We keep waiting for white smoke from the Brexit negotiation rooms. But the signals from the EU-UK talks are now that the parties have reached an understanding that regulatory divergence — where one party adopts laxer rules than the other on the environment, social and labour issues, or state subsidies — will be managed by the option to retaliate with tariffs to avoid being undercut by a race to the bottom. The technical talks are focused on whether this can be turned into concrete enough procedures that both sides are willing to sign up to — how to “future-proof fair competition”, in the words of European Commission president Ursula von der Leyen.
This is good news: we are now in “split the difference” territory rather than irreconcilable disagreements on principles. That is where negotiations can succeed. It is also why fish, despite the direct conflict of the two sides’ interests, will not be what prevents a deal from being agreed.
Of course, things can still go wrong. Even high-placed EU diplomats now seem only vaguely acquainted with what precisely is going on at the negotiating table. We will just have to see; but I stick to my view that a deal will happen, and it will largely happen because Prime Minister Boris Johnson will make the required concessions while declaring at home that he made the EU back down.
If the most important action has been on the EU’s level playing field demands, what is the reason for this? Reactions to the EU’s focus on protecting against British deregulation have ranged from jingoistic (“they don’t get that we want sovereignty”) to playing the victim (“punishment tariffs”) or patronising Europe (“they are too defensive about their single market”). We should do better. It is crucial to understand the rationale for insisting on level playing field rules in trade deals because it is going to become an increasingly common component of trade liberalisation worldwide.
The reason, as Spain’s foreign minister Arancha González has pointed out, is that trade deals are not vehicles for independence, but frameworks to manage interdependence. And this interdependence is intensifying in two ways. One is that as trade evolves towards services and more sophisticated goods, the product you trade can no longer be separated from how it is produced: financial services and personal data are just two examples of how the quality of the product you receive (the risk to your finances or your privacy, say) depends fundamentally on how the service is regulated in another country.
The other is that we increasingly understand the difference between globalisation and deregulation. To be an economic liberal internationalist is to promote cross-border economic exchange where everyone pursues the activity they can do best. It is not to accept that production is moved purely in order to circumvent the rules that express democratic preferences over how workers should be treated, whether producers may pollute, or how states subsidise companies to tilt the playing field in their favour.
In one sense, it is “very simple” as von der Leyen put it to the European parliament on Wednesday: it is about making trade liberalisation compatible with “fair competition on our own market”. The same can be said for other forms of globalisation: flows of capital or people should be encouraged, but not serve as means to circumvent rules for how we govern our economies.
In practice, of course, there are a lot of fine lines to draw. But this new, richer view of globalisation is not going to go away — indeed it is the reason why globalisation will continue, but take on a more overtly political form.
The EU’s insistence on an ability to withdraw trade privileges from trading partners going by sufficiently different rules is not something unique to the talks with the UK. Something like this has already existed in the EEA agreement for a good quarter of a century.
It could be said that the EEA is special: it is expressly designed as a framework for deep and evolving economic integration between trading partners whose intention is to play by a single set of rules. The economic logic of this is that of free trade: different rules create frictions for cross-border exchange. However, few if any other trading partners in the world are as committed to rule-sharing as the EU and its Efta partners.
But more recently, the EU has become more willing to use its heft to condition trade with other partners, too, on their willingness to adopt rules to its satisfaction. The (still unratified) free trade agreement with Mercosur is the clearest case: it requires the parties to comply with certain climate change commitments. Earlier trade deals are less richly equipped but not bereft of requirements on social and environmental conditions. The EU is, for example, pressuring South Korea to strengthen workers’ rights under a commitment given in the two economies’ free trade agreement. The EU has also withdrawn trade privileges to Cambodia under its “everything but arms” framework, because of human right violations in the country.
And the EU is not alone. When the Trump administration renegotiated the North American Free Trade Agreement, it insisted on demanding wage floors in Mexican car manufacturing as a condition for tariff reductions. As for China, no one should doubt its willingness to condition trade on others playing by its rules; Australia is only the latest example.
Compared to these examples, the EU’s rule-making is benign. It is not against free trade to insist on similar regulation: it is simply pointing out that businesses should not compete on their ability to circumvent the rules to govern how a population democratically has decided to live. One might even say that understanding how globalisation and common rule-making go together is a precondition for popular sovereignty.
Current and former colleagues of mine have produced insightful analyses of China in the past week. James Crabtree analyses President Xi Jinping’s new economic policy framework, calling it “a radical new understanding of globalization and of China’s place within it”. In the FT, James Kynge and Jonathan Wheatley observe a significant pullback of infrastructure investments in China’s Belt and Road megaproject. And global investors are rushing in to buy Chinese stocks and bonds.
Last week’s EU summit may go down in history as more momentous than many have noticed.
The EU’s resolution fund is clearing its last legislative hurdles, and it is already having its intended effects. In Spain, companies are drawing up ambitious proposals for investment in digital and green infrastructure.
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