The Transatlantic trade deal will not create export-led growth
The Conservative Party’s general election manifesto could not have been clearer:
A sustainable recovery must be driven by growth in exports’.
A preceding speech by George Osborne specified ‘net exports’, explaining that rising exports had to be matched by falling imports, as Britain once again became a nation of ‘makers’ rather than simply consumers.
Yet the data on Britain’s trading position since the coalition government took office is equally clear: the trade deficit is getting worse rather than better.
In the immediate post-war era, the UK’s current account alternated between small deficits and small surpluses. Since 1984, however, the UK has run a current account deficit every single year, and deficits have grown in magnitude. In 2012 it stood at more than £59 billion, almost 4 per cent of GDP – the largest deficit since 1989.
From 1997 to 2009, the situation improved, as the continuing decline of manufacturing was to some extent been compensated by the increasing tradeability of financial services. The average annual deficit was around 1.8 per cent of GDP.
From 2010 to 2012, the average deficit increased again to 2.7 per cent. The trade balance is the chief component of the current account deficit. This stood in 2012 at almost £34 billion, or more than 2 per cent of GDP.
GDP data shows that the trade balance has improved slightly in 2013, as exports increase. However, the increase is largely in line with the overall increase in GDP, with exports accounting for no greater a portion of GDP than in 2010, 2011 or 2012.
This limited improvement has been assisted by sterling depreciation, so our exports are cheaper – but this trend is actually quite worrying, insofar that it is driven by lower inflows of capital into the British economy from abroad.
Clearly, the recovery is not being led by exports. Furthermore, there has been no rebalancing within exports away from financial services and towards manufacturing. Financial services represent less than 10 per cent of the UK’s GVA, but almost a quarter of all exports.
This is where the Transatlantic Trade and Investment Partnership (TTIP) comes in. TTIP is a hugely ambitious free trade deal between the United States and the European Union. The US is Britain’s most import export destination, and indeed our second biggest source of imports (just behind Germany, and just ahead of China and the Netherlands).
The deal will virtually eliminate tariff barriers between the US and the EU. But most of the benefits lie in eliminating ‘non-tariff barriers’: the rules and regulations that those wishing to sell to or invest in other countries must abide by. Depending on the extent of the final agreement, the deal could lead to an increase in between 0.3% and 0.7% of GDP for the UK.
However, I believe most of this benefit will not be realised, and indeed may have been miscalculated. Even if it were realised, it would not represent a rebalancing towards export-led growth.
TTIP has attracted a little controversy recently due to the implications of seeking to eliminate non-tariff barriers – in other words, harmonise regulatory practices between jurisdictions. TTIP would not only require national governments to alter legislation to conform to the agreement, they would also have to compensate any company who successfully argued their ability to operate freely in other countries was being impeded by excessive regulation.
Compensation would be agreed by investor-state dispute settlement mechanisms: shadowy, quasi-judicial bodies which meet in secret and are not led by an independent judiciary. Such mechanisms are already a feature of many trade deals between developed and developing countries. George Monbiot of the Guardian has understandably labelled these aspects of the deal ‘a full-frontal assault on democracy’.
But the faulty economics of the agreement are just as interesting. Firstly, Britain already has a very liberal regime in terms of openness to American firms. This is why our European partners stand to benefit much more than we will. It is acknowledged research for the Department of Business, Innovation and Skills (BIS) that harmonisation between the US and continental Europe will actually divert trade away from Britain.
Secondly, in reaching the estimated benefit of 0.3%-0.7% of GDP, the BIS research appears to take no account of the negative economic impact of additional imports from the US. Exporting to the US will be easier for Britain – and exporting to Britain will be easier for the US. Clearly there will be a short-term economic benefit arising from cheaper American imports; but there may also be a longer-term impact on skills and investment in Britain if our producers suffer as a result.
Thirdly, the estimation of the cost of non-tariff barriers is actually quite unscientific, and is based largely on asking firms about the extent of these expenses. Invariably firms will exaggerate the cost of regulatory compliance. I think it is worth reproducing in full a crucial footnote from the BIS research (readers should feel free to skip ahead, and take my word for it that the estimate is somewhat less than robust, but this passage provides a wonderful insight into the delusions of neoclassical economics):
In order to estimate the ad-valorem NTBs and to quantify to what extent those are removable between the two economies, the Ecorys study (2009) undertook a survey as a first step. The survey was conducted on EU and US firms, in which they were asked if they were facing NTBs. If NTBs were identified, companies were asked about the importance of such barriers. The survey answers were then calculated on a 0 to 100 scale, with 0 indicating that there was no regulatory divergence or any type of non-tariff measure and 100 meaning there were prohibitively high NTBs and levels of regulatory divergence. The business survey restrictiveness indicators were then cross-checked against OECD (2007) restrictiveness indicators and against the Product Market Regulation indexes. For the service sectors the combination of the OECD restrictiveness indicators and the survey results were used. The acquired survey data, was then used on a gravity model to estimate the corresponding ad-valorem equivalents of NTBs. On that basis Ecorys (2009) reached cost esimates of existing NTBs for traders in percentage, which can be interpreted similarly to ad-valorem tariffs.
I have no problem with this approach as a purely academic endeavour. But to use it as the basis for creating costs estimates for NTBs between several enormous economies is problematic. To justify certain policy prescriptions based on these estimates is unbelievably hubristic.
Clearly, after making the case that regulatory harmonisation is a necessity, the argument that things like employment protection and even tax regimes must also be harmonised (i.e. levelled down) is not very far behind. While Britain has a more liberal business environment than continental Europe, for the most part, we still have some way to go to match the United States.
Increased investment in new technology and the UK manufacturing base is the surest path to export-led growth; deregulation will, at best, provide a temporary boost while exacerbating long-term structural defects in the British economy.