3. Modern Trade Relationships

A single trade agreement is insufficient for a modern trade relationship

International trade is traditionally viewed as the product of a single goods manufacturer being sold to another country. In the 21st century, however, this represents a shrinking percentage of total trade, once we consider the complexity of modern goods and services. Instead, trade today mostly takes place in a complex global network of goods and services producers, whose work is combined into a final package for consumers. For example:

  • The 30,000 components that go into a modern car, which are typically combined with services such as maintenance, financing and satellite navigation systems
  • The increasingly sophisticated food producers of the Netherlands, whose products depend on sophisticated IT systems
  • Global research communities responsible for producing pharmaceutical products

All of these activities, as well as the finished products and services, are subject to regulations, laws that must be followed, which can be set at various levels from regions of a country, to those agreed in global membership bodies such as the World Trade Organisation (WTO). Producers must demonstrate they meet the laws of the countries in which they operate and sell, whether this is for services or goods. For manufacturers there is typically a testing process, sometimes facilitated by reference to using voluntary best-practice standards. 

All of this complexity, together with the regulations, has delivered an unprecedented choice of safe products at good prices for consumers. However, it has also led to concerns of unfair competition from countries that don’t follow the rules, affecting domestic producers. Those same producers could also be disadvantaged by discriminatory practices in other countries, for example with regard to regulations, or if other countries reach agreements to remove obstacles to their trade.

For traditional goods producers in the time before extensive regulation, the only significant issue was tariffs, the import taxes levied on their products. Recognising that increased trade delivered better choice and lower prices for consumers, tariffs were steadily reduced after the creation of the General Agreement on Tariffs and Trade in 1947. But modern trade barriers are different, involving regulations or testing procedures, barriers to the movement of people providing services, restrictive rules of origin (making it harder to combine products sourced from different geographies) and infringement of intellectual property rights.

The best Free Trade Agreements cover some of these issues, but remain predominantly focused on tariff reduction and rules for trade. They typically do not remove many of the barriers to trade between parties in a manner satisfactory to them. Instead, countries typically cooperate through a network of agreements, regional and international bodies, and dialogues. These are the relationships that support modern trade, and are of particular importance to neighbours. Trade between neighbours remains cheaper than that between distant countries – hence, for the UK, EU trade will remain significant. 

Thus, to support a modern trade relationship between the UK and EU, we will need more than a single agreement. Cumulatively, it was only membership of the EU that could remove virtually all trade barriers, with the single market aligning regulations and the customs union removing tariffs. However, there is much that can be done between a thin FTA and membership, and this report identifies some priority areas.

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