22
Examination of witnesses
Sir Simon Fraser, Alan Beattie and Alan Wolff.
Q1 The Chair: Welcome, everyone. Thank you very much indeed to my fellow committee members for being here today. I particularly welcome three very relevant witnesses, who will give evidence in our inquiry relating to trade in a turbulent world and how the UK should deploy its trade instruments.
With us in the room is, first, Sir Simon Fraser, chair of Chatham House. His experience in international affairs, as leader of the Foreign Office for many years and his other experience in diplomacy and trade, will be particularly relevant in thinking about how we as a country can respond to the issues.
I am also delighted to welcome Alan Beattie. I am sure that many of us here have read his excellent work in the Financial Times. One reason he is here is that I kept forwarding to the clerks the articles he had written, saying, “We must get this guy because we want to hear what he has to say. Clearly, he knows what he is talking about”. I am extremely grateful to you for coming to give your thoughts.
Joining us remotely, we have Alan Wolff, senior fellow at the Peterson Institute for International Economics, who for five decades now has been one of the leaders in trade policy, advising numerous Presidents of the United States. I think he will be extremely helpful in allowing us to understand how the US looks at trade and how other countries can respond through trade.
We all have our own questions. Often, in these situations they are quite carefully scripted. You might even have received a copy of them, but, since we have such an intellectual pool of talent to dip into, I hope you will allow our members to ask questions that will follow naturally on from one another. The premise of this inquiry is to understand how the UK can grow its economy using different types of trade instruments, given the issues that the WTO and some multilateral institutions are facing, and the difficulty of negotiating very significant, complex FTAs in themselves. What are the other routes to economic growth through trade instruments? What new things should we do? How differently should we be looking at things, or should we focus simply on what already exists and make sure that those organisations function properly to our benefit?
Given that, to kick off with the first question, could you each spend a few moments talking about this and maybe encapsulate your general thoughts as well, as a good introduction? If we look back over the past 75 years or so, what are your views of the so-called current failings of our multilateral institutions and the place of Britain in those organisations? What else should we do when it comes to trying to make sure that we have the right agreements and treaty structures in place to grow our economy? Perhaps Sir Simon Fraser would like to go first. Some initial thoughts would also be quite helpful for setting the scene for this discussion.
Sir Simon Fraser: Thank you very much, Chair. I am sure that many things will come out during the course of the discussion. Perhaps the place to start, as you say, is to look at the multilateral system: why and how it began, where it has got to and, therefore, the sorts of dilemmas we face.
Essentially, the institutions we are working with were originally part of that post-Second World War impetus to try to build systems for stable co‑operation in politics, security and economics between states. The GATT was part of the broader push to achieve that, which included the creation of the UN, Bretton Woods and so forth. Since we are going to talk about the United Kingdom, I think we played a leading role in that. It was associated with historical change in our position as well, with the end of imperial and commonwealth preference over time and our repositioning in the international system.
We played a leading role in the 1990s in the evolution of the GATT into the WTO. That was a very significant evolution. I think it was the first international organisation given powers to make decisions binding its member states, which of course has been part of the controversy ever since. I suppose that this broader evolution towards collaborative trade policy found its highest expression in the European Union and its single market, which we were also highly influential in creating, so there has been a history in which we have been involved.
The problem we face now is that the shared conviction in favour of open trade—I will not say free trade, which is a very specific matter—through multilateral institutions has been eroded. There are a number of reasons for that, which we can dig into, but the system fundamentally became overcrowded. More and more sovereign states were involved in negotiations, which originally were dominated very much by the US, the Europeans and a few others. Behind that, there was the erosion of political will and conviction that this is the way that we should conduct international economic affairs, and the growth of economic nationalism and a focus on national security. That is where we stand.
Therefore, the question you pose is: how can we adapt? What should we hold on to and should we find new approaches? By way of opening comment, it is important for us to try to find ways of maintaining rules-based systems or approaches to international trade. It is probably not the right approach to try to hang on desperately to the institutions we have had in the past if those institutions are no longer fit for purpose. We need to be flexible and creative in the way we go forward.
The Chair: That is very helpful. It would be interesting to hear Alan’s thoughts, from a US perspective.
Alan Wolff: It is an honour to be with you today. There could not be a more important subject for world trade than how to organise ourselves internationally. I echo Simon Fraser’s comments. In 1945, the United States, working with the UK, came up with the brilliant idea of having a global trade approach and organisation, the International Trade Organization. That did not get approved by the US Congress, so it never came into effect. What was left was a contract. The British know how to work with an unwritten constitution. There was no international organisation; there was a contract. GATT had 23 members, which is not very many, but they accounted for most of world trade at that point, at least among the allies. They decided to lower barriers to trade and lower tariffs, to work on the basis of reciprocity and transparency, which was also very important, and on the basis of non-discrimination, or MFN—most favoured nation. The latter has now been called into question by both the UK statement, somewhat by inference from the WTO and the US saying it is dead, which it is not—it may be dead to the US for the moment, but it is not dead. Yet all those elements are still needed.
The World Trade Organization, which grew out of the GATT, is potentially very relevant, but the GATT era was one of pragmatism, and the UK, US and others were very good at it. While it was not recognised for many years, it functioned as an organisation. I agree with Simon Fraser that the shared conviction is not there now, particularly among the three largest trading blocs or partners: the US, the EU and China. All of them to some degree—less so the US right now—swear fealty to the WTO and say it is just great and is absolutely needed, and then do not invest in it.
The burden of my remarks to you today is that the UK can play a central role. You have one foot in the CPTPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and one foot—more or less, aside from now and maybe back in at some point in some way—in the EU. The UK is a bridge for the elements that we need to move forward in the world trading system. I think the UK is not only well positioned but has the potential to assume that role.
Today’s session and your follow-on work is vitally important. Remember that size is not what matters particularly in contributing to this process. Singapore, with 6 million people, is among the most active participants in the WTO. It does a lot. We can talk a little later about what it contributed and is contributing. I think the UK can be absolutely a prime moving force for the world trading system. I will leave it there for my opening remarks.
