Of Global Trade, UK-EU Relations, and Welsh Lamb

Summary: Global trade, never easy, is getting harder. The UK was a leader in the current wave of raising barriers to trade, but don't seem to have adjusted to this new age. Thankfully in our EU relations we at least seem to have recognised the need for deals, but there is still a way to go in understanding the nature of the industry-government collaboration that drives much of 'free trade'...

Good afternoon. It is always a pleasure to talk to those at the sharp end of trade, as well as a learning experience. I realise my duties are to also impart knowledge, which I shall aim to do, but I would emphasise my experience that many of you will have far more knowledge of day-to-day realities of trade than those in government seeking to provide assistance, or those thinking about what the UK should do, possibly more than you realise.

My subject today is global developments in trade, how the UK is managing them six years after the Brexit referendum, and what that means for Wales.

For trade policy, this is a time of change, and complexity, but the core of business is unchanged in many ways. Beyond having good products and services, ultimately success in modern trade is about a partnership, involving producers, government, the wider export facilitation sector, business associations, researchers, and many more besides. We haven’t necessarily understood that enough yet in the UK, a subject to which I will return.

We might have been lured by membership of the EU to believing that trade was easy, but that was definitely the global exception, and current developments suggest that it isn’t just the UK going backwards in openness to trade. Truth be told, there never was a golden age of trade, or hyper-globalisation as some would have it, there were always domestic considerations, it was always complex, and dominated by larger players.

Good products and services can usually find a way though, which is the positive start I want to give before I go into all of the difficulties. We, you, have something of value. So how can that be maintained and grown is a question, one which should be facilitated by broad context, as well as examining what other countries do to support their agricultural sales.

One thing to be clear about upfront is that this any analysis must be more sophisticated than simply singing the praises of free trade, or alternately of protection. Government action should help, but too often in the UK it has been somewhat half-hearted. Brexit has meant frictions, but need not be the end of the UK’s opportunities.

We are overdue in understanding the situation of the UK, for good and bad. That’s an essential starting point.

The changing world

2022 is a year of change for the world of trade, the rapid pace of development such that it has been difficult to keep up let alone fully appreciate what is happening. Most obviously, we see Russia’s invasion of Ukraine leading to severing of trade ties, with effects that we have seen for energy prices and many products dependent on them, though that rise had already started.

The spillover fear that China is no longer a safe trading partner, leading to increasing trade frictions between ‘the west’ and China. These coming on top of the existing concerns related to human rights and unfair competition.

Then the response to climate change, which is seeing both the EU and US propose unilateral measures not obviously in line with the World Trade Organisation’s rules, namely the EU’s Carbon Border Adjustment Mechanism, and the US Inflation Reduction Act containing subsidies only for US made electric vehicles.

The resultant increased tension between the two, which can’t be resolved at the WTO because there is no fully functioning dispute settlement system due to US veto. A trade war at a time when both are supposed to be working together against China would be a real failure for the west.

Politicians in many countries talking of globalisation as increasingly the problem, and national production as the answer, even if subsidies or greater protection from competition are required. Economic security is joining national security as something increasingly spoken of by policy makers, even if it has yet to be fully defined.

Of course, businesses will still trade globally even if politicians would like them to do something differently, our phones are still made in China, food is travelling across the world, but the growing concern of politicians that this is problematic is having an effect. Data and goods can be sent around the world, combined in ever more sophisticated ways to be sold to end-consumers, but barriers are being increased to some of this.

At the same time Inflation and the cost of living are dominating economic issues in numerous countries, particularly in Europe and North America. A lengthy recession in the west seems likely to be on the way, and at least some part of the reason is that more barriers to trade are being erected.

Growth was already a problem, in the UK as in plenty of other countries, for which some have blamed trade. The slowdown since the global financial crisis has surely contributed to many of the other insecurities we see. Our politics seems unable to cope.

The point of this talk is not however to fill you with gloom, for we can all see plenty of bad news stories on a daily basis. It is to provide some insight into what will happen that will matter for Welsh farming, so here are a few future global developments that seem likely.

1 – Trade is going to get harder, but it will not be like going back 50 years (and hence we really didn’t need a national boat to trade). Globalisation, the movement of goods and services across the globe, is not coming to an end, as so much was driven by technology and consumers, rather than politicians. Rather, though, we also can’t expect it to get any easier, and that’s the first time this has been the case since 1945.

2 – Rules for trading are going to be more nationalistic and fragmented. The principle of a single organisation laying down the outline of global trading rules is on the way to being broken particularly by the US and China, and neither were particularly good at following it to start with. Regulations were already the major issue, rather than tariffs, and these are likely to cause more difficulties in exporting, to particular countries, with less redress when there are problems like clearly unfair rules that are more about overt protection than consumer protection. Larger exporters will find these easier to navigate.

