A deal with the US would only boost GDP 0.1 per cent, says a former Assistant Director at the DITby David Henig / July 31, 2018 / Leave a comment
Whether it is the ability to “negotiate new lucrative deals” or “to catalyse a new phase of liberalisation of trade in services” (both takes from an article last week by Paul Marshall of Prosperity UK), or Liam Fox saying “for the first time in over 40 years the UK will have the chance to decide who we trade with and on what terms,” there is clearly excitement in some UK circles around the idea of Free Trade Agreements. Indeed it is becoming an ever more central part of the case for Brexit.
This excitement is frankly a bit baffling to longstanding trade experts.
Not that we don’t like Free Trade Agreements (FTAs) or think they are worthwhile. If you want to create the conditions for business growth then part of this has to include setting the rules by which they can trade internationally, with the aim of reducing barriers as far as possible. The World Trade Organisation does this only to a basic degree, you can do a lot more in bilateral agreements. Whether it is cutting tariffs, allowing services companies to operate in another market, removing unfair regulations, or streamlining customs processes, FTAs can make a difference to a business.
Free Trade Agreements are not, though, an economic game changer, or particularly quick to agree. The European Union has been negotiating an FTA with the South American “Mercosur” countries since 1999. We hear there may be a breakthrough soon. Then again we heard that earlier this year, and indeed in previous years. We should be able to move more quickly than the EU, but it is still rare to go from starting negotiations to implementing an agreement in less than three years. Meanwhile the economic growth from FTAs is most likely to be in the range of 0.05 per cent to 0.3 per cent of GDP, which is nice to have but not going to change the country overnight.
There are two reasons why FTAs are neither a game changer or particularly quick. The first that large parts of an FTA entail tackling a large number of small barriers, which inevitably takes time to negotiate, and may not be economically significant (but is great for the companies helped). The second is that as well as removing the barriers of the other party, they want to remove barriers in your…