International Trade Opportunities

Lord Green of Hurstpierpoint Excerpts

Thursday 7th July 2016 Lords Chamber

[Lord Green of Hurstpierpoint (Con)]

My Lords, I congratulate my noble friend Lady Mobarik on introducing a debate on a matter that is topical, critical and urgent. In fact, well before the referendum decision this was an urgent and chronic topic for us. It is the clear Achilles heel of the British economy and has been for several decades. Last year the external position of the country deteriorated to the point where the current account deficit was just shy of £100 billion and something above 5% of GNP. That is the largest since the war. The trade deficit is over 2%, which is not a record but nonetheless serious and chronic. It is worth reminding ourselves that no other developed country is in this position. The Australians have a significant deficit, but it is about 3%. The US and Canada both have deficits, but they are less than half of ours in proportion to GDP. No other major EU state faces the same challenge. Finland, Poland and France all have trade and current account deficits, but they are less than a quarter of ours as a percentage of GDP.

The trade deficit has been there almost all the time since the 1960s. Hitherto we have had no trouble financing it, but it would be folly to assume that the markets are always going to be that kind to us. As the noble Lord, Lord Stoneham, indicated in his remarks just now, the deficit is becoming more deeply rooted. Traditionally, sterling devaluation every now and then helped us out of the crisis of the time, but each sterling devaluation has had less effect than the last one. Why is that? It is partly because of short-term responses. There seems to be a tendency for export prices to be held up in the foreign currency rather than to cut them on the back of a devaluation in order to gain share. On the import side, it seems to have resulted in a short-term depression of import demand rather than real domestic import substitution. In any event, over time the growth of supply chains has reduced the impact of a sterling devaluation because our major engineering names—household brands for all of us—which export world-class products from this country find that the import component has gone up over the past 20 to 30 years from around 30% to about 70% of their output.

The point is that this is a serious challenge and has been so for a long time, and there is good reason to believe that part of our challenge is to get more British firms involved in the export markets. Compared with some of our obvious competitors across the Channel, we have a smaller proportion of businesses engaged in the export trade.

Of course, we have recently increased dramatically the scale, complexity and risk of the challenge. We have put into question our ready access to the market that takes more than 40% of our exports. As my noble friend Lord Patten said, the EU does indeed have every rational interest in a reasonable deal with the UK going forward, but it will be complex to negotiate it. We have told ourselves that other markets will be ready and eager to negotiate trade agreements with us to replace the existing 50 or so EU agreements around the world under which we currently trade. We have told ourselves, too, that in the case of the big ones currently under negotiation—the United States, Japan and India—the counterparty is not only ready and eager, but will find it easier to negotiate with us because we do not have to balance the demands of 27 other member states against our priorities.

“O brave new world

That has such people in’t”,

I am tempted to observe, because now we are on our own. We have taken the challenge, we have made the decision, and now we need to deliver on the promises.

We have given ourselves some extra degrees of freedom—that is clear—but we have undertaken grave risks. We have seen sterling fall. As of yesterday it was at its lowest level against the dollar since 1985 and against the euro since 2013. On the face of it that is good news for British exports, but on the other side we have started to see anecdotal evidence of an investment slowdown, various announcements of decisions, particularly strategic decisions, being put on hold, IPOs being pulled, and evidence that we are moving into a period of uncertainty that will affect investment. We need to keep that period of uncertainty as short as possible.

It is too early to tell, as Zhou Enlai famously said about the French Revolution, how this will all play out—but it is not too early to reflect on the policy challenges and the trade promotion imperative that we now face. I will talk briefly about three things. The first is the policy challenge vis-à-vis the EU. Participation in the single market now becomes a trade policy and negotiation question. Essentially there is a spectrum of possibilities that will have to be looked at in the coming couple of years or so. At one end we have an arrangement that looks like the EEA—essentially for access to the single market but taking the four freedoms as well and the costs of contributions to the Brussels budget. It is worth noting under that heading that being a member of the EEA does not get you inside the common external tariff of the EU and that we will face, even under that regime, new customs procedures, proof of origin rules, and so forth.

At the other end of the scale we have the WTO rules which, however, cover only goods. If we set our tariffs with the EU at zero we have to generalise those around all the other markets—and that removes bargaining chips as we go into negotiation with them. I make these points simply to indicate that life will not be easy or straightforward in these negotiations.

We can look at in-between arrangements. Switzerland has attracted a certain amount of attention in recent days. That country has dozens of agreements with the EU. Its relationship is fractious and changing. It is worth noting that it does not yet have passporting arrangements for Swiss banks in the EU, and that the Swiss have put all of that in balance by their referendum in 2014 which voted to restrict migration from the EU. The standstill arrangement on that runs out next February, so we will see how the Swiss get on.

There are other models. People talk about the Canadian arrangement: the Comprehensive Economic and Trade Agreement. That covers goods and agriculture and deals with tariffs, quotas and subsidies but does not cover services which are, as a number of speakers have already pointed out, important to us. It is also outside the customs union and would have the same effect, therefore, as being in the EEA.

Not talked about enough is the Turkish option. It is inside the customs union and can still negotiate independently with third parties. The arrangements cover only part of its economy—notably its manufacturing and processing industries—and Turkey notoriously does not have free movement of people. That is a disadvantage in their minds which, I suspect, would not be a disadvantage in the mind of the British Government. I do not know what the way forward is; I merely stress the importance of sorting out this problem as soon as we reasonably can.

As for the rest of the world, we have to negotiate with those countries that are currently covered by the EU agreement. It is probably too easy to assume that they will be happy to sign the same thing with us independently. In the case of the Canadians, for example, that was a painfully negotiated deal, involving the provinces as well as the federal Government of Canada, which makes it complex on their side as well as on ours. We will see as we get into it how well we get on with these various renegotiations.

What about those countries where no agreement exists yet—notoriously, the United States, Japan, and China, the first, second and third largest economies in the world, by the way? Negotiating TTIP at the moment feels to all concerned rather like walking through treacle and we do not know how and when we will get out the other side. We have told ourselves that they will find it much easier to negotiate with us because they do not have to deal with the requirements of 28 member states—only with us. That is true, but we need to stare one uncomfortable fact in the face: that negotiation is all about services and regulatory convergence or harmonisation. Tariffs on goods are 3% both ways, and for the most part are relatively trivial. The services that we care about, in particular in pharmaceuticals and financial services, are ones where it is a particularly difficult negotiation on their side. We would be unwise to assume that the Americans will find an agreement with the UK easy to negotiate.

We are where we are, and the question, to quote one famous Russian politician, is: what is to be done? The most obvious point is that we need a huge increase in official resources devoted to this challenge. We should see this as almost putting the country on a war footing. I am told that there are about 20 people in the trade policy division in the Department for Business, which roughly coheres with my memory of it from a couple of years back. My suggestion is that we probably need to grow that at least fivefold or maybe tenfold as quickly as possible with people who are able, and who, as rapidly as possible, will be trained in the minutiae of trade negotiations.

On the trade promotion front, we should re-look at the question of the UKTI budget. It was slightly reduced in the spending round. It would seem rational to ask ourselves whether we should not reinstate an investment in UKTI and encourage an expansion of the partnership that has been developed between UKTI and business groups around the world—in some cases it is chambers and in others British business groups in what I think is now 37 countries. I suggest that we need to enhance those, be prepared to invest in them as strategic partnerships and not see them just as contractual arrangements. In short—I am conscious that I am overrunning my time—there is a lot to be done. I look forward to hearing any comments from my noble friend the Minister on the way that we will resource this.