Katherine Evans participates in the IR Global Virtual Series – International Trade: Global and regional trade in the post pandemic

Foreword Co-Authored By Andrew Chilvers And Bob Brewer

Global Trade: Combating protectionism and the pandemic

The past 18 months were a huge shock to international trade as increasing protectionism and Covid-19 wrought havoc with all previous forecasts and economic roadmaps.

Many business analysts predicted that the double whammy of protectionism and pandemic would spell an end to globalised trade.

Indeed, if we roll back a few years many economists were already warning that international trade was tapering off even before President Trump, Brexit and the coronavirus. As older, more established economies converted to the new digital economy, less goods were being shifted around the world. This coincided with the rise of China as an economic superpower, the proliferation of international laws, regimes and treaties governing trade and the increasing interconnectedness of supply chains.

But this complex global trading pattern was also the architect of its own undoing, creating financial instability, a trade imbalance, climate change, a rise in cyberattacks and the spread of the pandemic through trade networks. These crises then reverberated across the globe, appearing in different jurisdictions and spreading across local borders.

The Trump administration’s moves to address the trade imbalance with other trading partners was a catalyst for the resulting rise in protectionism – overnight he was using tariffs as a tool. This was particularly the case with China, where supply chains were impacted as businesses had to work around the tariffs, causing supply chain diversification and huge issues around the rules of origin.

This imposition of tariffs has now forced US businesses to take on higher costs at exactly the wrong moment, ie during a global pandemic. This has also had a knock-on effect with other US trading partners such as Canada, Mexico and the EU, which are all re-evaluating their trading relations with China, particularly around the rules of origin to ensure products are not using mainly Chinese components.

What are the opportunities and challenges that face global and regional trade in your jurisdiction?

According to the UK Office for National Statistics, imports of goods from EU countries excluding precious metals, fell by £14 billion between quarter 4 2020 and quarter 1 2021. That’s a fall of 21.7%. During the same period, exports fell by £7.1 billion, which is a fall of 18.1%. It is hard to tell at this stage what part of the fall is due to Brexit and what part is due to Covid, which has been a major challenge for all the world’s economies.

Brexit was always going to hurt the UK economy, at least in the medium term, and Covid has just compounded those Brexit related issues. We should also add to the challenges which the UK economy is facing, the need for the UK to make the requisite changes to its economic model in order to meet its international climate change commitments. These are also likely to have a negative effect on economic growth in the short (and potentially also the medium) term.

The increased prospects of UK businesses trading internationally was propounded by Brexiteers as one of the main advantages of leaving the EU. On the one hand, UK businesses exporting internationally are currently able to offer their products at a cheaper rate than they could pre-Brexit due to the low value of the pound sterling relative to other major international currencies, thereby making UK business products more appealing than products from EU countries. On the other hand, the introduction of rules of origin has led to UK businesses being liable for additional tariffs into the EU, and that in turn has led to increased costs.

UK businesses are currently reviewing their supply chains to evaluate whether changes in their supply chain might reduce or extinguish the tariffs altogether. By being a little bit smarter, the idea is that many businesses at least can avoid the worst impact of the additional European tariffs whilst maintaining compliance with the current rules.

I think the EU may also have scored something of an “own goal” by requiring so many new forms to be completed by UK businesses to enable them to trade with the EU because UK businesses are increasingly saying, “Well, if I have to fill in all those forms just to trade with the EU, I might as well start trading with everybody else around the world. At least it won’t be any harder”. There’s currently a lot of enthusiasm for joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) (also known as the Pacific Free Trade Agreement), and I think that will be very beneficial for the UK in terms of helping UK businesses to focus on new trading opportunities outside of the European Union bloc.

In terms of summing up the position, I would say that whilst the UK has lots of challenges to overcome in terms of making the most of new global and regional opportunities, those opportunities are there, and businesses just need to reach out and grab them.

What is the impact of non-preferential rules of origin in the post-pandemic trading environment in your jurisdiction?

The UK has historically taken a fairly relaxed view about what constituted the “last substantial transformation” of a product in terms of whether or not it met EU rules. When the UK was still part of the EU, if we said something was a UK product, that was rarely questioned. Now, of course, there will be more questions and as soon as more than one country is involved in the production or manufacture of a product, then more rigorous focus needs to be given to whether or not the relevant rules of origin have been satisfied.

Consumers have also starting to look at ethical issues around the origin of products and services that they buy. These may include environmental concerns around countries which are perceived to be burning too many fossil fuels or it may result from other political concerns. There appears to be quite substantial hostility from UK consumers at the moment towards Chinese products and services. Partly that has been caused by the impact of steel dumping on the UK economy. Partly it has been caused by the political crackdowns in Hong Kong, which is an island with which the British feel a very strong historical and cultural affinity. Partly it has also been caused by China’s treatment of the Uighur people, in circumstances where the UK population is more than 4% Muslim, which has increased consumer hostility to China from a wider social group than might normally be expected as a result of the mistreatment of a minority ethnic group by a foreign power.

Predictions: what do you think global and regional trade integration will look like in your jurisdiction in five years?

I would say that for the next five years the UK will be focused on joining and making the most of CPTPP. Joining CPTPP is likely to be the big medium-term change for the UK. CPTPP addresses trade between 11 countries and covers about 13% of global GDP / 15% of global trade in a single negotiation – £110 billion worth of UK trade, all based on 2019 figures. Joining CPTPP would remove tariffs on 95% of goods traded between the UK and the other member states. That’s going to be a big area for the UK, but it may cause some concerns in the EU.

There were rumblings in the EU that if the UK joined CPTPP, the EU would not be happy about the ongoing transfer of personal data to the UK. However, since the UK has now received an adequacy decision from the EU in terms of its data protection rules and the UK does not seem to be minded reducing those data protection standards, this may not become an issue. Overall, I think the accession to CPTPP will result in a shift away from UK trade with the EU to trade with non-EU countries.