In the current international landscape, Beijing can cripple foreign industries by cutting off access to its domestic market. Atkinson argues that this tactic has already proven effective in recent times, with EU telecoms companies recently threatened with being shut out of the Chinese market should the bloc bring a trade case to the WTO against China for unfairly subsidising its own telecoms giants, Huawei and ZTE.

This matters to the world as China is pursuing global dominance in key industries and technologies through its Made in China 2025 scheme. It is therefore time for a new approach under which like-minded democratic nations agree to come to each other’s aid. Success would depend on members of this ‘NATO for trade’ cooperating to deter Chinese economic aggression that would harm all nations.

China’s state capitalist model and economic playbook have proven to be powerful, and it’s imperative that like-minded democracies have their own strategy, building on each nation’s technological strengths, to ensure that they can compete and prosper economically and technologically.

To read the full report from the China Research Group, please click here.

Robert D. Atkinson is the President of the Information Technology and Innovation Foundation

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Last month, our cost of Brexit model showed that leaving the single market and customs union had reduced the UK’s total goods trade by 11 per cent in March. Using the recently-released data for April, we estimate that total goods trade is once again 11 per cent, or £7.9 billion, lower.

To estimate the effect of single market and customs union exit, we use trade data from other advanced economies. An algorithm chooses – from a ‘donor pool’ of 22 advanced economies – a smaller selection of countries with economic characteristics that most closely matched those of the UK over the last decade. Those countries are combined into a ‘doppelgänger UK’, with the relative weighting of the selected countries chosen to create the smallest possible deviation from the real UK goods trade data between 2016 and 2019. By comparing the UK’s actual goods trade performance from January 2021 to that of the doppelgänger, we can assess how leaving the single market and customs union has affected Britain’s trade in goods. (For more details on how the model works, see the estimate for January.)

COVID-19 does not significantly affect our model, because we only use it to evaluate the UK’s performance from January 2021, when goods trade in advanced economies had largely recovered to pre-pandemic levels. The countries in our doppelgänger UK are chosen using pre-pandemic data, which also reduces the impact of the virus on our estimate.

To read the rest of the article on the Centre for European Reform, please click here.

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Last month, our cost of Brexit model showed that leaving the single market and customs union in January 2021 had reduced the UK’s total goods trade by 22 per cent. Using the data for February, which was released today, we estimate that goods trade is now 5 per cent, or £3.5 billion, lower. That is a significant improvement on the January data, as we expected, partly because businesses had built up stockpiles to cope with disruption at the EU border in January, and were replenishing them in February, and partly because volatile trade in precious metals rose sharply. Furthermore, the value of trade in ‘doppelgänger UK’ – a group of countries whose trade performance matched that of the UK between 2016 and 2019 – fell slightly in February. Monthly trade data is volatile, so it will take several more months for the impact of Brexit on the level of UK goods trade to become clear.

To read the full insight piece by the Centre for European Reform, please click here. 

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Main messages

• A robust carbon pricing framework with anti-carbon-leakage measures is needed to support deep decarbonisation of industry on the pathway to net-zero greenhouse gas emissions.
• The EU has announced that a Carbon Border Adjustment Mechanism (CBAM) will be operational by the end of 2022. A failure by the UK to coordinate or keep pace with the EU’s level of policy stringency for industrial sectors could risk important UK exports being penalised by the CBAM.
• This could entail large financial transfers from the UK to the EU, potentially amounting to €1 billion or more, with exporters of steel hit particularly hard.
• The product coverage of the CBAM has significant implications for the expected carbon leakage and competitiveness impacts, as well as for paid/collected fiscal revenue. It matters particularly for steel, where semi-finished products account for a significant share of sectoral trade-embodied carbon.
• As the EU is the UK’s main trading partner in carbon-intensive goods, regardless of whether the CBAM considers only basic materials or broader products, the potential impact is significant. Around one-third of the total value of all UK goods exported to the EU could be affected.
• Joint implementation by the EU and UK of a CBAM covering imports but not exports would be more compatible with environmental objectives and trade law. However, it would disadvantage UK raw material exporters as they would not be able to pass on carbon costs in foreign markets. This would particularly affect exporters in steel and aluminium because they have a stronger trading relationship with non-EU countries. 

