Government’s trade policy is holed beneath the water line

David Hannay is a member of the House of Lords and former UK ambassador to the EU and UN.

Last week saw two major developments affecting the government’s trade policy. Both were negative.

In her Mansion House speech, the prime minister for the first time admitted that the government’s decision to reject remaining in the single market or in a customs union with the EU meant that the extraordinarily complex alternative solution the UK has proposed would mean less good access to Britain’s largest export market than it currently enjoys.

On the same day, Donald Trump dashed any hopes the government might have had that a free trade agreement with the US would compensate for that loss. The president announced his intention to unilaterally impose swingeing import duties on steel and aluminium, including on imports from the US’s partners in free trade areas such as Canada.

The full significance of the Trump policy, coupled with his grossly irresponsible and misguided assertion that trade wars are a good thing and easy to win, has yet to sink in on this side of the Atlantic. If the president follows through on his intention, there will surely be retaliatory measures against US exports by some of that country’s main trading partners and allies. There will also be recourse to the dispute settlement procedures of the WTO, which could well mean collateral damage to that organisation’s capacity to sustain international trade rules should the US reject its rulings.

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Britain, as a member of the EU at least until March 2019 and as a member of the EU’s customs union for at least another two years of transition, will be on the opposing side of that trade war from the US, with whom constructing a new trade relationship has been such a key part of Theresa May’s post-Brexit narrative.

As if that is not bad enough, it seems likely that the prime minister is still understating the amount of damage that could result from the government’s preferred solution for a trade agreement with the EU – even if that solution managed to survive intact the test of negotiation with the other 27 EU members. It is not just that that preferred solution is at odds with the position likely to be endorsed within a few days by the EU27, although it certainly is. It is also the fact that the new customs arrangements it proposes are fiendishly complex and will impose considerable bureaucratic burdens on businesses and delays to the smooth functioning of highly integrated industries; and that virtually nothing will survive of the, admittedly imperfect but valuable, single market in services which make up 80% of our economy.

So, not a great week for Britain’s trade policy. One wonders how many more setbacks have to occur before the government realises that it has put all of our eggs in the wrong baskets.

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Edited by Luke Lythgoe