Q2 The Chair: That is very helpful. I have a brief follow-on. Why do you think the MFN principle and the US’s view to trade has become so negative when, thinking of our relationship with the US, it is our biggest single-country trading partner and clearly is selling things to people around the world? I use American products probably every hour of my life, as we all do here. What has gone “wrong” in the sense of the view of the benefits of that exchange of goods and services? Is it a sense of unfairness of state support from China? Is it a sense that it is imbalanced, or that the trade-off between different types of goods is not set properly? I would like to hear your view on why people feel that what has been so good for an economy, broadly, is considered so negatively?
Alan Wolff: In part, we point at the wrong cause of our current difficulties. This Administration want to blame foreigners. They are about to blame foreigners, with a series of 76 hostile cases of investigation of others, for being at fault. Yes, there are imbalances. China is a problem that has to be dealt with. It is a problem for macroeconomic reasons: excessive investment and inadequate savings. We have the reverse in the United States, but we do not see our own problems and solve those.
We come to this pass in part because we do not have a good social safety net in the US. We promised that if some individual workers got into trouble with trade, we would ease their problems to a degree and help them with a transition to more fruitful economic employment. We did not do it. Denmark did. I assume and hope that the EU as well as the UK have done a better job than we have, but we really did not come to the assistance of those who suffered from a Japan shock 50 years ago and, more recently, a China shock. With no adequate response by government, what do you blame? You blame the institutions as failing. They have failed to some degree, which I am sure we will get into. The WTO is not adequate.
To end on one note, what is the No. 1 trade problem in the world today? Hormuz and the Iran war. What exactly is the WTO doing about that? Has there been an emergency meeting? No. Do we have any thoughts as to what the WTO should be doing as an organisation? No. It is as if it did not happen. The same thing happened with Covid. The institution is not sufficiently responsive. The problems are real.
Q3 The Chair: That is a very well-made point. The other Alan, do you want to give your thoughts?
Alan Beattie: First, I issue the customary disclaimer that my views are mine alone, not those of the FT. That is a comfort to both of us. To add some hopefully short thoughts on top of those, I think you could argue quite easily that the WTO is doing fine in terms of the original goals it set itself, remembering where it came from, which was to undo the 1930s. The reciprocal principle came from Roosevelt’s own Reciprocal Trade Agreements Act of 1934. It pulled a bunch of other countries into that even, as Alan said, without a formal international organisation and, over the decades, brought down tariffs.
We have seen that challenged over the past year by Donald Trump in the most threatening way since the creation of the GATT. However, one very gratifying thing is that you have not had any copycat spiral of protectionism; you have not had the 1930s at all. Partly, that is because it is fairly obvious to everyone that it has done such damage to the US economy, or is likely to do so, that it is not a good thing to follow—somewhat like Brexit. I imagine that the US probably hit peak tariff in the autumn of last year and, if anything, it will only be negotiated down. I can imagine that just about holding. A lot of trade, as the WTO will insistently tell you, is still done under WTO most favoured nation terms. I think they calculate that it is something like 70%.
The problem is not so much that eroding or not just that eroding, but, as others have said, the WTO’s failure to keep up with the breadth and depth of the global economy. It is still fundamentally a tariff organisation. It has attempted to move into services. It is very difficult to do agreements in services; they are not particularly binding. It has moved into intellectual property, very controversially so. It does have some effect there, but whether that is a benefit is a moot point. It shied away from having disciplines on investment, for example. I am not saying that it is necessarily the best institution to do that, but if you are to be an institution that tries to govern the entirety of global commerce, you are missing out a huge amount in terms of depth and breadth. There is the accession of China, a country which is so huge, developed so quickly, has so many strengths and has many ways of organising its economy, which it turns out are beyond the reach of the WTO to address and yet are very trade distorting. That is the problem.
With regard to the UK’s role, it goes against the grain for me to disagree with Alan on anything, but I am afraid I disagree with him on this one, where I am somewhat sceptical. I do not think the WTO really needs, to use another term people often use, an “honest broker”. I do not think this Government have used the term “honest broker”; it has been used of it a lot. That term was last used, if I recall, by Harold Macmillan in the years after the Suez crisis when Britain was similarly trying to find a role. I do not think the WTO system really needs an honest broker. It has one: it is called the WTO. The reality is that countries have their own interests and the UK will not be taken as some neutral body by a large swathe of the WTO’s membership because it is an advanced economy with particular interests in financial services and so forth. In the past, small groups of countries have managed to have some impact—for example, the Cairns Group, which is a group of agricultural exporters. You get a group of countries together who have a particular interest and push it. That has made some progress but has not produced any results or agreements. There have been no substantive negotiated agreements since the WTO itself was created in 1995.
Trying not to make this a counsel of despair—we can get on to talk about the plurilaterals and what has been done recently—I do not think you can push forward the WTO on the basis it has operated so far. My watchwords are copy, bypass and borrow. See what principles you can do outside it, see how you can try to do the things it actually does outside it, and see what things you can copy and do elsewhere.
The Chair: That is extremely helpful. Given there are three of you, we might not have everyone answer every question.
Lord Hannay of Chiswick: Just because his name has not been mentioned, on the issue of Britain playing some kind of role in a future world trading system, I think it would be right to recognise that the first director-general of GATT was a Brit, Eric Wyndham White. He ran the organisation for a very long time extraordinarily successfully. We would do well to remember that we owe him a debt.
The Chair: All great things were invented in this nation.
Q4 Lord German: I think I can now segue clearly to what was almost itching to come out in your introductory remarks. What are the big principal challenges now which face the rules-based system we have at present? Can they be resolved and, if so, how? I think that is a big bullet question.
Sir Simon Fraser: To make one comment on what has gone before, it is very important—I hope this will come out in our conversation—that while, of course, we should focus on the institutions of trade and the WTO, we have to think about that very much in the context of what is happening in geopolitics and geoeconomics at the moment and the real-world issues that this country and others are facing. Those will determine our attitudes to some of the more technical questions we face. Maybe we can come back to that.
