Cameron: Commonwealth Free Trade - First Steps

As the old saying goes, the longest of journeys begin with a single step.

The significance of this well-worn phrase hits to the point that often the magnitude of the challenge can be so overwhelming that a mental paralysis sets in. When presented with a monumental task, one forgets that a distance of either a yard or a thousand miles still requires putting one foot in front of the other in successive course.

The recent EU Referendum in the UK is very typical of the phenomenon. In the wake of the ‘Leave’ verdict, there have been a number of developments that have overloaded the body politic – the naming of a new Prime Minister and senior Cabinet members, when and how to trigger Article 50 of the Lisbon Treaty, how the negotiations with the EU proceed, the offers of free trade deals from a couple of dozen countries, the pointed comments from some Brussels officials, not to mention the protests among those who feel that the verdict could – and should – be overturned.

Of course, the biggest impact of Brexit has been the near schizophrenic reportage on its economic impact. Every magazine and broadsheet in Britain and elsewhere has spent a great deal of time churning out ‘on again, off again’ predictions of financial oblivion that were out of date before the ink dried on the broadsheets. Two months past the vote, and the consensus opinion is still attempting to find a new normal. As an editorial in the Financial Times states:

“Nearly two months after the UK voted to leave the EU, the question of how the economy would respond in the short-to-medium term remains unresolved. The one thing that seems clear is the impact on the rest of the world, which looks negligible...The UK economy may be humming along regardless of the vote, or it may be a cartoon cat that has run off a cliff but not yet perceived the abyss below. Until more data have provided guidance in this uncertain situation, policymakers should watch and wait.”1.

When all is said and done, however, a decision was made. That decision requires actions in the short, medium and long terms. A majority of Britons voted to leave the European Union. Prime Minister Theresa May has pledged that this vote will be respected.2. The vote requires the enacting of Article 50. When that occurs, both Britain and the EU will have two years to work out a new arrangement for their relations into the future. Beyond that, Britain will need to work out new relationships with other countries in order to secure its own prospects into the future.

Those are the facts of the situation. What one reads (and hears) that does not fit into this path or address it directly is merely white noise – a needless distraction from a serious and important task. Britain’s primary concerns will – and should – be what will the future relationship with the European Union post-Brexit look like, and what other trade arrangements are possible in a short time frame.

To the former, one can only look from the outside. Negotiations between nations and supranational entities behind closed doors in order to find a new ‘normal’ do not lend themselves to much in the way of outside opinion – other than a combination of speculation and wishful thinking. We know that teams of negotiators from London and Brussels will spend a great deal of time hammering out the ground rules for economic engagement between Britain and the EU for decades to come. We know that the British and European publics – and those of us in the broader world – will not know either the content or the import of the arrangement until the press conference where it is formally announced. In the case of the latter, however, there is much that can be said and suggested in the public square.

In 2005, I wrote a book advocating a Commonwealth Free Trade Agreement, or CFTA.3. As polite a hearing as I received, there was no shortage of skepticism. The prevailing view was that Britain would never leave the European Union, and that even if it did that there would be few countries interested in doing a deal with them anyway.

The numbers in the book may be a bit stale, but the trends and patterns they illustrate are still valid – in some cases even more so. As for the chief skeptical observations, Brexit became a reality on June 23rd, and one month later the Daily Express newspaper reported that 27 countries – accounting for two—thirds of global trade – had indicated their desire for trade deals with the UK.4.

Formally or informally, a CFTA is very much achievable in the long term. The inherent logic of it will make it happen, with or without pressure or lobbying. It may not be strictly a free trade agreement restricted to Commonwealth states, but Commonwealth states will have free trade with one another, either by way of bilateral agreements or as a consequence of another treaty (as in the TPP where 6 of the 12 signatories are Commonwealth jurisdictions).5.

That is tomorrow. We live in today.

In the immediate term, Britain faces the significant challenge of negotiating Brexit with the European Union, while entering into preliminary talks with one or more of the countries interested in a bilateral deal, and doing so with a bureaucracy that has not negotiated a trade deal on behalf of the UK since it joined the EEC in 1973.