High-level recommendations

• To decarbonise industry there needs to be a strong policy framework that includes a high carbon price and complementary leakage measures. The carbon price should rise to £75/tonne in 2030.
• Given strong trade linkages and integrated supply chains with the EU, uncertainty around UK’s post-Brexit climate policy and particularly around anti-carbon-leakage measures further reduces the long-term investment security for carbon-neutral production processes for UK industry. As a priority, measures should be put in place to address this uncertainty and enable investors to recover the incremental costs of carbon-neutral investments. 
• To reduce investment uncertainty, the UK should consider close multilateral cooperation with the EU on a robust policy package to support industrial decarbonisation, including linking of emissions trading systems, equitable CBAM design, the gradual phase-out of free allocation of permits, support for innovation, and carbon contracts for difference.
• Policies to address carbon leakage and prevent export sectors from losing global market share should focus on specific sub-sectors and may be differentiated. For example, leakage provisions that are tailored to steel and aluminium would be needed if the UK has a broad, import-only CBAM in conjunction with the EU CBAM. This could include different boundaries for product coverage.

To view the original research by the London School of Economics and Political Science, please click here. 

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To read the full report by the Office of the U.S. Trade Representative, please click here.

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The EU-UK trade and co-operation agreement (TCA) was negotiated in record time, concluding dramatically on Christmas Eve. But in truth, the negotiations could have been wrapped up by the end of the summer, had it not been politically necessary for the EU to fight the good fight over access to UK fishing waters, and for the UK to leave as little time possible for domestic parliamentary scrutiny. The eventual compromises on the contentious issues of level playing field, governance and fish were both predictable and predicted. The TCA’s late arrival left resource-constrained businesses with only days to adjust to new arrangements, but it should be broadly welcomed as a significant improvement over the January 1st default of no trade agreement. The question that now needs answering is not if the agreement can evolve – it can – but rather if it can endure.

The new trade deal between the EU and the UK could evolve over time into something more substantial, but first it must endure.

The TCA removes tariffs and quotas (conditional on the exported products meeting the agreement’s rules of origin criteria) but does little to facilitate trade in services, or negate the need for new bureaucracy and checks at the border. But this was expected – once the UK government prioritised regulatory autonomy, ending freedom of movement, and gaining a free hand on trade policy, its economic ambition was limited to a trade agreement with the EU similar to what the bloc has with Canada and Japan (at least for Great Britain; Northern Ireland has a deeper trade relationship with the bloc under the terms of the Withdrawal Agreement). Importantly, the TCA does include broader co-operation on issues such as law enforcement and social security, although not on foreign policy. One unexpected benefit is that temporary visitors to each other’s territory can retain access to state-provided healthcare, as is current practice among EU countries.

Yet, even taking into account the UK’s limited ambition, there are notable gaps and omissions in the agreement. The UK failed to convince the EU to include ambitious provisions on the mutual recognition of professional qualifications or match the UK’s ambition on the temporary movement of services suppliers, particularly intra-corporate transferees. Nor did the EU accept broad-brush mutual recognition of conformity assessment (whether UK-based testing labs could continue to certify that UK produced products meet EU requirements) or binding commitments to a reduced frequency of border inspections carried out on food products. The TCA also kicks the can on a number of important issues: it does not include provisions for a financial services regulatory dialogue (unlike the EU’s trade deals with Canada and Japan), instead moving the discussion into a potential future memorandum of understanding. The agreement buys more time for the EU to unilaterally decide whether the data of its citizens can continue to be stored and processed on UK-based servers for up to six months. And it leaves open the possibility of the UK linking its own emissions trading scheme to the EU’s.

Thankfully, the provisions written into the agreement are not the end of the story. Sitting beneath a ministerial level joint partnership council, the TCA includes 19 specialised committees covering near every aspect of the agreement – from sanitary and phytosanitary measures to public procurement – which can suggest improvements. And while it is unlikely that the EU or UK will want to fiddle with the agreement in the immediate future, over time and as the political spotlight moves elsewhere, it is possible that the TCA will be incrementally upgraded. Additional provisions on the mutual recognition of professional qualifications or of conformity assessments are conceivable, for example. You could also imagine the UK seeking to revisit the question of border checks on products of animal origin, simply to reduce the burden placed on traders navigating the new internal trade border between Great Britain and Northern Ireland.

However, substantial improvements to the agreement will not be possible unless there is a notable shift in domestic opinion in the UK. Unlocking a relationship of similar depth to Switzerland’s with the EU, for example, would require the UK to accept free movement of people, regulatory harmonisation, and most probably a role for the European Court of Justice. And while it is conceivable that British public and political sentiment on these issues could soften in the future, in the short to medium term that seems unlikely. This also poses a problem for the opposition Labour party, which will instinctively want to deepen the trade relationship, but fears turning off those potential voters with more eurosceptic inclinations. In the immediate aftermath of the treaty being signed, Keir Starmer, Labour’s leader, has rejected free movement of people and ruled out extensive re-negotiating of the TCA were Labour to come into power. Positions will inevitably change in the coming years, but the built-in possibility for evolution of the TCA does not mean evolution will happen.

