What will happen to world trade after Brexit?
The fate of Brexit is uncertain, but if the UK were to leave the European Union without a deal it would automatically fall back on World Trade Organization rules. Would this be such a bad thing? Tim Harcourt, the J.W. Nevile fellow at UNSW Business School, is a trade expert and he spoke with Julian Lorkin for BusinessThink .
Tim Harcourt: I think it’s a bit too early to drink to Brexit, isn’t it, because we don’t know whether it’s really ready for closing time yet. But it’s been interesting, hasn’t it, because in some ways, when they made the referendum, when David Cameron called the referendum, the people made a decision. Three years on, we haven’t got one.
BusinessThink: Exactly. They seem to have been in some sort of Augustinian form of purgatory for the past three years while the deadline has been extended and extended. And everyone’s wondering if it will ever actually happen.
Harcourt: Well, amazingly, when we were filming in the UK, I interviewed Alexander Downer, who was High Commissioner at the time, and the South Australian Agent General, Bill Muirhead. And they both said, “Well, we might … it might not happen”. And they were right, in a sense. And I guess people voted for Brexit – 'we want to be out of the European Union' – but the leave campaign, spearhead by Boris Johnston, now the Prime Minister, hadn’t really put up a detailed plan of how.
It’s a bit like if Australia voted for a republic and then people said, “Well, what sort of a republic do you want?” You almost need another referendum to go through the detail. And I think that’s where the stalemate’s been between people wanting to leave the European Union, whatever that means, and the actual detail of are you leaving a customs union? Are you still privy to European law? How does it all work? The complications with Northern Ireland and the Republic and so on.
So I think it was a lot harder than when people were putting something on a ballot paper.
BusinessThink: Well, isn’t that the problem with Boris’s deal at the moment, in that we seem to have a sort of agreement to leave but no deal on what happens with trade afterwards. And that’s sort of the … well, you could look at it as the glass half full – all right, there’s a deal – or a glass half empty of, all right then, are we going to get the hangover after Brexit?
Harcourt: I think in some ways it would be an interim deal because you would have two years to negotiate it, otherwise you go to a WTO term. So in some ways it is a deal, but it’s an interim deal and they’d still have to work out the details.
Probably the big breakthrough that Boris brought together that his predecessor Theresa May couldn’t is that he came up with a solution for Northern Ireland and Ireland. Whereas Theresa May did have a border in there, and the backstop, which would have meant no one really left Europe at all, while Boris has the Irish Sea. So that’s quite a big change.
BusinessThink: It is. But throughout this whole discussion many people may be wondering why a WTO deal would be so bad? Now, I’ve seen forecasts saying GDP would fall by 8% if there was a hard Brexit and it went on to WTO terms. But why is trade under those terms so bad for a large country?
Harcourt: Well, Australia has WTO terms. I mean, we have some free trade agreements in the Asia-Pacific and Chile and so on, but otherwise we go with WTO terms. So it’s not this … I mean, the language of it – crash out, off a cliff – it is exaggerated. Sure there would be disruption, but it’s not crashing; it’s just a change in your trading arrangements.
BusinessThink: And let’s face it, it’s going to be a country of 70 million people that’s still there. People still need to eat, they still need to exist, and there’s still going to be money there in the economy. So maybe this is a question of the markets crying into their beer far too early when they’ve just no idea what will happen.
Harcourt: Well, people have exaggerated the forecasts, and even the Bank of England ran 'project fear' during the campaign. And when you think about it, the British set up the world trading system through the empire and imperial preference, the system which we’ve got today. So they do know how to trade. And in some ways, I think Australia’s been let off the hook because the Brits have been so tied up in Europe and Brexit negotiations, we’ve been waltzing around Japan and Korea and China and India and ASEAN doing very nicely, thanks very much, without any British competitors.
BusinessThink: Well, isn’t this a fantastic time because we’ve got all the discussions about the US and China and their trade negotiations. You’re right – Australia can sail in and mop up trade deals while all the attention has been elsewhere. What is actually going to be the impact then when we get to the end of this? Is Australia going to be sitting pretty?
Harcourt: Well, it’s interesting with Trump and China and the other trading partners because, as a candidate, Trump did campaign on protectionism, and he did campaign on this idea that “I’m a businessman. The previous administrations have done bad deals. I’m gonna rip them up and start again.” And at first I thought that he was just going to put out a few tweets. When a few American companies decided to stay in Ohio or Wisconsin he’d claim victory. But he’s actually been quite fair dinkum. He’s actually done what he said on tariffs. And in some ways, for Australia, no one wants a trade war. As a small open economy we would be big losers in it. We don’t want the US and China to do too well together because if they do some sweetheart deal and cut Australia out of the market, that’s really bad for us.