On your question, I will make three points. First, I think that the system, as we heard, has struggled to keep up to date with the change of the agenda. It focused on traditional trade approaches, particularly trade in goods and tariffs, but the nature of the economy has changed and is changing very rapidly. Therefore, it is difficult for the WTO and other multinational institutions to maintain their relevance and be effective fora in which to resolve disputes and make progress.
Secondly, as I mentioned before, frankly, the field has become very crowded. When I first did trade negotiations when working for, then, Sir Leon Brittan in the European Commission in the 1990s, essentially, if the US and EU agreed on something it happened. Russia was more or less marginalised and China was not a major player. When I went back to the European Commission in 2004 and we were negotiating the Doha round, it had completely changed. There were many more sovereign states, there were many more poles of influence in negotiation and it was very difficult to drive things through. It just became very complicated and complex. In the end, we got stuck.
Thirdly, I have to go back to the point that attitudes have changed. There is not the will now to co-operate through the multilateral system in the way that there was before. I think that, as we heard, that is particularly an issue with the United States, which no longer offers the leadership it used to. Frankly, there is a lack of political dynamism and drive to make the system work. Those are some of the issues we face and that complicate our lives in trying to make the current rules-based system relevant in the current context.
Lord German: Alan Beattie, given your “copy, bypass and borrow”, how do you see the principal challenges? Which ones can be copied, which would you bypass and which would you borrow?
Alan Beattie: One thing I should say first—I always try to get it in early—is that there is a huge difference between trade governance and trade. I have heard gloomy things about the WTO but they have been said many times. In the whole decade of the 2000s, the WTO launched and completely failed to achieve a major multilateral trade round, the Doha round. Everyone kept telling me then how awfully trade was doing and the whole system was falling apart. Of course, that was the decade in which trade grew faster than at any time since the Second World War.
The real heroes of trade are not to be found in the corridors of Geneva. They are the supply chain managers, financiers, shippers and the people who have managed to overcome an almost total blockage of the Red Sea and Suez Canal over the past few years without any major impact on world trade. Even now, they are doing their best to overcome what I absolutely agree is a huge shock coming from Iran. That is a bigger shock for the world economy than it is to trade.
If you are talking about what kinds of agreements are effective—going back to diplomacy and trade bureaucracy—recently at the WTO we saw a ministerial conference which was almost a complete failure. One interesting innovation was to try to push a plurilateral deal on e‑commerce through the WTO itself. It is not in itself an enormously important deal. It is quite shallow, it excludes quite a lot, and the US is no longer a member. It tried to copy the WTO and borrow the dispute settlement system from the WTO and yet push it through.
Those sorts of plurilateral agreements and closed plurilaterals—meaning they apply only if you sign up to them; they are not most favoured nation plurilaterals—are a second best to having proper multilateral agreements. However, they are not a bad second best, in the sense they can pull in large numbers of countries and you can get critical economies of scale. Whether they will be able to achieve that I do not know. We talked about the US falling out of love with the WTO. One other major impediment is India, which essentially blocks any and all negotiation going through the WTO and, in what my father would have called a dog in a manger attitude, is even trying to stop plurilaterals to which it is not itself a signatory being adopted in the WTO. What is going on now is a sort of innovative legal and administrative attempt to make those sorts of agreements work adjacent to the WTO system, but not of the WTO system. There are lots of other things, but I pick out that one as an example of trying to replicate the principles of the WTO with an agreement that cannot, because of political reasons, go through it.
The Chair: I think we will move on.
Lord German: We have not asked Alan Wolff to give his view. I was going to read from his document.
The Chair: The next question also links into that. Perhaps you could bear that in mind, Alan. When Lord Stevenson, who is online, asks his question, we will go to Alan Wolff first. Otherwise, we could end up having quite a long series of answers.
Q5 Lord Stevenson of Balmacara: Alan Wolff, is it possible to characterise what is behind the motivations of the main countries that seem to be causing us problems in the whole discussion we have had so far: the US, China and the EU? Where are they coming from, and where are they trying to get to?
The Chair: Alan Wolff, perhaps you would answer that question and refer back to Lord German’s points about the breakdown of the WTO and the issues around that.
Alan Wolff: China is very comfortable with the current WTO as is. It has no great suggestions as to how it might be changed. It has nibbled around the edges with a few things like plastics pollution in the ocean, which is not central. It has worked on the investment facilitation for the development agreement that a lot of the developing countries like. That is not central to the trading system, but useful, so, “It’s fine, thank you very much”. It gets to ship as much as it wants to. It creates an imbalance in the world trading system and a lot of pressures.
The US wants total freedom now, under this Administration—simple as that. That is based on power politics, not most favoured nations or non-discrimination, but, “We’re stronger than you are and we’re going to extract concessions”. The EU is a middle power. It would be nice if Mark Carney’s Davos speech reached Brussels, and the EU recognised that it is actually quite large. It is the largest trading entity in the world of WTO members, with some 15% of world trade. It does not act that way, so it is not coming in and throwing its weight around. It was second chair to the United States. When I was in the US Government—during the Tokyo round and the penultimate round of multilateral trade negotiations—what the US and EU, in those days the EC, wanted to achieve was achieved. It fell to me, just because no one was interested in the subject in the US, and my EU counterparts to name a new director-general, a Swiss—to follow Eric Wyndham White minus a couple in the middle. If we in Brussels agreed, it happened and no one else was consulted. Those days have very much gone, as Simon Fraser said. It is a different world.
You have to think of the WTO as a forum as opposed to an institution. How are 166 countries going to pull together in any particular direction? They do not. There are failings of leadership from the large countries. That is one thing. I see a series of external challenges that we do not face. I said the Iran war is the No. 1 trade problem today but it is not discussed in the WTO, to my knowledge. There will be a meeting of the General Council in early May, to follow up on the one in Yaoundé, which did not discuss the problems of the Iran war. We did not meet Covid. We do not meet food security as an issue, which with climate change is vitally important. We do not address what we do about AI. What do we do about the digital economy? We are missing leadership addressing the major issues of today.
