27 September 2024 – Ana Peres is a Lecturer in Law at the University of Sussex and a member of the UKTPO.
Lawyers, economists and political scientists are increasingly using a new term to frame discussions on current trade relations and policies: geoeconomics. This means that countries are intervening in strategic economic sectors not primarily for profit but to ensure autonomy, build resilient supply chains and secure access to valuable capabilities. Such approach contrasts with the ideals of free trade, market access and interdependence that shaped international trade for decades. These traditional ideals, even when supported by a so-called ‘rules-based system’, always posed challenges for developing countries to meet their objectives. So, what does geoeconomics mean for developing countries? Unfortunately, it threatens to sideline them even more.
Consider one of the main areas where geoeconomic strategies are at play: the development of clean technologies. Governments are implementing industrial policies to secure access to critical raw materials, an input for electric batteries, and to protect domestic production of electric vehicles (EVs). Such policies often require substantial subsidies. Recent discussions at the WTO Public Forum highlighted that a clear distinction between “bad” and “good” subsidies is not only desirable but essential to deal with many of the new and standing issues in the organisation. Beyond the question of their legality, we need to consider which countries have the financial resources to engage in this new wave of industrial policies – and what happens to those that do not. For instance, the UK’s former Conservative Secretary of State for Business and Trade, Kemi Badenoch MP, stated that the UK government would provide “targeted support (…) looking at what we can afford (…)”. If the UK, as a G7 economy, is concerned about affordability, developing countries face even greater challenges in this context.
An analysis of the proposed “Clean Energy Marshall Plan” suggests that a Harris administration in the US could use industrial policies to make developing countries dependent on US exports of clean technologies. Chinese foreign direct investment (FDI) to Latin America is shifting to “new infrastructure” sectors, such as energy transition. The EU signed a memorandum of understanding with Chile to promote sustainable raw materials value chains. All these developments reflect the geoeconomic trend, by prioritizing autonomy, resilience and access for wealthy countries, at the expense of those objectives for poorer countries.
Resource-rich developing countries are not defenceless in this geoeconomic world. For instance, Chile is one of the world’s largest suppliers of lithium (around 80% of all EU imports). The Chilean government’s response, creating the National Lithium Strategy to strengthen control over its reserves and maximise their benefits, offers a glimpse of one path resource-rich developing countries may follow. Similarly, Southeast Asian countries like Indonesia and Malaysia are trying to capitalise on the EV industrial policies of the US and China.
These examples show the power dynamics underlying international trade flows. While geoeconomics brings power and politics to the fore of current trade relations, it does not introduce them to the existing trade order. The process leading to the creation of the WTO and the surge of free trade agreements during the 1980s and 1990s reaffirmed the rule of law as central to promoting trade liberalisation. A rules-based framework should favour the stability and predictability of the global trading system, enabling countries to negotiate new topics and settle trade disputes. However, even in this ‘traditional’ WTO-led approach, law and power are closely linked. Restricting the role of power in trade agreements and institutions does not eliminate it from trade rules and negotiations. Developing countries have long struggled to have their voices heard in trade rulemaking and negotiations. For them, it has always been political.
The novelty of the geoeconomic framework is the recognition that economic and geopolitical powers are intertwined in policymaking. Governments are implementing policies beyond trade, covering areas like environmental protection, defence, health, and digital technologies. Geoeconomics shows how states use their economic and political power to achieve domestic goals and assert or maintain global leadership.
While geoeconomics is useful for describing the current context, it has not yet adequately addressed the position of developing countries. Like many frameworks applied to international trade, geoeconomics explains trade relations and trends from the perspective of the main players. In this case, the US, China and, to a lesser extent, the EU. Tensions between the US and China are driving a new division between allies and adversaries. This raises important questions: who decides which countries are friends or foes? Can – or should – developing countries take sides? What are the potential consequences? Could developing countries leverage the conflict between the world’s two largest economies to strengthen their positions? What will happen to developing countries that are not resource-rich? These will become defining questions for developing countries in the era of geoeconomics.
During the Cold War, the polarisation of global powers led third world nations to advocate for a New International Economic Order. They understood that their interests were sidelined in the global debate driven by ideological and political conflicts between the two superpowers. At the WTO Public Forum, the possibility of “third nations” or “middle powers” guiding multilateral trade efforts was raised, as an alternative to overcome the stalemate created by the clash between the US and China. However, such a heterogeneous group will have to find common ground if they move forward without the two biggest world economies. That is no easy task. This is why including developing countries in discussions about the geoeconomics of trade is so important today – to ensure their concerns are not overlooked or marginalised as they once again risk being caught in the middle of power struggles that threaten to leave them powerless.
Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.
Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.
Jessie Madrigal-Fletcher September 27th, 2024
Posted In: UK - Non EU, UK- EU
Tags: Geoeconomics, WTO
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23 September 2024 – Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School.
In recent weeks Sir Keir Starmer has visited Germany, France, Ireland and Italy, each in the name, he says, of turning a corner on Brexit, resetting the UK’s relationship with Europe and – most importantly – raising economic growth. The OBR estimates Brexit in its current form to be costing the UK a permanent non recoverable 4% of GDP pa.
So far, the PM’s visits to the EU have been good symbolism. Recent UK opinion polling shows increased public support for building back closer ties with the EU, reflecting that there are many in the UK, including a growing contingent of “Bregretters”, who would like to repair the economic and political damage done since 2016. On the European side the optics of welcome have been decently warm, although perhaps this is not so very surprising after almost ten years of dealing with EU-shy Conservative governments.
However, it is quite striking that, at the time of writing, Starmer has not yet made a visit to Brussels. He may be waiting for Ursula von der Leyen to launch her second term Commission. However, his absence to date has been noted at the Berlaymont and his immediate rebuff of an EU proposal for a youth mobility scheme went down badly. EU officials are reported to be asking how serious about a Brexit reset he really is. There is doubt he has a clear strategy beyond his “red lines”[1].
While the new Commission awaits final confirmation, the UK has a breathing space which it can use to clarify its own strategy. But by the time the new Commission starts to plan its five-year agenda, in early 2025, the UK needs to have put together a clear proposal for the EU to react to. To be good enough to deliver an economic upturn for Britain, it will have to be more than just a few cherry-picked ideas and restatement of what the UK doesn’t want.
But even as he enthused about a bilateral deal with Germany on his Berlin trip, Starmer doubled down on his red lines of “no single market”, “no customs union” and “no rejoining the EU within his lifetime”. If he intends to stick to these red lines, he may find they hinder his goal to boost the UK economy, a point also made by the Resolution Foundation.[2]
EU officials have always insisted that the first requirement for improved relations with the UK would be a renewal of trust, and a willingness by the UK to adhere to the commitments it made in Boris Johnson’s 2020 hurried and flawed “get Brexit done” deal – the treaty formally known as the Trade & Co-operation Agreement (TCA).
The TCA is due for its first 5 yearly review in 2026. Although the EU has repeatedly made clear that they do not want to review the body of this agreement, the treaty does contain provisions for modifying some of its rules without modifying the treaty itself or making a new one. For example, the TCA Title X provides for “Regulatory Co-operation” which would allow UK and EU regulators to discuss and agree potential areas of joint interest, with a fairly open-ended agenda, and it includes concrete provisions for cars, aviation and medicines in annexes. They could then extend the models in other areas. Similarly, the UK-EU Joint Partnership Council which oversees the treaty can agree to change the rules of origin, and has already done so for electric vehicles.
Ahead of the 2026 review the EU has made it clear that the original Barnier red line of “no cherry-picking” no longer apply. Side agreements or “mini-deals” can be signed at any time. Their youth mobility proposal[3], for now declined, was a mini-deal and they have also proposed an SPS [4] mini-deal which would allow meat, fruit and vegetables and flowers to move between the UK and the EU more quickly. To get recognition of our food safety rules we need to make binding commitments to total equivalence, (including how we check third country imports). The British ambition of a comprehensive agreement on Mutual Recognition on Conformity Assessment is unrealistic. Piece by piece might work, including rejoining EU regulatory agencies as associates, eg EFSA and EASA.[5] There is scope for the signature of new UK-EU mini-deals on a range of topics including carbon pricing, aerospace and mutual recognition of professional qualifications. These could require formal endorsement by the Council of Ministers and even possibly the European Parliament, but they are a key avenue to explore. The UK government is placing its hopes in a deal on defence and security, which, although contrary to the Conservatives’ views, Labour hopes will have the broadest economic security dimension.