There are numerous countries ready and willing to lend a hand. The governments of Canada, Australia and New Zealand (the rest of the CANZUK grouping) have offered the British their technical expertise in this regard.6. Australia has gone beyond that and is actively pushing to be the first non-EU nation to sign a free trade agreement.7. These are positive developments and further proof that both the Brexit and Commonwealth Free Trade arguments have been, and continue to be, valid.

The negotiations with Brussels will be challenging and will no doubt consume the lion’s share of resources that Whitehall can muster. Precious little will remain for negotiations outside of the EU, and yet it is only with the successful conclusion of such agreements that the British government can demonstrate that Brexit can – and will – work.

‘Quick and easy’ is rarely a good strategy for government policy – either domestic or international. Yet there is a need for the UK to target trade negotiations that present the path of least resistance and provide the greatest opportunity for success.

Luckily, there is one particular agreement that Britain can conclude in a relatively short period of time, with limited resources, which would yield immediate results. The UK could initiate a free trade agreement with Canada.

The arguments and rationale for such a move include the following:

1. It has pretty much been completed

Canada and the EU have already concluded the negotiation of the CETA and, if ratified, will create free trade conditions between Canada and Britain until such time as the formal departure is completed.8. If Britain and Canada operate their bilateral trade relations according to the rules set out by CETA, there will be a certain amount of ‘conditioning’ that will take place. That is, trade will take place under a particular set of rules, develop and conform around them. CETA can serve as a ‘template’ for a Canada-UK treaty, whereby negotiations can focus chiefly on what both parties wish to amend or omit, rather than recreating a treaty from scratch.

2. It may be in place even before Brexit is concluded

If the ratification of CETA proceeds and the treaty is enacted before the Article 50 process is concluded, a state of free trade will exist between Canada and the UK. It will continue for as long as it takes for the process to conclude. While the treaty specifies a period not to exceed two years, there are sub-clauses that allow for an extension of this period by mutual consent.

3. It is in Britain’s interest

Canada represents an important market for Britain, as a G7 economy, as a Commonwealth member, and as an entry point to NAFTA. While a free trade agreement with the United States, or a formal entry into NAFTA, would be of immense benefit to the UK, it will take time. ‘Immediate priority’ is not synonymous with ‘immediate result’. Even under the best conditions, such as the ‘fast track’ authority a US President has for negotiating deals – those deals still require Congressional approval.

Consider the experience of the Australia - US free trade agreement. Even though President George W. Bush had ‘fast track’ authority to negotiate the deal, the treaty still needed passage by the US Senate. According to Congressional Quarterly in 2004:

“In exchange for the promise of expedited action, the administration was required to consult with Congress and keep the appropriate committees informed as it negotiated the pact and wrote the bill. As part of that process, both chambers held informal “mock” markups to weigh in on the draft bill before it was formally submitted.

The House Ways and Means Committee approved the draft without amendment June 23, but the Senate Finance Committee ran into trouble that reflected concerns over the beef and dairy provisions.

On June 23, the committee narrowly adopted an amendment by , D-N.D., to make it more difficult for the president to waive a mechanism in the pact that was supposed to protect the U.S. beef industry from import surges. Olympia J. Snowe of Maine was the only Republican to support the amendment, giving Conrad a 11-10 majority. Finance Chairman , R-Iowa, issued a statement calling the amendment “entirely unnecessary” and unconstitutional because it would violate a Supreme Court ruling against “legislative vetoes” — provisions that would allow one or both chambers of Congress to block actions of the executive branch.

The following day, the committee rejected the draft, 7-14. The vote was mainly a sign of displeasure with the Conrad amendment, but Snowe joined out of concern that even small increases in dairy imports could be detrimental to some dairy producers in her state. Conrad maintained that the trade agreement was designed more to reward Australia for supporting the U.S.-led war in Iraq than to open markets to U.S. products — an assertion flatly denied by the USTR, which said the agreement offered significant new export opportunities for U.S. manufacturers.”9.