Moreover, the TCA also contains many reasons to think it could crumble away. Along with the ability for both parties to terminate the agreement following a 12-month notice period, the TCA is littered with review clauses and dispute settlement processes that could lead to parts of the agreement being suspended. Take the commitments on subsidies, for example. The UK succeeded in seeing off the initial EU attempt to bind it to EU subsidy rules both now and in the future. But the UK still signed up to binding high level principles on subsidies and accepted that benefits of the agreement could be suspended in the event either party breaches them, and those breaches impact trade and investment flows between the two. The same is true of commitments made on the environment and labour rights, where future regulatory divergence could see the re-imposition of tariffs.

The concept of preferences being suspended in the event of the signatories to a trade agreement breaching their commitment is pretty common in trade agreements (although the particular approach taken in the TCA is very much unique), but the political climate, particularly in the UK, makes the TCA uniquely unstable. Those MPs who have long harboured grievances towards the EU are unlikely to ever be satisfied by a treaty that keeps the UK, even loosely, in the EU’s orbit. They will probably agitate for symbolic divergence, no matter the consequences. Some may even want to tear up aspects of the treaty, as they are already doing with respect of the Withdrawal Agreement, to force further confrontation with the EU. While the current UK government is unlikely to pander to the more extreme voices in the short-run, this could change if it feels it is starting to lose voters to parties to its right. And so long as the UK remains geographically proximate to Europe, there will always be someone harbouring a desire to torpedo the relationship.

So long as the UK remains geographically proximate to Europe, there will always be someone harbouring a desire to torpedo the relationship.

There are also a number of events scheduled for 2021 that could create political tension in the EU-UK relationship. The EU still needs to decide whether the UK’s financial services rule book is equivalent to its own, and if so whether to allow certain financial products to continue being sold into the EU from the UK’s territory. Technically speaking, as a recently departed EU member with all of the same rules, the UK should be able to easily meet the EU’s criteria. But the EU’s decision will inevitably be influenced by its political desire to onshore more financial activity and build an integrated European capital market on the continent; it is unlikely that it will grant UK-based firms across the board access, and instead will only grant equivalence in the areas deemed to be of ‘systemic importance’ to the EU’s financial markets. On a separate note, many of the derogations and waivers, currently in place to facilitate trade between Great Britain and Northern Ireland, will expire through the first half of 2021, potentially creating further difficulties for the UK’s new internal trade border. Either of these issues, and many others, could put extreme pressure on the relationship and the sustainability of the TCA.

Whether the TCA stands the test of time is yet to be seen. Much will depend on the nature of UK politics over the coming years, and whether Brexit has put the so-called EU question to bed, or not. Regardless, for better or worse, the EU’s relationship with the UK will not remain static, and in ten years’ time will inevitably look very different from what it does today. 

Sam Lowe is a senior research fellow at the Centre for European Reform.

To read the full brief, please click here. 

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While the EU as a whole might be better placed than the UK to absorb the economic shock of a no-deal, the fallout within the EU will be uneven, resulting in winners and losers. The asymmetrical impact and differential capacity and willingness of national governments to mitigate the shock could exacerbate regional disparities and unbalance the EU’s internal level playing field. As the economic realities of Brexit will be felt differently across the Union, it might become more difficult to maintain the same level of EU unity post-no-deal.

The EU-UK relationship can be expected to become more conflictual and competitive, particularly in the absence of common rules under a no-deal. Regardless of whether a deal is reached, the UK government’s willingness to breach international law is likely to have a lasting effect on trust and has brought an element of precariousness into the relationship. This lack of trust and predictability will also affect the EU’s and UK’s ability (and willingness) to amplify the other’s voice in the geopolitical and security sphere, at a time when the UK’s departure is weakening both sides’ respective weight and capabilities.

All these negative repercussions will be intensified should the talks end in an acrimonious divorce. In any case, the potential for a no-deal by accident or design remains high. The only way to secure a deal at this point is for Boris Johnson to make a double U-turn on his red lines and the Internal Market Bill. Nevertheless, even so, the deal would be a thin and precarious one with low levels of trust, while the threat of further treaty breaches would impede the normalisation of the EU-UK relations. The EU, therefore, must anticipate a much more conflictual and difficult relationship, no matter the eventual outcome.

To download the full paper, please click here.

Jannike Wachowiak is a Junior Policy Analyst in the Europe’s Political Economy Programme at the European Policy Centre.