Lastly, institutionally, if there were no Prime Minister and no Cabinet, what exactly would the House of Lords and the Commons achieve? That is the WTO. There are 166 countries. They meet only as a committee of the whole. They meet in sub-committees on particular subjects, but in terms of getting anything done they meet as a group. What could they possibly achieve? There is no mechanism for organising the members and no steering committee. There used to be at one time, but there is not now. There is no executive. If Ngozi Okonjo-Iweala, the director-general, stood up and said, “I think we ought to do the following”, they would say, “Who the hell are you? You have no role. Privately, you can talk to us, but you aren’t central”. Let us hold on to a consensus arrangement where we all have to agree and India does not, and it takes hostages. We have internal problems. We have external problems. We have problems of leadership.
The Chair: Thank you for that. That is very helpful.
Lord German: Above the sentence on leadership in your recent report, you said that change has been made incrementally. Are those increments going anywhere, or are they just random? In other words, are they steps to somewhere and someone has a goal in mind, or are they simply a set of random steps going nowhere?
Alan Wolff: They are trying to set a work programme. They failed to do that at their ministerial conference. There will be a follow-up in Geneva, but we do not know what will emerge from that. The work programme is rather diffuse; it is a little something for everyone. What Alan Beattie said, which is absolutely accurate, is that members who have aligned interests come together. It is not an earth-shaking agreement, but, on the digital economy, they said, “Sixty-six of us pledge to do the following”. That is a product of the fact that there is a goal.
One other thing is that the heroes of trade, who are the people involved in trade, operate on certain rules. They know—and the US is not attacking this—that customs valuation is very important, and standards will not be used as a barrier. Parts of the WTO work and are vitally important to the private sector, but they get no headlines.
The Chair: Thank you very much. We will go on to a quick supplementary from Lord Hannay on this question.
Q6 Lord Hannay of Chiswick: We touched on the issue of China. I do not want to ask you to go back to whether China was admitted too soon or on the wrong terms, or whatever it is. That was a long time ago and it is now in. Yet it is true that it is more comfortable, as has been said in the evidence you have given us, with the status quo that we have now than anyone else. To what extent do you think that that is due to the complete inability of the other main players—the United States, Japan and the European Union—to get together on a serious platform to talk to the Chinese about how the situation could be improved and how the problems it is causing everyone else could be addressed? How much is that due to the fact the Chinese have been very clever about divide and rule, and the three major trading powers I mentioned have been extremely bad at co-ordinating their positions on issues that they have with China? I wonder if any of the three of you could address that point, because it seems fairly fundamental in the way ahead. How do we handle China?
The Chair: Maybe, Simon Fraser, you want to touch on that, and then we will go on to the next question.
Sir Simon Fraser: Very briefly, it is a good point. The Chinese got into the WTO and applied the rules in their terms. They studiously avoided becoming leading negotiating members in the WTO. For example, during the Doha round negotiations, the core group was the US, EU, India and Brazil, and the Chinese were not at the table. Deliberately, in a way, they did not expose themselves and played it by the book, and that is part of the issue. I agree with you; I do not think we have been effective in devising means for challenging them on that in a collective way, so divide and rule applies. It has, in a sense, been a failing. I was in Brussels when they were brought in, and we thought it was a great step forward. Actually, bringing them in was the right idea, but the way that they have exercised their role in the WTO and the impact that they have had on other players in it and the restructuring of our economies as a consequence of the way they have behaved has had fundamental impact, which is very much part of this unravelling. We have failed collectively to engage with them to try to redress that. I think that is a fair observation.
Alan Wolff: Can I make one quick point?
The Chair: Yes, then we will go on to the next question.
Alan Wolff: Take steel. An OECD Steel Committee was formed in 1979. I was its first chair. The problem was the Government’s intervention in steel. British Steel was heavily subsidised at the time. So were various countries on the continent. The Japanese, unfortunately, engaged in support of their steel industry. We thought that transparency would help. It did not solve the problem. Along comes China. It has half the world’s steel production. The OECD has an operation under way to discuss the point, and has zero effect. China withdrew in 2019 from that steel forum. Collectively, we have failed to deal with even one sector, and we failed for 50 years. You are right: we have not come together to deal with the problem that we have.
Q7 Baroness Lawlor: You dealt with part 1 of my question, which was how far trade instability has been prompted by the failings of the WTO system to ensure that the principles of free trade are observed by its members. You spoke about some of the problems that we have with the removal of tariffs, non-tariff barriers, state subsidies and other distortions, and about effective dispute resolution mechanisms. Given that you have spoken about these, is there any one, two, three or more that you would like to flag as potentially the more serious? Then I have a supplementary.
Alan Beattie: The one part of the WTO system that functioned fairly well until a few years ago was dispute settlement. The US became increasingly disenchanted. By the way, it should be noted that the US has always had more of a transactional relationship with the WTO than it would perhaps claim. The spirit of the 1990s was really not that of the 1940s, the multilateralist generation. As it started to lose some high-profile cases, it fell out of love with it, during multiple Administrations, until it finally pulled the plug.
The response to that is one of the more heartening things that I have seen in the international system, which is led by the EU but not just the EU. That is the reconstruction of—I am now going to get this wrong—the Multi-Party Interim Appeal Arbitration Arrangement. Essentially, it replicates the dispute settlement entirely. Most of the big traders are members. The UK belatedly but none the less joined. India is not a member and of course the US is not a member. It remains to be seen how long you can have dispute settlement when there is no ability to write new rules. It remains to be seen whether that could have any more restraining impact on China than the previous system, and I suspect not because you essentially have the same rules. That is at least one example of part of the system that was taken away and has at least partly been reconstructed.
Baroness Lawlor: Thank you very much. The other part of the question is: given what we have said about it and the system as it is not being up to date with today’s trade and not able to cope, particularly with all the various services trades that we do, how best can the UK champion new trade instruments for services, in view especially of the absence of any secure framework? I take the point that it is businesses that make trade and people who facilitate businesses, not trade instruments, but none the less a secure framework is also needed.
