UK Trade and Investment Strategy

Debate between Jim Cunningham and Julia Lopez

Tuesday 23rd July 2019 Westminster Hall

[Julia Lopez]

No party wants the backstop to come into place, because we hope there will be a free trade agreement in its place, but the hon. Gentleman will be well aware that there is much concern that the backstop will tie us into rules and regulations that hamper our ability to achieve the aims that the Brexit process was intended to achieve.

Inevitably, the dilemma I outlined has constrained DIT’s ability to determine what might be offered to non-EU trading partners in any roll-over agreements or future negotiations. Perhaps all that is understandable and to some extent inevitable, given the complexity of extracting ourselves from a 40-year relationship. However, in the absence of a strong DIT voice in the Brexit process, there has been a failure to understand the potential trade-offs in the withdrawal agreement and how rapidly the rest of the world is moving on. There has also been a vacuum of informed parliamentary debate on our global trading future, leaving MPs to veer wildly from visions of chlorinated chicken and the bargain basement sale of the NHS to naïve declarations about the speed, value and impact of new free trade agreements.

[Mr Jim Cunningham (Coventry South) (Lab)]

I congratulate the hon. Lady on securing this timely debate. She mentioned that Parliament in particular has not really debated these issues. Actually, we have. I put it to her that the Government have not been clear about what sort of trade deals, and how many, they have agreed around the world. Perhaps she can give us an answer.

[Julia Lopez]

I am not entirely sure I understand the hon. Gentleman’s point. Does he want to know why the Government have not been clear about how many trade agreements they have secured?

[Mr Jim Cunningham]

indicated assent.

[Julia Lopez]

Well, at the moment the Government are not able to enter into negotiations on FTAs, but they are able to try to agree roll-overs of those deals. As I set out, the problem for the Department has been that it does not quite know what scope it has to negotiate those roll-overs, so partners have been waiting to see what is eventually negotiated with the EU to know what negotiating leverage they have over us. That leaves the Department in a rather difficult position, and that has had an impact on our ability to roll over trade agreements.

[Mr Jim Cunningham]

If the hon. Lady has looked at the news this morning, she will know that Canada and India, for a start, are not at this stage prepared to enter into a trade deal with the British Government.

[Julia Lopez]

I am not entirely sure I heard that—I do apologise.

The state of unreality we have got into in our trade debate must end now, not least because it undermines our credibility as a negotiating partner. It is time to decide our desired trading destiny, work out how we get there and then determine how to maximise our leverage along the way. If we are honest, we all want trade with the EU to remain virtually untouched at the same time as we open up new market opportunities. We want to acquire the right to regulate and tax as we please, and we would like to stop club membership rules such as freedom of movement. That is what the EU would term a “cake and eat it” strategy.

Boiling down the last three years, they have largely been about what price tag the EU wants to place on that goal and whether such a prospect is even for sale. In effect, the EU’s answer has been that no such deal is on offer and that we must instead pay to leave, tie ourselves into the EU’s regulatory sphere without a place at the table and wait to see whether we are granted any freedom to diverge. Unless we can find a middle ground between those positions, we will be walking away from the counter, which will introduce trade frictions and potentially tariffs into our relationship. It is important that we deal rapidly with the consequences of doing that, and DIT will have to be put front and centre of that task.

Earlier this month, when the International Trade Secretary appeared before the Select Committee, I was staggered to learn that DIT had apparently played so small a role in advance of the 29 March and 12 April deadlines for our leaving the EU. Overnight, we could plausibly have been left with no formal trading arrangements with the EU to allow for the continuation of tariff-free exchange. Indeed, that remains a very real prospect. Yet when I asked whether DIT had had any discussions within Government about drafting a simple framework for a future FTA to offer the EU at that juncture, the Secretary of State advised that the responsibility was DExEU’s, and that there would be little point in tabling an offer because the EU would simply reject it.

