The step change anticipated if Leave succeeded was a huge loss on the markets. That did not occur. But there is an unanticipated step change. An opportunity has emerged for the UK to lead action in reconstructing the World Trade Organisation (WTO), transforming it into a fresh global platform that liberalises global trade in services and investment.
Taking such a role does not depend on the terms of Brexit. The UK is already an independent member of the WTO. Regardless of when and how it settles with Brussels, it has a place to speak now in the WTO. And an active, influential and independent UK voice on global trade and investment is sorely needed there.
It has become fashionable to opine that the era of globalisation is ending and a retreat to protectionism looms. What such commentators overlook is the institutional impediment to a global resort to protectionism – and that is the WTO. All major economies are locked into legally-binding commitments not to raise tariffs. They can only reverse these measures if they compensate other WTO members. The worst that can occur is that further liberalisation stalls.
Moreover, there has been a change that many commentators have missed. Trade analysts have been reporting annually to the G20 since the financial crisis that annual growth in world trade in goods is no longer the leading indicator of global growth. One reason is readjustment of traffic in global supply chains and related slowdown in trade between China and the US. Chinese goods are not as cheap as they used to be.
With tariffs generally low, global growth today depends on liberalising other constraints on business, specifically restrictions on access to services markets and on foreign investment. The annual rate of foreign investment is steadily rising. This focus is now a feature in the newer trade agreements being negotiated among Asian Pacific economies, and in particular in the yet-to-be-adopted 12-nation Trans Pacific Partnership free trade agreement led by the US. They also featured in the US/EU negotiations for a TTIP agreement, but that now seems stalled.
A welcome development is the recent recognition by key developing economies that services are an important contributor to economic growth. In advanced economies like the UK, services industries generate 60 to 80 per cent of GDP. In developing economies – Asia and Latin America, for example – the contribution to GDP is just 40 to 60 per cent. They are also aware barriers to foreign investment must be removed.
These were key objectives of the now moribund “Doha Round” set of negotiations which began in the WTO in 2001. When it became clear five years ago that progress could not be made on services, “unofficial” backroom negotiations were initiated among the 50 WTO members who wanted change. The negotiations are formally private – “ex-WTO”. They are supposed to conclude this year.
A major initiative is required in the WTO to embed these new developments, and then inject energy and momentum into the organisation’s role in expanding global liberalisation of trade in services. The basic measures in WTO agreements are the bedrock of virtually all bilateral and regional trade arrangements. It is vital that its utility and credibility is maintained.
Here is a significant leadership opportunity for the UK. It is still a WTO member in its own right, as are all members of the EU. If any major global economy is to champion liberalisation of investment and services, it is the UK. This is its international economic headland.
Given the immense task of Brexit, the UK government is probably not in a position to take on such a role in the WTO right now. But one thing the Brexit process will demonstrate is that a key part of rebuilding an independent policy position on international trade and investment requires re-acquisition by UK officials of the detailed technical knowledge which is now embedded in the three overarching agreements (GATT, GATS and TRIPS), seven major agreements and the 20 odd minor agreements, as well as the WTO Dispute Settlement system. Without this knowledge, UK officials will not be able to negotiate quality bilateral trade agreements. All of them default to, or operate from, key premises enshrined in WTO agreements.
Things move slowly in the WTO. An energetic and influential party, which is a natural role for the UK, can have a major impact in revitalising the WTO system. The EU is active in this sphere, but cannot be adroit because it has too many players with diverse interests.