Is it time for the UK to have its own trade policy?

In many respects, the UK is well placed to benefit from 'globalisation', namely the integration of the world's economies as communications improve and trade barriers are reduced. In many respects, the UK is well placed to benefit from 'globalisation', namely the integration of the world's economies as communications improve and trade barriers are reduced. We have the advantages of the English language and close cultural links with many of the rising economies; we do not have bloated manufacturing or agricultural industries vulnerable to overseas competition; and we have a political consensus amongst the major parties that free trade is to our benefit.

For this reason, the failure of the Doha round of the World Trade Organisation ("WTO") in July is seriously bad news, even though it received little publicity. The WTO provides a multilateral framework for its 149 members to remove trade barriers, whether import tariffs and quotas or subsidies for domestic production, and provides an adjudication mechanism to ensure fair play.

In its 58 years history (the WTO was previously the General Agreement on Trade and Tariffs), it has moved slowly and progress has rarely been smooth, but the refusal of the WTO countries to reach agreement constitutes its worst failure. Given that the US President's Congressional mandate to enter into a new trade agreement will expire shortly, the prospects for success are grim.

What went wrong at the WTO?

Why did this happen? The key issue was agriculture. The details of the respective negotiating positions of the parties is fiendishly complex but, in essence, the EU blames the US for failing to offer more by way of cuts to agricultural subsidies and the US blames the EU for failing to offer to reduce agricultural tariffs.

There is no doubt that both could have done more, but it worth noting that OECD figures show that EU farmers are subsidised to much greater extent than their American counterparts. And, as David Cameron made clear in the House of Commons on 28 June 2006, "although our headline offer appears to be a 39% cut in tariffs there are concerns that when it is applied in practice it means a lot less. In fact one estimate based on figures from economists at the World Bank is that it would effectively mean an average of just a 1% cut". When David Cameron put to the Prime Minister the view that this was "totally inadequate", Tony Blair agreed.

There is agreement in the UK that we should have offered more but the problem is that UK trade policy is not determined by the UK Government but by the European Council of Ministers and the European Commission. And, as recent events have made clear, the EU institutions do not share our enthusiasm for open markets.

Why didn't the EU do more? Tempting though it is to blame everything on the EU's trade commissioner, Peter Mandelson, who conducted the negotiations, his hands were almost certainly tied by the French Government determined to protect their farmers.

Why does it matter?

Does the failure of the Doha round matter? Yes and for three reasons.

First, the benefits of further trade liberalisation for the UK. There is overwhelming evidence so show that trade creates greater economic efficiency and, therefore, wealth.

The reduction in tariffs would be particularly advantageous to the UK in that we import more agricultural produce from outside the EU than all other European countries and, as a consequence, pay 43% of all the EU tariffs levied on imported agricultural products - as much as France, Germany and Belgium combined. The higher prices as a consequence of tariffs hit the poor the hardest, given that they spend proportionately more on items such as food and clothes.

Second, the benefits of further trade liberalisation for the developing world. For example, one World Bank model has shown that a reduction in tariffs could take 140 million people out of poverty. If developing countries are to develop, access to the markets of the developed world will be essential. The current policies of the developed world prevent this from happening and the Doha round should have done something about this.

Third, the Doha failure will weaken the credibility of the WTO. At best, this might mean an indefinite delay until another multilateral trade round is agreed. At worst, major countries may refuse to accept the terms of previous WTO trade rounds, such as the dispute settlement system, and we could return to the protectionist policies of the 1930s.

Could the UK have done better?

Would it have made any difference if the UK had its own trade policy? Perhaps.

Those arguing for the status quo make three arguments in favour of the EU representing its 25 member states at WTO negotiations. First, the EU has much greater influence collectively than the member states would have individually. True, although when this influence is used in a manner which is opposed to the interests of the UK, that is not such a good thing.

Second, at a practical level, it is easier to reach agreement when there are fewer participants. By the EU speaking as one, this effectively reduces the number of participants from 149 to 125. A reasonable point, but hardly a clinching argument.

The third and most persuasive argument is that, even if the UK had a separate voice, the EU (or, to be precise, France) would still have a veto - a WTO trade round requires unanimity. At least with the EU, the likes of France might be required to compromise in the Council of Ministers when setting out the Commission's mandate and, in practice, a further compromise may be made by the Commission at the final negotiations. Certainly, some argue that this happened during the final stages of the previous trade round, the Uruguay round, although this has not been the Doha experience. The counter argument is that France is currently able to hide behind the relative might of the EU and, if isolated, would be forced to be more flexible.

A brave new world?

In any event, any immediate progress in reducing trade barriers will have to be undertaken through bilateral agreements. This is far from ideal in that bilateral agreements increase complexity and can lead to competing trading blocs. It also tends to disadvantage developing countries which are usually in relatively weak negotiating positions. But, given the WTO failure, there is no other option.

Again, bilateral trade agreements are negotiated at an EU level and many are already in existence. The existing agreements also reveal how EU trade policy disadvantages the UK in that there are only nine WTO countries with which the EU has never considered preferential trading agreements and six are members of the Anglosphere and countries which are traditionally major trading partners of the UK - Australia, Canada, New Zealand, Singapore, the US and Hong Kong.

How successful will the EU be in negotiating bilateral agreements? It is difficult to be optimistic. The protectionist instincts of some member states will be to the fore. Whereas many in the UK want to look outward to a wider world, too many continental politicians still look inwards to a Fortress Europe. In circumstances where it is no longer imperative to keep the French on board (as, arguably, might be the case with multilateral agreements) why pursue the EU approach?

The remarks of Bryan Sanderson, co-chairman of the Government's Asia Task Force, deserve close attention. Mr Sanderson, a former supporter of Britain in Europe, was asked about progress in reaching a bilateral agreement with India, likely to be one of the two economic superpowers which will emerge in the 21st century. He argued that "the pace at which this moves when it has to go through the EU is glacial in comparison with the speed with which bilateral deals are being done by other countries".

If a committed Europhile has reached this conclusion, it is time we started to consider our options seriously. The difficulty is that the Common Commercial Policy is a central part of our membership of the EU. The EU is a customs union and not a free trade area, like NAFTA, where its members are able to negotiate external trade agreements in their own right (Mexico, for example, has a bilateral agreement with the EU). But in considering how our relationship with the EU should evolve, the argument for flexibility in trade is one that must be made. Even a debate on the subject may help put pressure on those EU states which have done so much to prevent the Doha round succeeding.

In an era of bilateral, rather than multilateral, trade agreements, is it in our interests that France continues to have a veto on our external trading relationships? If we had our own trade policy, could we do more to enable developing countries to export to us and help make poverty history? By allowing cheaper imports of clothes and food, could we do more to help the poorest in our society? Is it not time for the UK to have its own trade policy?