This was the experience of Australia – also an English-speaking Commonwealth nation and a long-time stalwart ally. The benefit of the American system is that 398 dairy farmers in Maine can summon the political influence to delay and/or amend a trade treaty with a major economy and ally. The downside, ironically, is that 398 dairy farmers in Maine can summon the political influence to delay and/or amend a trade treaty with a major economy and ally.

A UK-US deal will take time – and a lot of it. Britain might move to the front of the queue, but it is a slow moving one.

4. It is in Canada’s interest

Canada also has a clear interest in such an undertaking. In 2015, roughly 43 percent of Canada’s exports to the European Union went specifically to the UK. 10. In many ways, CETA is more of a free trade deal with Britain than the EU. Had Britain voted to stay in the EU, it is likely that the ‘Commonwealth Effect’ (Lundan and Jones: 2001) 11., the attributes identified by Harvard University’s Jeffrey Frankel in his research on gravity models for trade 12., combined with free trade access would have made those percentages even more dramatic.

A CETA devoid of Britain, however, is an agreement significantly devalued for Canadian manufacturers and exporters. It is an agreement that is automatically worth 43 percent less to Canada the moment that the Article 50 process has been completed. While CETA will certainly help to encourage and promote trade between Canada and the remaining EU member states, we must acknowledge that those increases are unlikely to compensate for such a loss.

Negotiating a complimentary successor agreement to CETA with Britain will provide an ‘insurance policy’ for Canada in its overall European trade.

The Way Forward:

Seven months from now, trade ministers from Commonwealth member states will be gathering in London. 13. Those who would be tasked with leading the negotiations suggested above will be in the same room, in the same place, at the same time. It is the moment to seize the opportunity.

At this conference, both Canadian International Trade Minister Chrystia Freeland and UK International Trade Minister Liam Fox should be given the latitude by Prime Ministers May and Trudeau to commit to private talks with a small team of ‘sherpas’. Those negotiators would, in turn, use the CETA draft as a starting point and focus only on those issues where some change is desired. They should set for themselves a time horizon of no more than one year – six months to finalize, and six months to be ratification ready.

The new Canada-UK treaty would then be given a date to come into effect that would be within two weeks of the conclusion of the Article 50 process and the ratification of a new UK-EU agreement.

Once concluded, there may be opportunity to find a way of harmonizing the terms of a Canada-UK agreement with the one governing trade between Australia and New Zealand (ANZCERTA). Less formal talks on this initiative could also take place this March among the CANZUK countries, with an agreement in principal to begin a more formalized process once the Canadian and EU agreements have been completed. Both ANZCERTA and CETA are known quantities, so there would be no reason why this stage of talks would not conclude in a short period of time.

This could, conceivably, allow for the ratification and implementation of a CANZUK Free Trade Agreement – and the nucleus of a Commonwealth Free Trade Agreement - before the end of 2020 – four years from now.

Seizing the Opportunity:

There is a Japanese proverb that states that “Vision without action is a daydream. Action without vision is a nightmare.”

Those who led Britain’s campaign to leave the European Union do have a vision of a nation that can prosper under the principles of political independence and economic cooperation. In 2014, the Institute of Economic Affairs awarded its Brexit Prize to proposals that not only envisioned a post-EU Britain, but detailed how it could be successfully done. Among the prize finalists was the contribution of my colleague, Commonwealth Exchange co-founder and Executive Director Tim Hewish, as well as that of my CANZUK Uniting colleague Iain Murray (with Rory Broomfield).14.

The vision has always been there, and for many the desire to act. The referendum of June 23rd, 2016 gave that vision and desire to act the mandate it needed to proceed.

Canada also has a crucial role - to take complimentary action to ensure this vision becomes a reality – not only to support an important and trusted ally, but to enhance its own economic and political opportunities.