The UK also has the option to voluntarily match certain EU rules, to ease the burden of compliance on UK businesses. Known as “voluntary dynamic alignment”, it could be a useful approach in principle. It could also help reduce paperwork and the number of border checks faced by UK goods going into the EU. However, this would not eliminate paperwork and checks entirely – in order to do so, we would need to rejoin the EU or at least something like the EEA. On CBAMs, UK firms are unlikely to face any charges if the UK voluntarily aligns fully with the EU. However, unless we agree to be legally bound to apply ETS rules and carbon prices virtually to the EU’s (including coverage and how we have treated third country good that may enter value chains), UK firms will be subject to the need to prove compliance. It may be that the UK way of treating electricity in the ETS might be better than the EU’s plan but this is unlikely to be worth facing the CBAM process.
Often performative divergence such as the UKCA or UK REACH regimes, in the name of “sovereignty” deliver nothing to business except regulatory duplication. The gains to admitting the need to follow the “Brussels Effect” will be at least as much domestic, simplifying business and generating certainty that is needed to restore investment. However, the EU will not automatically recognise the validity of our rule enforcement, even though we have no choice but to accept EU quality certification. An EU negotiator said to me: “We’ll be like India”, i.e. tough on the UK. And they will get to pick more cherries than the UK.
As David Henig[6] points out, there is still appetite on the EU side for a better relationship. Yet, for the UK to benefit, it will need to be prepared to negotiate in all of the above areas. As part of quickly pulling together a new strategic plan, the UK must figure out what it can offer that the EU wants. At the same time, the UK must decide on its own top aims; identify where it can make offers that cost little but will show goodwill; and consider what it is prepared to give up, even though there may be some gain from regulatory autonomy in that sphere. It will not be all or nothing, but there has to be a package.
Unfortunately, the improvements to Brexit that would make the biggest and quickest difference for the UK’s economy are the ones that are currently off-limits, behind Starmer’s red lines. This does not mean the UK can’t do anything at all. There is some low-hanging fruit, including some sort of youth mobility deal. But to make a big difference in reducing border frictions and the uncertainty created by Brexit, the UK will have to go further than Starmer is willing to admit. Making this policy flex work is going to require engaging with the public openly. He could even try one of his now-familiar messages, along the lines of “the Brexit situation was a lot worse than we thought”.
The new EU Commission will start in January 2025. By that time, it would make sense to have dispel any doubts about the UK’s commitment to improved relations, and to be ready – after considering what the UK can offer the EU – to put some attractive proposals on the table. If we take the lead and find areas of mutual interest that generate visible benefits quickly, we can create the political momentum to go further.
[1] Poltiico https://www.politico.eu/article/keir-starmer-european-union-brexit-relationship-reset/?
[2] https://www.resolutionfoundation.org/app/uploads/2024/09/Growth-Mindset.pdf
[3] See https://www.theguardian.com/world/2024/sep/20/eu-youth-mobility-proposal-uk
[4] Sanitary and Phyto Sanitary ie Food safety.
[5] European Aerospace Safety Agency, European Food Safety Authority.
[6] https://ecipe.org/wp-content/uploads/2024/09/ECI_24_PolicyBrief_17-2024_LY04.pdf
Peter Holmes would like to thank Karen Triggs for her support in creating this blog post.
Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or the UK Trade Policy Observatory.
Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.
Jessie Madrigal-Fletcher September 23rd, 2024
Posted In: UK- EU
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19 September 2024
David Henig is the Director of the UK Trade Policy Project at the European Centre for International Political Economy (ECIPE).
The Conservatives seriously proposed a Brexit with no deals with the EU. Since the UK-EU Trade and Cooperation Agreement (TCA) has been in place, the EU has said it can’t be reopened in any circumstance. Now Labour wants a reset but would prefer a quiet one that nobody really notices.
What is it about the world’s second-largest trade relationship[i] that means it is talked down consistently? Similarly, an integrated UK and EU is surely crucial for European competitiveness and security, so why does neither side see this?
Most obviously, this is the ongoing aftermath of a divorce so messy that both parties simply want to pretend everything is now fine for them. Except, geography means the relationship can’t just be ended, not to mention a billion euros of annual trade, which is rather a lot of customers dependent on governments to help them. Then there’s Northern Ireland, which has already been called the unwanted child of a Brexit split. Not to mention, shared objectives for a transition to net-zero, and of course the need to work together to defeat Russian aggression on the eastern flank.
In reality, neither the UK nor the EU have got over the split, and putting to one side protestations to the contrary, that needs to change. There are simply too many shared challenges starting with the growth that both badly need. Global Britain or an EU-Mercosur trade deal are a poor substitute for that.
This is a relationship of almost unfathomable breadth. Beyond what’s mentioned above, there’s everything to do with mobility, for work or those under 30. Negotiations over specific arrangements for Gibraltar. Cooperation over sanctions and economic security, and indeed the shared incentive of ensuring strong supply chains. Data transfers and financial services in trade, and so on.