3 – Tackling climate change will grow in importance, as the dominant global challenge of the coming years. The transition into a net-zero economy is a huge and still under-appreciated challenge, which has the potential to come at high cost to all of us. It is comforting to think there is a way to have both transition and recovered economic growth, but that may not be realistic. Natural food products should be a part of this.

4 – Expect to hear a lot more about economic security– and that includes food security. We seem to have re-entered a phase of global instability, and the most forward-thinking countries are planning accordingly. Another phrase that is starting to do the rounds is weaponised interdependence, which means major powers exploiting global networks, including around trade, for their own benefits.

Much of this is not positive news. But some also carries opportunity.

The UK’s changing relations with the EU and others

So how is the UK responding to the global changes of which you could say we were an early adopter with Brexit?

Because regardless of how you voted then, or what you think of government action since, it has been quite in line with the prevailing geo-political winds of greater freedoms over national economic decisions. In recent history, no country has raised trade barriers to neighbours as much as the UK.

Which makes it all the stranger that we have seemed unable to grasp the changes, and shape our policy accordingly. Not in terms of continuing to fight the 2016 referendum, though there is far too much of that across the country, but of recognising that our place in the world has changed and using that as the starting point for a reconsideration of national interests.

Many of you will already be thinking that in the face of such global challenges it is reckless at the very least to be risking your futures by fully opening to New Zealand and Australian competition. Not least when access to nearby markets has been undermined, and the EU is on the way to signing new Free Trade Agreements with the same two countries which could further displace UK access.

The EU-New Zealand FTA did not dramatically increase NZ access to the EU market for sheepmeat, though arguably existing WTO quotas are already generous. It is hard to see the same result for Australia given the paucity of their existing access, and the EU could well be tempted to accept on the basis that this will then mean at worst displacing UK imports.

Such are the challenges of being outside the room when such market-making issues are being discussed. The cost of greater control over our own destiny was less influence over our neighbours, that was the choice made that we need to accept.

Are we making the most of that control though? Examining UK government actions, the worry is that they have been done without considering all relevant factors, that future accession to the Trans Pacific Partnership was the priority much more than creating a level playing field for our farmers.

Trade policy, even more so at a time of economic change, is hugely complex. Balancing our needs for food imports with domestic production at a fair price for consumers and producers alike is a challenge all governments share, yet is just one of many faced in every trade deal.

Simply saying trade is good and running cursory consultations then asking everyone to trust the government is not sufficient. As I think an increasing number of MPs of all parties are starting to realise.

Just as seriously, the UK government equally do not seem to have got to grips with our new regulatory landscape. It is seductive to think that removing all EU regulation will make everything easier, but it simply isn’t correct. All developed countries regulate their markets, consumer and producer interests, worker safety, and so on.

When trading, we have to meet those regulations of others. When considering domestic interests, we have to balance them just as was always the case in the EU. That is again a level of sophistication that still seems absent from our political debate. Are we asking our farmers to meet a higher standard than our imports, and if so, why and with what impact? There is a case at the very least for considering that we should have further core standards that create a level playing field.

Not that the issue of regulation can ever be settled, but there is a serious question as to why the UK government wants to have full control of all product standards when to do so means higher than necessary trade barriers to the EU. A veterinary agreement has the potential to really help, but is not currently on the table. Of most concern would seem to be the lack of understanding that is shown by barely even discussing the issue.

Beyond such complaints, what then of the likely future direction of UK trade relations? In general, the global Britain push is slowing in the face of the growing protectionist forces and realisation of complexities, and there is more of a recognition that we will need to upgrade our EU relationship.

Under this government I think we can expect accession to the CPTPP to be completed, though with little extra access to markets as we already have deals with most members, some minor upgrades and downgrades to existing deals, and possibly completion with India which will be low ambition in a big market – that may also be a reasonable opportunity for UK agriculture.

Thankfully, the prospects of a trade war with the EU over the Northern Ireland Protocol are receding, though not completely disappeared. This government is not likely to do much proactively towards Europe, so it will be the next one after 2024 that will reach the veterinary agreement. Rejoining the EU, single market, or customs union seems unlikely even then.

Visas for seasonal workers and various other skills are likely to remain controversial, and a case will probably have to be made on a fairly regular basis. Immigration seems destined to always be a hot issue in the UK.

We should also think of attitudes in our target markets, for example that the EU cannot be expected to become any friendlier to trade. One of the misconceptions throughout the Brexit process has been that in some way they owe us a good deal, or are indeed in some way nice to deal with. The EU negotiators are tough, as those who have worked with or against them will know very well. There is a premium on a negotiating partner being crystal clear in their aims when faced with this.

Clarity and domestic consensus have not been UK strengths since 2016. This or a future government need to improve that, responding to the global changes and bringing people together on the basis of shared national interests and economic security. There isn’t much reason to be optimistic on that score, but at some stage we can perhaps learn from our mistakes and focus.