In doing so, both nations can lay the cornerstone of a much larger trading arrangement that can become the foundation of a ‘new globalization’ – one that respects national sovereignty, promotes not just free trade, but fair trade, and gives an entry point for smaller and developing democracies to connect to the global economy.

That may seem unlikely at the moment. Then again, what seemed to be an unlikelihood a decade ago is the reality we are living right now.

References:

1. FT View, “Britain’s economy after the Brexit vote is an enigma,” 2016 August 19 http://www.ft.com/cms/s/0/3dba0c4e-6619-11e6-a08a-c7ac04ef00aa.html#axzz4I5ts3RIQ

2. Cowburn, Ashley, "Theresa May says 'Brexit means Brexit' and there will be no attempt to remain inside EU" The Independent, 2016 July 11, http://www.independent.co.uk/news/uk/politics/theresa-may-brexit-means-brexit-conservative-leadership-no-attempt-remain-inside-eu-leave-europe-a7130596.html

3. Cameron, Brent H., “The Case for Commonwealth Free Trade: Options for a New Globalization,” (Trafford Publishing: 2005) https://www.amazon.ca/Case-Commonwealth-Free-Trade/dp/1412042771

4. Maddox, David, “Brexit Boom continues: Now 27 countries around the world want trade deal with UK”, Daily Express, 2015 July 30, downloaded 2016 August 06, http://www.express.co.uk/news/politics/694787/BREXIT-BOOM-27-countries-around-world-want-trade-deal-UK

5. Commonwealth jurisdictions included in the proposed Trans-Pacific Partnership agreement are: Australia, Brunei, Canada, Malaysia, New Zealand, and Singapore

6. “NZ mulls Australian trade advance with UK,” Newshub.co.nz, 2016 September 04, (downloaded 2016 September 13) http://www.newshub.co.nz/politics/nz-mulls-australian-trade-advance-with-uk-2016090418

7. Ross, Tim and Swinford, Steven, “G20: Theresa May in talks over a free trade deal with Australia after Brexit,” The Telegraph, 2016 September 04 (downloaded 2016 September 13) http://www.telegraph.co.uk/news/2016/09/03/g20-theresa-may-in-talks-over-a-free-trade-deal-with-australia-a/

8. Blatchford, Andy “Canada-EU free trade deal could take effect next year, feds say”, Toronto Star, 2016 February 29 https://www.thestar.com/news/canada/2016/02/29/canada-eu-free-trade-deal-could-take-effect-next-year-feds-say.html

9. "Australia Trade Pact Endorsed." In CQ Almanac 2004, 60th ed., 15-3-15-4. Washington, DC: Congressional Quarterly, 2005. http://library.cqpress.com/cqalmanac/cqal04-836-24357-1084762.

10. “Imports, exports and trade balance of goods on a balance-of-payments basis, by country or country grouping ,” Statistics Canada, downloaded 2016 August 13 http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gblec02a-eng.htm

11. Lundan, Sarianna M. and Jones, Geoffrey, “The 'Commonwealth Effect' and the Process of Internationalisation,” in The World Economy 24 (1), (London: Blackwell Publishing, January, 2001), 99-118. http://onlinelibrary.wiley.com/doi/10.1111/1467-9701.00345/full

12. Frankel, Jeffrey A., “Assessing the Efficiency Gains from Further Liberalization,” John F. Kennedy School of Government, Harvard University, Faculty Research Working Papers Series, RWP01-030, December, 2000.

13. “Commonwealth Trade Ministers Meeting to be held in London in March 2017", Commonwealth Enterprise and Investment Council (CWEIC), downloaded 2016 August 20, http://www.cweic.org/commonwealth-trade-ministers-meeting-to-be-held-in-london-in-march-2017/

14. Rory Broomfield and Iain Murray, Tim Hewish, Ben Clement, Prof. Stephen Bush and Daniel Pycock, “Brexit Prize: Final shortlisted entries,” Institute of Economic Affairs, 8 Apr 2014 http://www.iea.org.uk/publications/research/brexit-prize-final-shortlisted-entries

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