nevertheless, the UK will have to be prepared to offer tariff reductions.

The Japanese experience of negotiating with Australia and on its accession to the CPTPP could serve as a model. Japan, which had a highly protected agricultural sector, has undergone tariff liberalisation as part of those agreements, but in some of the most sensitive sectors tariffs have been maintained and reductions have been phased in over 10, 15 and even 20 years.

The issue of standards ought to be less contentious with these markets. The RSPCA notes that New Zealand’s farm standards “have been judged higher than the UK”. Nevertheless, it is worth noting that Australia and New Zealand take a different approach to the EU when it comes to standards. Both joined the US in its complaint against the EU’s ban on hormone-treated beef.

George Brandis, Australia’s High Commissioner to the UK, said recently that “the intellectual argument for free trade in some quarters of the British political establishment is an argument that still needs to be fought and won.” It is true that the UK has much to learn and much to gain from cooperating with both countries on trade policy.

Both have undertaken radical programmes of unilateral trade liberalisation (Australia from the 1970s and New Zealand from the 1980s). Both countries have also liberalised further via networks of trade agreements. Australia’s FTAs with Chile, China, Malaysia, Singapore, Thailand and the US provide for duty-free and quota-free access for all their goods into the Australian market.

As a result, both countries have successfully combined the diversification of their exports while delivering benefits to consumers by lowering tariffs on imports. Just as importantly, both countries have used the moral and political capital earned from unilateral reforms to place themselves at the forefront of global initiatives to promote free trade.

New Zealand is a founding member of the Digital Economy Partnership Agreement (DEPA), together with like-minded Chile and Singapore, which is at the cutting-edge of innovation in digital trade. It was with these countries that New Zealand initiated the process that ultimately led to the CPTPP. Meanwhile, Australia is the joint leader of the 23-party negotiations on the Trade in Services Agreement at the World Trade Organisation.

If the UK wishes to be at the forefront of the argument for global free trade, this is the sort of company it should be keeping.

Alan Mak: Reform capital allowances and R&D tax credits to fire up investment and create jobs

1 Jul

Alan Mak is MP for Havant and Founder of the APPG on the Fourth Industrial Revolution.

Improving Britain’s productivity is key to both our economic recovery after Coronavirus and enhancing our global competitiveness post-Brexit. The best lever for firing up Britain’s productivity is incentivising more investment in the latest IT and software, new plant and advanced machinery – all proven catalysts of growth and efficiency. Failure to direct billions of pounds into these fundamental building blocks of our economy will hold back our recovery.

The State cannot be expected to do all the heavy lifting, especially given the Government’s substantial spending commitments to help the country through the lockdown and beyond. Instead, it must be businesses that take the lead, especially SMEs who have traditionally made up the “long tail” of unproductive companies.

Rather than a safety-first approach of hoarding cash, postponing investment and hunkering down, businesses must be incentivised to invest more in the coming months. This must be an economic recovery powered by bold investment decisions that create jobs, upgrade technology and boost productivity.

The dampening effect on capital expenditure (capex) and investment caused by Coronavirus is already large and destructive. One investment bank estimates that £23 billion has been slashed from this year’s capex budgets already, whilst the Bank of England predicts a 26 per cent drop in business investment for 2020. In 2009, as the financial crisis erupted, the fall was 16 per cent by comparison. Some of the country’s biggest employers such as BP and HSBC have already started cutting investment.

In practice this means IT systems and software – now at the heart of every business – being used for longer. Machines normally replaced every decade will have their life extended. Trucks and vans will be allowed to age. Outdated buildings that offer no room for new employees will be kept on. Research and development (R&D) could stall.

Reductions in investment not only have negative consequences for our country’s GDP, jobs and productivity, it also damages our capacity for R&D and our reputation as a nation that innovates for the future – key to our leadership of the Fourth Industrial Revolution.

Reforming and adapting two existing incentive schemes – the Annual Investment Allowance and the R&D Tax Credit – would have a major impact in reversing this decline in business investment and productivity.

Introduce a new Annual Investment Allowance ceiling for green or digital investments

Capital allowances enable a business to deduct the cost of qualifying items from their profits, lowering their corporation tax bill. This incentivises investment in key productive goods from machines to laptops.

The Annual Investment Allowance (AIA) is the annual cap on such deductions and its level has varied dramatically in recent years from £25,000 in 2012 to £500,000 in 2015. Until December 2018, the AIA was £200,000 but it was raised to its current £1M level from January 2019. The £1 million level is due to expire this December.

To encourage a green recovery and investments that focus on digitisation, the AIA could be allowed to fall back to the previous £200,000 ceiling, except for certain types of capital expenditure that achieve environmental or digital goals which would still benefit from the £1 million special ceiling. Replacing a diesel-powered machine on the factory floor with one powered by electricity, or digitising a production line by adding new software powered by artificial intelligence (AI), could be examples of investment that would be rewarded by the new special AIA ceiling.

Alongside the introduction of a special £1 million ceiling, the scope of what can be claimed through capital allowances should also be expanded to take account of the growing digital dimensions of every business. For example, digital tools purchased on a subscription basis (such as monthly website hosting costs) should benefit from relief not just one-off investments in physical goods (such as buying a new machine).

Increase R&D tax relief rates for SMEs and widen the scope of the reliefs

R&D tax reliefs support companies that work on innovative projects in science and technology, and enables the cost of qualifying projects to be reclaimed from HMRC. They’re especially effective for digital start-ups, who get a tax break and much needed cashflow back for critical work.

From April this year the relief rate is 13 per cent, but the lion’s share of R&D tax relief is claimed by large, research-intensive businesses. SMEs can currently claim up to 14.5 per cent in certain circumstances, but incremental increases such as this do not have a dramatic effect on investment appetite.

Often the most cutting-edge innovation, especially in the digital sphere, is carried out by small teams and growing start-ups – not just multinationals. To encourage more micro businesses and SMEs to pursue more R&D, new and much higher rates of relief should be introduced. For example, a rate of 25 per cent for SMEs with fewer than 150 employees, and 35 per cent for SMEs with fewer than 50 employees.

What qualifies for relief must also be broadened to include more of the digital tools that software developers use, including software testing tools and data analytics software. In addition, cloud storage fees, user experience development work and the cost of buying data sets needed to train algorithms for AI-driven start-ups should also be tax deductible.

Britain is currently 19th out of the 37 industrialised nations in the OECD when it comes to R&D investment, spending 1.7 per cent of GDP against the OECD average of 2.4 per cent. To match world leaders including Germany and Japan, who invest over three per cent, we must urgently update and expand our R&D tax relief regime.

This is the second in a three-part series on how to boost our economy after Coronavirus.