So the catastrophic situation for Australia will be US/China trade tensions continuing, all-out trade war, or a sweetheart deal. We sort of want some competitive tension in some ways.
BusinessThink: That sort of Goldilocks situation, in the middle, where the glass is sort of just the right size – not a schooner or a midi ...
Harcourt: But a cold one.
BusinessThink: Exactly. That’s very important. Trump has argued that trade wars are easy to win. It now almost looks as if he was right because he seems to be winning that trade war.
Harcourt: Donald Trump thinks that trade is [getting] lots of exports out without any imports in, that’s a win. But that’s not how economies work. You want exports and imports to move together. I mean, 90% of Australian exporters are also importers. So his view of wars is actually not right. You want trade to flow both ways.
I think his real issue with China is with things like intellectual property – you know, ripping off ideas, China’s status as a developing economy and getting concessions in the world trading system. So I think in some ways people like what’s Trump’s doing because he’s pushing China back and calling their bluff a bit more. And I think Brazil and the European Union, Japan, are sitting back going, “Go Donald”, because they’ve been wanting to do this also to China for a long time.
BusinessThink: Just indeed as Brussels seemed to push the UK too hard. A lot of this seems to be rhetoric, a lot of experimentation, let’s put this policy out there and see if it flies. But there doesn’t actually seem to be any hard agreements, which is what the world really seems to need, from what you’re saying, all those free trade agreements.
Harcourt: Well, that’s right. If the WTO’s as dead as a Doha and you don’t have a multilateral trade system functioning, you have to have bilateral trade agreements, even though they’re not first-best.
But I’ve got to say, you’re right about Europe. In some ways Europe does not want … I mean, they want to push Britain hard because they don’t want everyone leaving the European project, but they don’t want to push them too hard because they’ll put both the UK and the EU into recession. And you’ve got to remember, 90% of world growth is outside the Eurozone, so there are plenty of places in the world for Britain to go if the Europeans want to really squeeze them to the pipsqueak.
So I don’t think it’s a good idea for the Europeans to go too hard on the UK. And I’ve got to say, the European Union started as a great project – Germany and France didn’t want to go to war against each other, they had a customs union[and] reduced trade barriers. But [when] you bring in a currency, a common monetary policy, common foreign policy, it’s just too much with 27 countries. How can you manage that? In Australia we struggle with Tasmania and Western Australia at Budget time with the Grants Commission. Imagine trying to do that in Europe.
BusinessThink: So gazing into my schooner glass and pretending it’s a crystal ball, in 10 years’ time are we just going to be laughing about this saying, it was a difficult time but in the end the world turned out all right?
Harcourt: We’re not going to be laughing about it. It will definitely have some impact. But we will probably think more carefully about how you do a referendum. I think David Cameron is going to come out a lot worse in this than Theresa May, or Boris Johnston for that matter. And at the end of the day I think sovereign parliaments have got to make the decision based on the will of the people, not some superstate. And I think that’s the lesson we’ll learn.
And probably for Australia, I mean, it’s amazing that we have a head of state, the Queen, of Australia, whose son, Prince Andrew, was going around as the UK’s trade advocate competing against Australia in China. I mean, for Australia we’ve got to think why do we have the British crown as our head of state competing against us in trade terms? Isn’t it surely in the Asian century important for our head of state to look after us?
BusinessThink: Exactly. But at least Australia’s got one recent victory out of the whole Brexit mess, which is Australian passport holders can use the UK passport queue at Heathrow. That’s one thing people have been waiting for ever since about 1973.
Harcourt: Yeah, you’re quite right. People of my parents’ generation, who of course would go through the Commonwealth citizens’ queue at Heathrow and be able to vote in elections – you know, vote early, vote often my dad used to say – they got very upset when suddenly the French and the Germans, all these people they fought the war against, were getting on the queue quicker. So we’ll return to the status quo.
And also with working holidays, I think this idea that young Australians go to London to get work in their twenties, that will continue, and it will be easier for them. And when you look at small businesses, 6000 are based in the UK compared with 3000 in Germany, and even less in France and Holland and Italy. So the UK’s still going to be a very important focus for young Australians working, for small businesses, for investment. Brexit or not, the UK’s basically where we’re still going.