I do not want to open a debate about the contentious World Trade Organisation article 24 process and the likelihood of the EU agreeing to such a mechanism to maintain tariff-free trade. However, surely we can at least agree, because both the EU and the UK have said so, that at some point in the future—either immediately or after some time—the two parties will want to strike a free trade agreement. Why, therefore, have the Government not yet drafted an outline of how they would like such an agreement to look, and why is DIT being squeezed out of this important conversation? I have also heard surprising reports about how little the Government have utilised our expensive chief trade negotiator in our Brexit negotiations. The under-utilisation of DIT’s resource has been a strategic mistake.

In the next 100 days, we must prioritise the close working, if not the merger, of DIT and DExEU, such that our future relationship with the EU is seen in the wider context of what we are trying to achieve in trade. EU-UK trade, of course, will be a vital strand of our future prosperity, but it will not be the only strand. The past three years have been defined by aggressive lobbying by companies and organisations that would benefit most from everything staying the same. That is understandable, but we are not giving equal airtime to the costs of ongoing alignment.

To give a couple of examples, the Select Committee has heard from experts that the EU regulation concerning the registration, evaluation, authorisation and restriction of chemicals is so onerous and expensive that all the fastest-growing developing markets are looking at adopting the non-EU model of chemicals regulation. Other experts advise that the EU’s hazard-based approach to farming standards excludes important technological advancement that could reduce the environmental impact of farming.

We must seek immediately to draft a generous framework document for an EU-UK FTA alongside a series of explicitly temporary stop-gap continuity agreements with third countries that would allow diagonal cumulation of rules of origin with pan-Euro-Mediterranean countries. At the same time, we need to return to DIT’s proposed no-deal tariff schedule and think carefully about how it can best provide leverage in any negotiation with the EU.

The Secretary of State assured our Committee that his Department would have adequate resource on 1 November to begin simultaneous negotiations on FTAs with Australia, New Zealand and the US. There is no doubt that that could introduce useful pressure and urgency to maintain a good relationship with the EU. However, we must be careful not to fetishise FTAs or to oversell what they can achieve and how quickly.

I was particularly pleased last week to see my right hon. Friend the Member for Uxbridge and South Ruislip (Boris Johnson) manage expectations about a US deal. The US are notoriously tough trade negotiators, with in effect two negotiating partners in the Administration and in Congress, and there is a limit to what can be achieved given the breadth of matters decided at sub-federal level. None the less, as the Minister for Trade Policy, my hon. Friend the Member for Meon Valley (George Hollingbery), advised our Committee last week, given the breadth and depth of our trading links with the US, even a relatively shallow agreement could reap substantial rewards.

Our North American trade commissioner, Antony Phillipson, set out to the Department this month his strategy for US-UK trade. I would be grateful if the Minister gave us an overview of what was said, particularly on how we intend to build a strong relationship at state level and whether we have the right resources to do so. The parliamentary mandate for opening formal US-UK trade talks and ongoing parliamentary scrutiny of negotiations will be critical if such a deal is not to fall at the final hurdle or to be brought down by misinformation campaigns.

The Secretary of State is proud that the public consultation on the deal was one of the largest such exercises ever undertaken. However, I noted that of the158,000 responses on a US-UK FTA, 152,000 were individual campaign emails and only 234 responses came from businesses. I fear that that may be indicative of a 38 Degrees-style effort to cause alarm about the future of the NHS or reduced animal welfare standards: two matters on which Ministers have already offered countless assurances.

We can do plenty beyond the US-UK FTA that will be less contentious and arguably reap benefits more quickly. Amid the important debate about the future of our fishing industry and sheep farmers, we overlook the fact that our economy is most heavily dependent on our world-beating financial and professional services. The FPS sector remains key to our ongoing prosperity, with its exports more than double those of any other sector. Our strength in this area far exceeds that of any other European financial centre. Meanwhile, over 30% of the trade value added in the UK’s manufacturing sector comes from services.