Improving cooperation across this piece requires, more than anything, a shared understanding and trust – of which there has been little sign since 2016. However, that’s not possible until the UK and EU are honest with themselves in their own ways. For the UK, “Take Back Control” is inevitably fettered for a trading economy in an interlinked world, and for the EU, that this will be a relationship of variable institutional structures rather than contained within a single arrangement.
Of course, a reset has to start with the implementation of what has already been agreed, but it also needs much stronger political relations that derive from regular summits at the level of leaders and senior politicians, and also building on existing institutions such as the Parliamentary Assembly and Domestic Advisory Groups.
Mutual understanding would ideally lead to a joint ongoing work programme. Start with the shared interests in security and energy. The UK should align with the EU Emissions Trading Scheme and EU CBAM, and the EU should facilitate this for the energy security needs of both parties. UK stakeholders hoping to find some hitherto even better solution or EU maximalists demanding the UK aligns with everything in return should not be the decisive voices.
Such a shared programme would show that there’s an ongoing relationship and not just one shot at improvement. A single undertaking makes sense for joining or leaving the bloc, not for the complex relationship we have now. Where there are things that one side or the other wants, we will need a process to find agreed solutions, and there will be some linkages. For example, fish and Sanitary and phytosanitary measures (SPS), mobility, and regulation. It will also require working groups with suitable reporting to the political level, some of which will be simple cooperation so as not to dive straight into the complex divisive issues. There are also unilateral decisions, such as the UK joining Erasmus, and EU data adequacy, to bring considerable goodwill.
Thickening engagement can build the way towards the inevitably more difficult detailed negotiations on removing barriers to food and drink trade, which is likely to be a process more than a single event. Similarly, mutual recognition agreements around conformity assessment make sense where stakeholders of both sides agree.
All of this will need change from both sides. For the UK, it means moving into the 21st century for negotiating, away from Whitehall knows best and let’s keep secrets, towards a team approach. There always has to be a realisation that everything will be reciprocal, and the correct answer to an ask from the EU is ‘we’ll listen’. Having a central coordinating team in the Cabinet Office with political leadership is crucial.
Meanwhile, the EU has to stop treating the UK like any other neighbour, because this is arguably the most crucial relationship for both sides given an allied US turning inwards, on which the UK and EU should also cooperate. There’s also a need to move away from the simplistic statements about not reopening the TCA, this provides a perfect foundation for expanding the relationship and avoiding another Swiss-style relationship.
Commentators and stakeholders have their part to play to support a much more informed public debate recognising a relationship evolving, but where progress is possible. Equally, we need to ditch the idea that this can all be fixed with the UK joining something like the Customs Union, Single Market, or the EU since all of these will be difficult and lengthy negotiations requiring strong political support which is not currently present on either side. For stakeholders, it also means focusing on the practical.
None of this relationship deepening will happen easily. Negotiations are rarely an easy ride. Where there is so much politics, there will be constant tensions and miscommunications. We’re already seeing this over the EU ask on youth mobility. The UK media is likely to continue to be hostile, and this is all the more reason why coordinators on both sides will need regular contact.
Diplomats know the challenges, that’s why they often talk of a load-bearing structure, like negotiators are actually engineers. Perhaps that’s not the worst analogy: Brexit replaced multi-modal links with a single-lane road and rail connection. It must next be dualled and double-tracked, and there are a lot of parts to such a project, you can’t just expect the structures to support expansion.
Notwithstanding the issues, there is goodwill. There are many on both sides that would like improvement, almost certainly including Prime Minister Keir Starmer and EU President Ursula von der Leyen. That should, however, never be mistaken for the expectation of special deals.
In truth, geography requires more from the UK-EU relationship, and the most likely outcome is that it will slowly happen. This probably won’t be the dramatic single event so many want to see, but a gradual evolution to something a little better.
[i] US-EU is the world’s largest trade relationship. UK-EU and US-Canada compete as the second largest.
Disclaimer:
The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or the UK Trade Policy Observatory.
Republishing guidelines:
The UK Trade Policy Observatory believes in the free flow of information and encourages readers to cite our materials, providing due acknowledgement. For online use, this should be a link to the original resource on our website. We do not publish under a Creative Commons license. This means you CANNOT republish our articles online or in print for free.
Charlotte Humma September 19th, 2024
Posted In: Uncategorised
