Trade: the death of the FTA

By Pete North - August 29, 2020

Lately our focus on Turbulent Times has been international development. It’s not particularly topical or anything but it certainly will be soon enough. In the near future the UK is going to need a raft of its own policies when it bumps into the limitations of “free trade”.

Brexiteers tend to have only a rudimentary understanding of trade and the working assumption is that, free of the EU, we can sign free trade deals with the rest of the world. It’s true we can, but only up to a point. What hasn’t registered is that not everybody wants “free trade”, particularly developing countries. Algeria is days away from activating an EU Free Trade Agreement that many Algerians fear could hurt the country’s fledgling economy, Morocco World News reports.

The trade deal, agreed upon 15 years ago, is facing renewed scrutiny from Algerian businesses and politicians as its 1 September activation date approaches. Algeria will face a looming budget crisis when the Free Trade Agreement becomes active as tariffs on textiles, electronics, steel, and vehicles will expire. The tariffs set by the Algerian government were meant to expire three years ago, but have become an important source of income. They have become even more important in the face of economic devastation caused by the pandemic. Those opposing the deal’s implementation have cited concerns of diminishing economic sovereignty.

Being that inland revenue collection tends to be rudimentary in less-developed countries, they rely on tariffs, these being easier to collect than internal taxes. Ending these tariffs, especially now, without alternative revenue could be devastating. “Free trade” is really only effective between developed countries. There’s a reason the WTO system treats LDCs differently. One size does not fit all.

Algiers has repeatedly asked to renegotiate the terms of the agreement. It says the EU has failed to respect a part of the deal concerning the transfer of technology and the movement of people, with Algerian nationals finding it extremely difficult to obtain EU visas.

A big chunk of income for developing countries is remittances and since their goods often cannot meet the stringent standards demanded by the developed world, reciprocal free trade is of little value. Visas, therefore, are their priority in trade talks. This is something the UK will have to contend with, while having to balance its need for export markets with domestic demands to control immigration.

According to bilaterals.org, Algiers has also asked the EU to encourage European companies to invest in the country, but to little avail. The Algerian-EU partnership “did not fulfil its promises for Algeria”, said economics professor Nadji Khaoua. “The deal is not a fair one for the country, the economist contends, and opening up its markets to foreign consumer goods will do little to create an economy less dependent on oil revenues, nor will it make it more productive”.

For developing countries reliant on tariff revenue, if they are to play on the same plateau as the global north, they need to develop domestic industries and their own alternative tax base. Without inward investment to make that happen, there is little possibility of dropping tariffs. If the EU has failed to invest in the fifteen years prior, then the deal is a non-starter.

The lesson here for the UK is quite obvious. We’re going to need wholly different ideas. We need to build long term economic partnerships centred on development and investment. Our narrow fixation with FTAs will only get us so far. Moreover, Algeria won’t be the only country to rethink its trade relations in the wake of Covid. Africa is rightly suspicious of free trade at the best of times.

We take the view that if you’re not talking about aid and development in conjunction with trade, and tackling the organised crime that erodes the value of such trade, then you’re not in the game. The endless witless prattle about chlorine washed chicken is “bicycle shed syndrome”.

One suspects this much is understood to a point by way of the merger between DfID and the FCO, a wholly welcome development in our view. But the trade debate is still caught up in fashionable Brexit themes and hasn’t moved off the same handful of talking points since 2016.

Where it’s going to get particularly contentious for the UK is the issue of visas. Brexit was partly motivated by a need to bring down immigration. The issue was sensitive before Covid but now our services sector is in semi-hibernation, the aerospace industry is on its knees, and the wider economy is facing the double whammy of withdrawal from the single market, politically, offering visas is a non starter. Nobody’s hiring. Our strategy therefore will need to be development-focussed. This will somehow have to be paid for.

In a post-Covid world I rather suspect all of the established ways of doing things are going to need a rethink. It may even be that, in a year or so, nobody will be in the market for a new FTA with anyone. The emergence of partial scope deals on tariffs between the EU and the US looks like an admission of defeat, when replacing comprehensive treaties. Yet they may set the benchmark for the next decade.

For some time now we have argued that FTAs are not necessarily the way forward. They take years to negotiate, can often fail and all too often face vocal opposition on the homefront depending on who is in office at the time. It may be wiser to seek plurilateral sectoral deals or new global frameworks to enhance value chain profitability.

The FTA has long been the EU’s favoured weapon of choice being that it has the clout and the resource, and the time, but what works for the EU may not be the right approach for the UK, or even the EU in a post-Covid world. We’re going to need bankable results soon. Long procedural negotiations, with no guaranteed results, are not a gamble we can afford. We’re going to need better ideas.