There are no guarantees in the withdrawal agreement of preferential access to the EU market for our critical service industries, and many in the City are now questioning whether we really want an enhanced equivalence deal that would leave us subject to the whims of EU regulators. The EU should have understood some time ago that growth in financial services is beyond Europe, with London business as likely to be lost to Singapore and New York as to Frankfurt, Paris or Dublin if it tries to diminish the City’s competitiveness. Nonetheless, it seems likely to impose tougher recognition requirements on us. Instead of responding with mercantilist reciprocity, we must seek quickly to demonstrate that markets can trade with one another without needing to regulate each other.

The best way of testing such a model could be an ambitious global financial partnership with Switzerland, which is having plenty of its own difficulties with the EU following the expiration of its equivalence regime. A dynamic Swiss-UK agreement including right of market access, mutual recognition and regulatory co-operation could set a gold standard in future services agreements that could in time be rolled out to other important financial hubs. That will require a more involved regulator, the active co-operation of the Treasury and the engagement of professional bodies to allow for recognition of qualifications.

That is where DIT’s role as convenor will become so important. The Department has established a network of new trade diplomats who sit within embassies to identify market access issues, build commercial relationships and triage problems among relevant Departments. I recommend that in key services markets we add to their number representatives from our own financial regulators, copying the example of the Monetary Authority of Singapore, which has offices around the globe, in recognition of the fact that services deals are as much about regulator-to-regulator as Government-to-Government co-operation.

A gold standard financial services agreement could be complemented by gold standard FTAs with New Zealand and Australia. I have said many times that these are not the biggest markets, but in both we have willing partners who can help advance our wider global trading agenda. They have experience in big and growing Asian markets. There is complementarity of language, culture and legal systems and an appetite to co-operate on quality food production, retail, healthcare, FinTech, defence and education. Meanwhile, at the WTO we can work together to embed important work on e-commerce and reinforce the multilateral rules-based system.

Plenty of diplomatic work can be done to enhance other trading relationships without needing an immediate FTA, though FTAs can be incredibly useful in providing momentum and focus. The Minister for Trade Policy talked at the Select Committee about the staggering size of the Chinese cosmetics market, which we find hard to access due to Chinese rules that require animal testing. If work could be done to demonstrate the quality and provenance of UK goods, such additional market access could be worth in the region of $10 billion. That would overshadow the benefits of most FTAs with smaller countries.

The Institute of Directors talked of similar barriers to trade for UK engineers, architects and planners over Chinese design licences. Seemingly intractable market barriers in China can sometimes be lifted quickly in response to citizens’ concerns, particularly in areas such as food and healthcare, where a demand for high-quality international products followed a series of consumer scandals.

DIT can not only flag such barriers and work with diplomats to remove them but highlight to our domestic businesses what kinds of opportunities are out there. The Secretary of State spoke last week about how DIT has helped a Cumbrian milk producer attend a trade fair in China that opened business to him worth hundreds of thousands of pounds.

It is important that we spot legislative developments, too. To give one example, Indonesia is to demand sharia compliance of financial products by 2025. With London one of the few financial centres with expertise in the field, our insurers and financiers could steal a march in this huge market. At the latest belt and road summit in April, the Chinese state pledged to put no more capital into belt and road initiative projects, capping the level at which Chinese banks can fund each project. That change of approach could open new opportunities to UK legal advisers, financiers and construction firms.

We need to empower the Department to do even more of that work. That will require skilled personnel. I was delighted to see the launch of DIT’s new training scheme last week for trade negotiators and diplomats. We need to leave them in post long enough to develop the long-term relationships and market knowledge that reap dividends. There is currently too much churn, which is particularly problematic in markets such as China, where guanxi—relationship building with provincial governments—is key.

In advance of this debate, I was sent a briefing by the Open World Research Initiative, a collaboration between 15 UK universities, which is calling for a chief Government linguist to embed language policy across Government. That is a great idea. Technology is moving on at pace in this area, but to understand a language and its nuances is to gain deeper cultural understanding and stronger relationships in future markets of importance.

