A trade deal with America would not benefit Britain – The Telegraph

Our underlying economic difficulties sadly lie much closer to home
Phew! That is a relief. There is to be no trade deal with the US in any foreseeable future, the new Prime Minister has belatedly admitted.
This was to be one of the big economic prizes of Brexit, so the admission that it is not going to happen any time soon might be thought a setback.
Certainly it will delight die hard Remainers, who are already yelling “told you so”. But though it would have been nice to have had a bilateral trade deal with the US, it’s actually not that important, and might even be thought of as a positive development.
The blow is more to vainglorious pretence than real life economic prospects.
While at International Trade, Liz Truss put huge amounts of time and effort into securing a deal with the US, but if it was ever on the cards, it went out the door with the election of Joe Biden as President.
That’s partly because Biden takes the EU’s side in the row over post Brexit trading arrangements with Northern Ireland. But it is also because it is way down Biden’s list of domestic priorities. He’s no interest in using up precious political capital on it.
With Trump, it was a real possibility. The former US President attributed his own election success in part to Britain’s vote for Brexit, and was strongly supportive of widening the US’s trading relationship with America’s one time rulers.
But the dream died with Trump’s removal from the White House, and it has long been obvious that without him, the negotiations would go nowhere.
A disappointment, then? Not really. The UK already has a very favourable trading relationship with the US, which is one of the very few major economies where Britain enjoys a substantial trade surplus. It is by no means clear that this would persist in the event of an FTA, the terms of which would be almost bound to favour the larger economy.
All trade is an economic positive, even if it results in a deficit, but when as much a net importer as the UK, it is as well to hang onto any surpluses that might be going. The US is one such case.
Fortunately for the UK, the US has a different way of measuring trade in services, and therefore believes that it is the US that has the trade surplus with us. As long as both sides keep believing they have the upper hand, everyone is happy.
In any case, Truss is right to think that, for the time being at least, slightly freer trade with the US is better pursued by joining the existing Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a relatively loose free trade agreement covering Pacific rim countries which already includes the US.
This would also have the merit of avoiding politically sensitive issues that would inevitably be part of a bilateral free trade deal with the US, such as food safety and animal welfare.
The whole free trade agenda has always been a bit of a con, in that FTAs that satisfy both parties are notoriously difficult to negotiate and rarely deliver any more than marginal economic gains.
They also involve politically difficult trade offs, with some industries casually surrendered to the full blast of foreign competition in return for other industries gaining better access. The whole process is a lobbyists paradise.
It would be good to have improved access to overseas markets, but it is not going to help much in solving Britain’s underlying economic difficulties, which sadly lie much closer to home and are even more intractable.
Chief among these is that as a nation we consume far more than we sell, resulting in an alarmingly large current account deficit. To finance this deficit, we rely on substantial inflows of capital from abroad. In effect, we import overseas savings to finance our excess consumption.
One of the reasons why the pound is weak against the dollar is that there is a concern in markets about the UK’s continued ability to do this in the quantities required. Even after this week’s expected increase in Bank Rate, UK assets are still likely to be judged not as attractive relative to others as they once were.
A falling pound should in theory help address both these problems. By making imports more expensive, and exports less so, it should in time reduce the trade deficit in goods and services. At the same time, it makes UK assets seem relatively cheaper, so helps with the balance of payments.
Yet there is no getting away from it; a falling pound is also a powerful reminder of a grim truth – that as the terms of trade turn against the UK, we are getting a whole lot poorer. Our pounds no longer go as far as they did.
And worryingly, devaluation has failed to correct the widening trade deficit. Since the vote for Brexit six years ago, the pound has lost a fifth of its value against the dollar and an eighth of its value against the euro. Yet it’s made virtually no difference. The trade balance has continued to deteriorate.
It may have been a bit of a freak number, distorted by measurement problems, but in the first quarter of this year, the current account deficit reportedly swelled to a record 7.1pc of GDP, the sort of number associated with failing nations in the eurozone sovereign debt crisis a decade ago.
A free floating exchange rate is meant to be a natural, market based remedy to trade imbalances of this sort, but so far Britain’s devaluing pound doesn’t appear to have had much effect.
Since the balance of payments must always by definition, well, “balance”, a big current account deficit needs to be matched by an equal and opposite inflow of savings from overseas. If it doesn’t, then the shortfall quickly turns into a balance of payments crisis, resulting in further devaluation of the currency and sharp rises in interest rates.
Just lately, the Office for National Statistics has had difficulty reconciling the two numbers, which may in itself be a warning sign of problems to come.
Something has to give; either demand has to fall so as to press down on imports, or exports have to rise, or interest rates have to increase to a level which ensures the inflow of overseas savings continues, or some combination of all three.
You begin to see why the new Government is so focused on growth. Most people don’t realise quite how dire the nation’s situation is. Without urgent remedial action, the country will just continue to get poorer.
Trade deals can be helpful in boosting exports, but only at the margin and are very unlikely in any immediate future to compensate for loss of access to the EU’s single market.
The much more important challenge is that of providing an environment in which business can flourish, which means not just cutting taxes, but removing red tape and other constraints on development and competitiveness.
Truss and her new Chancellor, Kwasi Kwarteng, have many of the right ideas. It’s not yet clear they have the political mandate to execute them.
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