Alan Beattie: Again, I repeat my scepticism that the UK can do very much beyond its own bilateral deals. Services are notoriously difficult to write deals for anyway because it is not simply having a tariff schedule. Just as an example, the EU signed a deal with Canada, the CETA deal, some time ago, and put in an innovative mechanism for mutual recognition of professional qualifications, which is enormously important. The first one that it went for was architects, which apparently was an easy one to go with because European and Canadian architects get on fine. I cannot remember how many years it was, but it was something like six or seven years at least from announcing it until that agreement went into force. It is an extraordinarily difficult thing to do. As far as I can tell, there are only two truly successful trade deals involving services in the world. One is the Trans-Tasman Mutual Recognition Agreement between Australia and New Zealand, and the other is the European Union.
Sir Simon Fraser: Thinking about that last question, it perhaps takes us a bit towards the question about the middle powers and what sort of role a middle-power democracy such as the UK can play. I agree with Alan: there is a limit to what we can do, and we should not be hubristic about that. We can be a voice that seeks to maintain what is best and functions in the multilateral institutions, and we should. We can also be creative and innovative in thinking about the evolution of the economy, the trading system and what needs to be addressed. In that context, I also think that we can and should think about how we can effectively be a player that mobilises like-minded countries that share our interests and values to try to push the system in that direction and to be a counterpoint to the power of the United States and the behaviour of China.
Therefore, the middle powers idea has attraction, but it is limited in its capacity. When you look at the middle powers, apart from defining who they are and who they are not, you find that they do not share geographic interests necessarily or indeed values in common, so it is quite tricky. There are considerable differences between us and the middle-power members of the BRICS, which have a different geopolitical position. It does push you, in my view, towards the United Kingdom looking very hard at its relationship with other western democracies and, in particular, our European partners, who share our geography and our values, and are our biggest trade partners.
Baroness Lawlor: We have very much a French economic and historic approach to centralised economy.
Sir Simon Fraser: One can debate that, and that may be more the case since we left the European Union. I would argue that when we were in the European Union we were very effective in pushing that group in the direction of more open trade. Of course, that was one benefit that we derived from it. The balance may have shifted since then. This is a very important issue and it is very live in our domestic politics at the moment. If you are looking at the countries with which you can co-operate most effectively in the context that we are living in, where we can effect real change to the growth agenda in this country in a positive direction, a lot of our focus has to be in working out the relationship with the European Union. Frankly, in the circumstances that we are in, for us to say, “We don’t have to make a choice between different partners. We’re trying to balance the US, China and the EU”, those trade-offs will become increasingly difficult for us to manage. That is one dilemma that we face.
The Chair: Baroness Anelay, who is joining us online, has the next question, which follows on very effectively from the points that Sir Simon just made.
Q8 Baroness Anelay of St Johns: Thank you. I was not sure if the other Alan, so to speak, wished to come in at that stage. I apologise if I interrupted him. If I can, indeed, build on the responses to the previous question, I note that the UK Government last June published the first ever UK trade strategy. Against that background, Sir Simon and Alan, what strategic positions do you think that the UK should adopt internationally to make the best of securing a stable, predictable trading environment that suits its interest? We already heard from you, Sir Simon, on some of the issues about how middle powers might behave. I appreciate that, Alan Beattie, you have some interesting, differing views. Could I start with Sir Simon to follow up on your previous comment and elaborate on what our strategy should be, and then turn to Alan Beattie to see whether you are fully in line with that or have some other ideas to develop?
Sir Simon Fraser: Thank you very much. I largely set out my position on this. We should be an effective and strong voice in supporting multilateral and plurilateral collaboration and co-operation between states. We should be very strong champions of rules in international relationships, and that is very important. That should be part of our trade policy approach, as indeed our broader international political approach. That affects our attitude in the WTO and in other bodies.
On the question of what strategic position we should adopt, I come back to the point that we are relatively exposed in the current geopolitical, geoeconomic environment because we are not a member of the European Union. We are not part of that triangle of major geoeconomic powers that we have been discussing, which was the US, China and the EU. That may give us opportunities, as some say, to be what you might call an honest broker or nimble, agile facilitator, but also we have to think about the consequences of that in how we manage those relationships and the trade-offs between them. My concern is that if we keep on trying to balance them all we will find that that becomes more difficult, because when we make an agreement with the United States, for example, on the regulation of AI, that will cut across the policy that the EU is adopting there and it may flow into our ability to enhance our regulatory alignment in areas where we wish to with the EU. We cannot see these things as separate vessels. In a sense, until we have decided where we are going to end up on that, it is quite difficult for us to have a clear sense of direction and purpose in prioritising our economic trade relationships.
Baroness Anelay of St Johns: Thank you. I appreciate that the next question will go further into detail about the geopolitical situation, but can I turn, please, to Alan Beattie for your response to the idea of the strategy encompassing us working with the coalition of middle powers?
Alan Beattie: I concur with Simon, and I am, if anything, somewhat more sceptical. Let me answer it this way. It is very easy to look at trade policy and say these are agreements between countries, they are Governments talking to each other, and they are international agreements. All trade is local. All geopolitics is local. There is a reason why you would think that Canada and the UK would be the absolute ideal countries to form a link with each other and be part of a middle-power alliance. They are similar-sized countries with linguistic, historical and familial links, and very much like-minded. Yet the UK and Canada have had a trade deal that has now been stalled for more than two years over the incredibly workaday issues of cheese quotas and beef standards.
Mark Carney, two days after he gave a great speech at Davos, went off and gave what I gather—I am not an expert in the politics of Quebec—was an incredibly badly received speech in Quebec in which he managed to annoy the Québécois. That is enormously important for Canada’s ability to act as an international player, because it is the dairy industry in Canada that essentially makes it difficult for it to sign any deals, and a large number of the dairy farmers are in Quebec. This sounds incredibly tedious, but in reality a lot of countries’ strategic positioning and their ability to act lie in places like the pastures of Quebec rather than the mountains of Switzerland.
Turning to the UK, let me put it this way: the best thing the UK could do is act as an exemplar. It should probably not have signed a deal with the US that certainly looked like it violated the most favoured nation agreement. At the moment, if it wanted to show its openness to the world, it could do things that it does not need a trade deal for at all, such as reverse its position on student visas and recognise that higher education exports are one of the most important services exports that the UK has. This is not as glamorous, I agree, as convening big groups of Ministers and sending out communiqués and all the rest of it. Before you talk the talk, the most important thing is to walk the walk, and that is something the UK can do on its own without even needing co-operation from any other country.