I would also like us to soup up the work of our international chambers of commerce as well as long-term, party-to-party political relationship building. I have spoken before about how good Germany is at that through its Stiftung model, which operates almost as a political diplomatic service, and its very activist chambers of commerce have presence not just in capitals but in important regional centres. We must bear in mind that some of these big Asian cities are prominent economic actors in their own right, often larger than small European countries.

Going forward, I want to see DIT work much more closely with the Foreign and Commonwealth Office and the Department for International Development to merge our international output into a coherent strategy. As my right hon. Friend the Member for Chelsea and Fulham (Greg Hands) highlights frequently, the strength of our voice on trade is fundamental to our relevance as a respected actor on the international stage.

I was pleased to see yesterday the announcement that DIT will be able to access the overseas aid budget to link our trade and aid work much more closely. In that vein, the Government should work with and challenge the City of London to become the sustainable development finance hub of choice, cementing its position as the go-to financial centre for Africa and south Asia’s gateway to global capital markets.

DIT also has a big role to play domestically. One of the problems facing UK business is not a lack of demand for their products but a reticence in bidding for international contracts and a real nervousness about exporting. DIT has been addressing that with energy and creativity, but such work is not given the prominence it deserves. The export toolkit launched last week is an attempt by the Department to give MPs responsibility for identifying businesses and projects in their constituencies that could benefit from export and inward investment opportunities.

DIT is uniquely placed to know how to make our domestic market attractive to the kind of inward investment that creates jobs, adds value and increases tax take here in the UK. Its end-to-end service for international investors is important, but we must also look at a single window for business registration and investment information. Similarly, it is vital that we keep an eye on the competition, because the trade promotion bodies of France, Germany and Spain are stepping up their game.

There is already a business environment advisory team that flags barriers on skills, migration, tax and development, and I would like to see its work given more prominence so that we can make the UK one of the most attractive, tax-competitive markets in the world. It should also look at how we give our financial regulators an explicit competition mandate to embed our dominance in financial services. Work must be done with the Home Office to break the link between long-term labour migration and mode 4, so that our desire to control immigration numbers does not hamper the ability of companies to move key personnel.

We must be equally alert to investment that is against our national interest. There is a big difference between greenfield foreign direct investment that creates jobs, embeds skills and generates long-term tax revenue in the UK and speculative investment—the use of these shores to park dodgy money or the strategic purchase of critical assets accelerated by the cheap pound.

I was horrified to see the exposé in The Sunday Times of the tier 1 investor visa, and I am similarly concerned about the security implications of allowing critical infrastructure to be foreign-owned. Our Committee is likely to recommend improved modes of data collection on FDI, so that we can better sort the wheat from the chaff and get a more accurate sense of investment trends.

We have perhaps suffered from the naivety in recent years that all inward investment is good investment, fearful that if we clamp down on flows into the UK, people will think we are closing in on ourselves. Australia and Singapore take a much more robust approach to property and infrastructure investment—particularly that affecting national security—and that does not seem to detract from their reputations as open economies. I ask that we look at the Australian model of a foreign investment review board, which rarely sees sales blocked but can add conditions to any investment, and which applies caution over foreign influence. I am pleased that the Government are already reviewing our approach via the Department for Business, Energy and Industrial Strategy White Paper on investment that was launched in July 2018, and I would be grateful if the Minister updated us on that work.

As I said in my introduction, the next 100 days will be critical in addressing some of the strategic errors made in the Brexit process over past three years, and the Department for International Trade must play a full role in that work. It is frustrating that so little progress has been made in determining the future EU-UK trading relationship, but DIT has now had three years to establish opportunities, expand networks, and increase trade expertise, so that it is ready to go. Now is the time for the Department to be unleashed so that we can draw up a trading strategy that will grow our economy, entrench our values on the world stage, and deliver exciting exporting and value-adding investment opportunities to each and every corner of our United Kingdom.