Welsh lamb and the implementation challenge

That brings this talk onto Welsh agricultural products, particularly lamb, and it is worth emphasising again one aspect of the global trade picture which seems unlikely to change significantly at least for goods. Because of the costs of trading, outside of single markets like the EU, exporting has typically been related to scale.

For a product like Scotch Whisky, responsible for 20% of the UK’s entire food and drink exports, that isn’t necessarily about individual producers, but an entire ecosystem of production and support investing in ensuring barriers are minimised, opportunities sought, and in particular that for whatever market is a priority, there is a high level of knowledge on operating conditions and how they can be improved.

The export of sheepmeat from the whole country is one tenth of the size of whisky exports. Perhaps equally significantly, despite the UK being the third largest exporters globally, that is only one fifth the level of exports from both Australia and New Zealand, and only just in the top ten of UK food and drink exports.

Similar to Scotch Whisky, it means that Australian and New Zealand production is set up for export, to meet the standards of other markets, and with a well-resourced operation involving government and industry working together intensively domestically and across the world.

What too many around the UK government don’t appear to realise is that modern trade isn’t just about knocking down barriers to exports, but having the scale and operation to take advantage. To give one of the best examples, all powerful supermarkets want consistency of product more than they care about sourcing, and that typically points them towards the largest scale producers, and those investing in the required technology.

This is typically backed up with a quality infrastructure supporting exporters, as well as the lobbying to secure suitable regulatory frameworks in third countries.

Whether UK and / or Welsh lamb can become such a product of intensive activity, which would be well beyond current government and industry support, is unclear. This is not a so much a matter of protection from others, but of seeking to grow markets by doing everything necessary in terms of production and marketing.

The signs are probably that this UK government is happy to rely on the world to feed us with the fewest impediments, with no great concern for whether that is the kind of economic security we need, or domestic production. Hence the NZ and Australia trade deals, and hence the lack of concern about barriers to the EU, such as the absence of the veterinary agreement.

While there are other markets, with China accounting for around a quarter of world imports, and the US another eighth, in both cases right now the UK risks being overpowered in trying to compete. Incidentally, and these are 2020 figures, the UK is the world’s fourth largest importer of sheepmeat.

If domestic lamb production and export is a priority, then the UK government would be doing a lot more to ensure our access to the EU market is going to be at least as good as that of Australia and New Zealand. Being part of their economic security, by providing reliability and scale, and meeting their regulatory requirements.

Only with the export scale provided by a nearby market can we also hope to be successful further afield. Asia may be the faster growing market, but it is going to be harder for the UK to service than those nearer, similarly the US or Africa.

Perhaps though the UK cannot realistically compete with the two largest exporters, at least on size. In which case it isn’t that trade is impossible, but expectations will have to be set accordingly. In this scenario, perhaps with Welsh Lamb as more of a premium product, there will still be exports, but at risk of being squeezed out of markets by those with greater size.

However, in this scenario, domestic production may be endangered. There are also changing consumer tastes to consider, which may mean less meat eating, as well as technological developments, particularly more around lab-grown meat.

This shouldn’t be a party-political decision, for the resources to be devoted need to be seen as a valued long-term investment agreed across the political spectrum. It also shouldn’t be something attempted on the cheap, let’s do what others do, but less of it. If lamb is to be a UK priority export, then all UK posts abroad need to be promoting, and have the knowledge to identify problems and opportunities. The industry here in the UK need to be supporting this in seeking to stay ahead of the competition, and the government regulating to meet and minimise export requirements. Some care in not undermining the product would also be taken.

It feels like this sort of clarity is some distance from our current debate, but that is what we need to seek develop. Because right now such a course of action, such clarity, seems unlikely from this government, and the next one may well also not have such focus. It will also take time to strengthen ties with the EU, by which time competitors may have taken advantage in for example negotiating preferential reduced inspections.

This all being the case, to succeed the industry really needs to be lobbying government to step up, and checking at the same time that you are doing everything you can. Our tendency for a let’s do the best we can approach is risking a production squeeze that surely cannot be consistent with UK economic security.

Conclusion

To conclude. The world of trade is complex and difficult, and in danger of getting much more so, while it feels the UK debate on the subject is simplistic and at best not improving too much. That is leaving exporters in limbo, and across industries the serious risk that we are not investing in our future like other countries.

There is a clear and pressing need to move on from 2016, on the basis of an honest appraisal of where we are. We can’t ignore the European market or what is happening there as our nearest, and global competitiveness requires us to be locally successful.

That needs to be accompanied by a step change in government facilitation, pressed by well-informed exporters. It means open conversations and collaboration, followed by appropriate international agreements. This should also involve serious consideration of the UK’s economic security, which surely needs to include producing plenty of our own food even if also remaining open to trade, a circle squared by being aware of what it takes to succeed in exporting.

Particularly with a world turning away from trade, none of this is going to be easy to deliver, but there’s no reason with greater focus that UK production and exports need to decline. Turning round a UK political debate that is far from helpful will be far from easy, but it is something we must all ai to do.