Q9 Lord Hannay of Chiswick: Can I ask about the interim dispute procedure, because that has been mentioned? I do not think it will come up under other questions. Do you think that this system that now has 60 adherents or so, including the UK, has the capacity to do a useful job in resolving trade disputes? Those 66 are a big chunk of international trade, though by no means all of it, and without the United States. Do you think that it has the capacity to develop into something, while not as good as—in its heyday—the dispute settlement procedure agreed in 1995 that overrode 301 and so on, or do you think that it will never be able to resolve anything very much?
Alan Beattie: No, it is already serving a useful role. It is already showing in particular that the system can continue and that there are big WTO members that are interested in the system and in keeping the principles. It is a question now of continuing to have momentum and to make judgments that are adhered to and gaining credibility as the years go on. As you say, it will only ever be a partial replacement.
Lord Hannay of Chiswick: Does Alan Wolff want to say something about that, too?
The Chair: Yes, perfect. Then we will go on to the next question.
Alan Wolff: Interestingly, in the last five and a half years that the Multi-Party Interim Appeal Arbitration Arrangement has been in place, it has processed two cases. Under the old system, every country appealed everything two-thirds of the time, so hundreds of cases were sent off for an appeal. Why? You could keep your non-conforming measure. You could well have believed that you were right, but also you were demonstrating to your own folks back home, your political constituency, that you were fighting like hell to keep their measure in effect. There should be a study made of where the MPIA has succeeded. The two cases that it processed were very well thought through. They were delivered on time and did not violate the rules. The old system, the appellate body, became a substitute for negotiation, to a large extent. That is the US view, which I think is correct. That said, enforceability is absolutely essential to the world trading system’s rules. Whether it is the MPIA, or the MPIA looked at to see whether it fulfils all its promise, there needs to be finality to disputes and enforceability. There will be some exceptions, such as real national security, not an excuse for protectionism. I think we can get back to that.
The Chair: That is a very optimistic view.
Q10 Lord Anderson of Swansea: Gentlemen, I have two questions, one general and one relating to UK personnel. On the general one, I am with you in recognising our temptation in the UK to overplay our potential role. I think of Eden’s three concentric circles in the middle 1950s, with of course the UK at the centre. Can you say something from your own vantage points of the effectiveness of our policy over the past recent years, particularly in relation to dealing with our own UK industry and helping it maximise its effect internationally? I will come on then to the personnel question. How effective have we been?
Alan Beattie: This is not a subject that I know a great deal about, though I know that engagement with industry has been intermittent. Sometimes it has been happier with it than others. I am sorry to say—I will go back to the same thing—that the most complaints I hear from industry are to do with the EU; they are not to do with anywhere else. The reality is that modern business is much more to do with regulation than it is to do with tariffs. Our biggest and most regulated trading partner is the EU. The EU also sets regulations for much of the world, or at least inspires regulations across much of the world. Realistically, if you really want to look at the relationship with business, the UK’s relationship with the EU is the right context to do it in.
Sir Simon Fraser: On the question of the effectiveness of British trade policy, I apologise, but I think it is very important to state that we have started from a strategic error that was made 10 years ago in terms of our trade policy. We have been recovering from that, and we have been learning the consequences of it. The people who advocated Brexit thought that we were going to be able to increase trade with China. Many of them have since become the most strident opponents of trade with China. They thought that we would be able to do a comprehensive FTA with the United States. The United States has hit us with 10% tariffs on goods even though we do not have a surplus in goods trade with the United States. Many of the expectations did not come to pass, so it is a complicated context.
There was a slight distortion of our trade policy as a consequence of that, in which we were seeking to demonstrate effectiveness through doing numerous FTAs with different countries to show that we could do them. We have done them, and some have quite good, innovative elements within them that have gone beyond what we had before, but in terms of the net benefit to the UK economy over time they are very marginal and by no means compare with what I believe is now demonstrated that we have lost in the relationship with the EU. That is the context and we have to bear that in mind.
I would like to come back on the question of capability and staff because that is important. Should I go on to that?
Lord Anderson of Swansea: Shall I start it? Clearly, the trade instruments are only as effective as the people who wield them. Until Brexit, this was not under our control. We have had a steep learning curve post Brexit. I wonder whether you have comments on the recruitment and training of our trade personnel. Should we look more to industry for people who actually do the selling? Sir Simon, you had this problem within the Foreign Office about looking at relations with outside experts and so on. We initially recruited at least one New Zealander with experience of trade negotiations. Are we recruiting the right people? Are we training them in a proper way, which can only affect the quality of our policy?
Sir Simon Fraser: It is a good question. I spent two periods of time working on trade in Brussels. Of course, you have a whole directorate-general there of people who are basically professional trade negotiators, and they are extremely experienced and skilled. Sometimes I felt, frankly, they were too skilled because they were so desperate to win every negotiation that they wanted to win it at least three times and never knew when to declare victory. Nevertheless, there was that expertise. When we withdrew, we faced the challenge of not having that depth of expertise within our national Civil Service. On the whole, successive Governments have done quite a good job of generating that expertise, of training people, of drawing on experience—
Lord Anderson of Swansea: Can I say in passing that, in this government document, I saw no reference at all to the present personnel side of things?
Sir Simon Fraser: I have not read that document in detail, so I cannot comment on it. First, there was a Department for International Trade, and then it was merged into the business department. There are people in there who have quite a lot of experience and who delivered effective trade negotiations in FTAs on behalf of this country. It was a challenge, and it decided to bring in Crawford Falconer at the start to head it. I do not think that we have been significantly hampered, perhaps to the extent that people like me thought we would be, by that lack of expertise. We have gone some way to building it up.
Lord Anderson of Swansea: Should we go more into industry to recruit?