© 2019, European Policy Centre

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In April 2020, the World Trade Organization (WTO) published its latest trade forecast. It predicted that global trade in goods will drop by between 13 per cent and 32 per cent in 2020 as a result of the economic impact of the pandemic. Fortunately, global trade is expected to bounce back in 2021, but the nature of the recovery is not yet clear. Rather than attempting to give an exact number, WTO forecasters have wisely considered both pessimistic and optimistic scenarios.

The WTO’s forecasts are illustrated in Figure 1. It shows the growth of global trade from 2000 to the financial crisis of 2008/9, the resulting dip in global trade, and the subsequent recovery and growth from 2011 to 2019. It then shows a stalling of growth in trade in 2019, just before the current pandemic induced slowdown, after which the graph projects both pessimistic and optimistic scenarios up to 2022.

Figure 1: Global merchandise trade volumes, 2000-2022

Source: WTO (100 = global trade volumes in 2015).

Figure 1 clearly shows that the growth in trade (blue line) was dented by the financial crisis of 2008-09. While the growth in trade volume recovered, it did not return to the growth trajectory before the crisis (dotted grey line).

FREIGHT-EXPECTATIONS

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Previous papers have looked at the interwar relationship between aggregate trade flows and the average tariff, and have found that interwar protection mattered less for the value of world trade than was traditionally thought. They have also explored the interwar relationship between trade bloc membership and bilateral trade flows, and concluded that trade blocs mattered less than traditionally thought as well.

In this paper we have estimated the impact of interwar UK trade policies on UK imports, using detailed information on trade and trade policy for 258 product categories. Our mean estimates suggest that the shift toward protection in 1931 and 1932 can account for about one-quarter of the decline in UK imports between 1929 and 1933, which is in line with previous results for the United States. However, we have also found that the shift toward protection, which was explicitly discriminatory, substantially increased the share of UK imports coming from the British Empire. Our mean estimates suggest that trade policy can explain over 70 percent of the increase in the Empire’s share of UK imports between 1930 and 1933. Other forces served to increase that share still further, but the impact of British protectionism was substantial. As late as 1938, trade policies can still account for over 50 percent of the shift toward Empire experienced since 1930.

What would we have found had we not had data on tariffs and trade for our 258 goods? What if we had only been able to calculate tariffs using more aggregate data? Calculating average tariffs by dividing tariff revenue by the value of imports is standard in the economic history literature, given the lack of uniform trade and tariff classifications in the past: as previously noted, it is what Irwin (1998a); Madsen (2001); and Estevadeordal, Frantz, and Taylor (2003) all do. Sometimes it has been done for broad categories of goods rather than imports as a whole (Lehmann and O’Rourke 2011); sometimes it has even been possible to calculate bilateral tariffs using the method (Albers 2017). Imagine that it were possible to compute such average tariff measures bilaterally, for each of our nine categories h used in the econometric analysis; or more realistically, given the data constraints of the period, for agricultural and non-agricultural goods;51 or even more realistically, just for aggregate imports. Table  3 presents the results that we would have obtained for 1933, looking just at the impact of tariffs, if we had only had data on trade and trade-weighted average tariffs at these three higher levels of aggregation.52 As can be seen, the results regarding the impact of tariffs on the total value of trade are essentially unaffected by the level of aggregation, since these depend above all on the upper level elasticity of substitution κ, which was in all cases estimated using aggregate data. However, the estimated impact of tariffs on the direction of trade falls as the level of aggregation increases: if we had used bilateral trade-weighted average tariff data in a one-good model we would have concluded that tariffs only accounted for 13 percent of the shift toward Empire, whereas in fact they accounted for over 50 percent.

Methodologically, this paper suggests that there are advantages to using trade and trade policy data that are as disaggregated as possible, and looking at what trade blocs do, as opposed to simply looking at whether they exist. Historically, the paper suggests that discriminatory interwar trade policy mattered more for trade patterns than the previous cliometric literature has found. It certainly mattered a lot in the British case; whether what was true for the United Kingdom was true elsewhere is a question which we hope that future research will address.

To download the full report, please click here.

Alan de Bromhead is a Senior Lecturer in Economics at Queen’s University Belfast, and a research affiliate at the CEPR.

Alan Fernihough is a Senior Lecturer at Queen’s University Belfast’s Management School, and a Research Associate at Queen’s University Centre for Economic History. 

Markus Lampe is a Professor of Economic and Social History at Vienna University of Economics and Business.

Kevin Hjortshøj O’Rourke is a Professor of Economics at NYU Abu Dhabi, is a Member of the Royal Irish Academy, a Fellow of the British Academy, and a former Research Director of CEPR.

Copyright 2020 American Economic Association. All rights reserved.

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