Sir Simon Fraser: That is possible. It is very important that we talk about business and industry, because, as has been said, they are the people who actually are the economic operators who need rules and a predictable environment in which to operate. They have a strong interest. As we know, there are all sorts of issues about bringing people from the private sector, into the public sector, around salaries, terms and conditions and expectations, but a number of people have come in from the private sector. I know in my own case one or two people who have spoken to me about it and expressed interest in doing that. That is one thing that can be done. The other thing that we need to make sure we are doing is effective consultation with business, really drawing on and understanding their first-hand experience of operating in the markets. That is certainly something that we must have in focus at all times.
Alan Beattie: I do not have a great deal to add, but make one observation. When the UK left the EU and had to replicate all the EU’s trade deals, there was quite a lot of disparaging commentary such as, “Oh, this is just copy/paste”. I do not think that was quite fair. For a new department to replicate all those deals, particularly the deals at the WTO, and renegotiate them, for a Civil Service without a big cadre of trade negotiators was very much a non-trivial task. I think it was the Foreign Office that took the lead in training up trade negotiators. It did well. That was very well done. I remember at the beginning of all this, when people would say, “What do you think about trade policy?”, I said, “Oh, as long as it relies on the civil servants, it will be fine. As long as it relies on Ministers, it will be a disaster”.
The Chair: Well, thank you very much. We are half Civil Service, half Ministers in this room.
Lord Anderson of Swansea: Will Mr Wolff say something about the training of the trade personnel in the US?
The Chair: Alan, do you want to just touch on it? We are running slightly behind. No? Okay. Maybe we could hold that thought while Lord Hannay asks his question. Some of what you asked has been covered but you may want to expand on some of it.
Q11 Lord Hannay of Chiswick: I want to begin with something of a declaration of interest, since I was a member of the last British negotiating team before we joined the EU in the Kennedy round. At that time, it was very clear that we were a minor player. The big decisions were taken by the European Union, the United States and Japan. We got in on the act on some of them because we had an outstanding chief negotiator in Roy Denman, but we did not punch at all above our weight, and some would say we punched below our weight then. I do not think we should, in any sense, underestimate the problem that we have given ourselves by starting a new British trade policy, which is the object of this inquiry, because it is quite serious. The personnel issue is serious, although many of the people who come and brief us are, to my mind, extremely impressive. We are on an improving curve on that.
I want to ask about the recent WTO ministerial. One of you at least gave a pretty negative analysis of what it did not agree at the Yaoundé meeting. Could you cast your eyes forward and give us, all three of you perhaps, your assessment of the way ahead, either in a context of the full WTO or, as may become more likely in plurilateral contexts, with the United States not prepared to sign up to any binding agreements in a multilateral framework? That is the first question.
The second that flows from that is: what do you think of the British paper that was put in to the WTO ministerial about three weeks before the meeting? Was it a valuable contribution? Is it still relevant, or has it been simply swept away along with the mass of other paper that international organisations meeting together generate?
The Chair: Should we ask Alan Wolff to go first on this? Alan, maybe touch on your view on the personnel issue in terms of trade negotiations as well.
Alan Wolff: Yes, sure. First, Roy Denman was a good friend. What Britain did was it captured Brussels, and Roy Denman became the director-general for trade. It was not Willi Haferkamp who led the Tokyo round; it was Roy Denman. We miss the voice of Britain, looking at the WTO and how it has evolved, and the GATT before it. Britain always had very strong input. Certainly in the early days it had a stronger input than perhaps later, except that it always had a strong input. I look at not limits but opportunities.
At Yaoundé, what happened? I have written on this. Sixty-six countries came together and said, “We’re going to have an e-commerce agreement, and we’re going to do it without formal approval in the WTO sense that we’re not putting it to a vote, which means consensus. We are not putting it up for veto by India, South Africa, Britain, Brazil or anybody else. We are just going ahead and we are doing it”. It is not an earth-shaking agreement. It is pretty good stuff as far as it goes. In fact, even the United States will live up to most of it even if it does not sign it. I tend to be optimistic, in part because pessimism never achieved anything. Optimism sometimes could be a fool’s errand.
On the 6 March submission that the UK gave, it is relatively bland. It is a nice statement in generalities about some good things that can be accomplished. It does not get very specific. It should be considered that it was the contribution before Yaoundé. Now there has to be a contribution after Yaoundé. What should the WTO be doing? It should address issues of major moment to the world. We have talked about them: what to do with the shortage of fertiliser, the prices of fertiliser rising and what that means for the world. There is a paper that I co-authored with Simon Evenett at Lausanne, Bernard Hoekman at the European University Institute and Petros Mavroidis at Columbia University. All of us are very pro-WTO. What do we do now? We go ahead and we agree to what we can agree and we put it into effect unilaterally. Eighty-seven per cent of world trade is not trade with the United States; it is the trade that is not with the United States. Can the rest of the world move forward? Will the US come along to the extent that it sees some utility in it? Yes.
I guess my most important point to you is that the UK can contribute in a major way. I benefit from not being as close as Simon or Alan Beattie to see the limits that may exist, but I remember the British voice. When I was at the WTO as a deputy director-general and then partial acting director-general for six months at the end of my time in Geneva, I came to the Foreign and Commonwealth Office and to No. 10, and I said that the UK is out of Brussels, and it is an opportunity to give full-throated support to the fact that Adam Smith was right, Cobden was right and David Ricardo was right. Business has an interest in efficiency, which is what the WTO was all about, and the GATT before it—in other words, allowing those who wish to sell around the world to do so. Hopefully, there will be a resurgence of business understanding that the US is an aberration right now in terms of its policies of high tariffs, which make no sense whatever, and there needs to be international co-operation.
What can the UK contribute besides thought leadership? Some specifics. Is there something to be done on financial services? Is there something further to be done? You have learned a lot perhaps on architectural services. One reason the WTO is so lacklustre is that it does not seem to be discussing what business would like it to address, and there is an opportunity to find out what is needed now. What is certainly needed is a return to stable tariffs. If it is 10%, it is 10%, but I do not think the American people are going to live with that very long. There is no tariff political party in the United States, not the Republicans, not the Democrats. When Trump is gone, who is the force behind a high-tariff policy? I do not think we get that back. We may not get back to total openness, but we will come a lot closer to it than we are today.
Q12 The Chair: Thank you very much again. Again, that is another optimistic message. Alan Beattie, why don’t you go next and then Simon? Then we are going to move on. We have one last question. Thank you very much, Alan, for staying on the line for another few moments.
Alan Beattie: On the question of the future of the WTO, I refer to what I said before about the plurilaterals and the hopeful possibilities there. On the UK paper, if it is the one that I am thinking of, most of it was fine, if not particularly remarkable. One thing raised my concern: it mentioned the most favoured nation status—MFN. The wording was something like, “Pressure is driving members to question MFN and the level playing field, and we stand ready to engage on these discussions”. It did not say, “We agree with undoing MFN”. It said, “We stand ready to engage”. I think this is probably a mistake because it is taking the US criticism of MFN in good faith, whereas it is not in good faith. The US simply dislikes the WTO. If you acceded on something, it would be something else.
I remember when it suspended the dispute settlement body that everyone tied themselves in knots saying, of things that are perfectly good, “Maybe we could shorten the deliberation time. Maybe we could just focus the judgment and make it clear precedent isn’t binding”, and none of it would have been good enough. There is the same thing here. The US does not want a strong, active WTO with a more flexible approach to MFN; it just does not like the WTO, straight up. The EU did the same, by the way, and indeed gave an interview to the FT saying that it was prepared to look at MFN as a founding principle. I think I am right in saying that the US subsequently cited both the EU and the UK papers, saying, “Oh, look, there you go. MFN is in play”. I understand you might want to engage, and it did not say, “We abandon MFN”. It said, “It’s the bedrock”. Yet by saying, “We are prepared to engage”, you encourage the idea that it might be fundamentally challenged.
Baroness Lawlor: How long has the US been pretty hostile to the WTO?
Alan Beattie: The hostility has been building over the decades. There was suspicion from the 1990s. It came after China’s accession in the early 2000s and then through the 2010s. It was building through that time.
Sir Simon Fraser: I do not think I need to add to this question on the UK paper. You have heard from the two greater experts on the detail of that.
Lord Hannay of Chiswick: We are taking evidence from Mr Lighthizer. We will get a version of American hostility towards the WTO and all its works.
The Chair: I hope so. To follow up some of the other questions, Sir Crawford Falconer is coming to give evidence to us. Also, we will be talking to a lot of businesses. It is very important that we hear from them how this works, not just from the practitioners. Baroness Bonham-Carter, the last question falls to you.
Q13 Baroness Bonham-Carter of Yarnbury: It does. To start, Mr Alan Wolff, I loved you saying pessimism never achieved anything. That is something that I try to live by, too. Let us hope, particularly at the moment. I am not sure who this question goes to. Lord Hannay referred to plurilateral agreements agreed at the WTO for the UK. I am moving slightly out of what we have been talking about before, to the joint statement initiative on e-commerce. How do you review the reported resolution to implement this agreement outside the WTO framework? As you know, digital services are absolutely essential to UK export strength. Making binding e-commerce rules seems to me a strategic priority. Alan W referred to you as “Alan B”. I do not know if this is for you.
Alan Beattie: As I said before, it is a promising way of doing it. It is better than trying to get it into regional trade deals where, of course, you do not have the right configuration of countries, and it is clearly not going to work in the WTO as a whole. The e-commerce agreement has some drawbacks. The US is no longer a member since the Biden Administration withdrew it. One thing that will be really helpful in there is to have at least something binding on cross-border data flow. However, as long as you have an agreement with China and the EU in it because of the EU’s attitude to data flow—it does not put data flow into trade agreements because the Court of Justice is against it—with all those caveats, yes, this is an interesting test case for how you can do something outside the WTO. This is quite similar to the MPIA that we talked about before, in the sense of trying to have something that is as close to the WTO as possible and uses WTO mechanisms as much as possible while bypassing the veto of India and other countries. Of all the things that are going on in the WTO, this is one that I will keep an eye on.
Baroness Bonham-Carter of Yarnbury: I had to leave the room at one point. I am sorry if I am asking you to repeat yourself.
Alan Beattie: I will attempt to be optimistic about it, which goes against my character and my brand.
Baroness Bonham-Carter of Yarnbury: Do you not think the lack of US involvement is very negative?
Alan Beattie: It is negative. That was the Biden Administration pulling out of all sorts of things involving data. The current Administration does not have the same attitude at all. I do not think it is that the US has permanently displaced itself from the digital governance field.
The Chair: Alan Wolff, would you like to talk about this briefly?
Baroness Bonham-Carter of Yarnbury: We were just asking about the e-commerce element of the trade deals and the fact that America is not part of it. The other Alan thinks that that is not such a big problem. What are your views on this?
Alan Wolff: The US will align itself with much of what is in the agreement. It said that it was afraid, as countries generally approach this thing, of some loss of some regulatory freedom. Privacy might be an issue down the road. There is a regulatory approach in Brussels that is not shared by the United States. Many things in that agreement—electronic signature, facilitating business transactions—will be not only adhered to but supported by the United States. As Alan Beattie said, the Biden Administration were the ones that had the problem with freedom of cross-border data flow. Certainly, China would, too. As opposed to the Biden Administration, the current Administration and future Administrations will say protection of source code will be very important, with no forced server location. You can build on this current agreement.
I characterise the agreement a little differently from Alan Beattie. Outside the WTO structure, yes; not outside the WTO. It was WTO ambassadors who created this thing, meeting in Geneva under the auspices of the WTO, just as all these plurilaterals that came along created in Buenos Aires at MC11, ministerial conference 11, in 2017. They just went ahead and did it, which I am a great fan of. We will not like it always. In fact, members with shared interests had just said, “We’ll do it”. They did it for facilitation of services. They have done it for investment. They are not earth-shaking agreements. The first chapter has been written now on e-commerce by these 66 countries, and it will be added to over time. It is a way forward.
No country, no member of the WTO, is willing to give up the consensus principle. They say, “Oh, it should be exercised with greater responsibility”, but it is not being exercised that way. One of the failures of Yaoundé, the failure at Abu Dhabi two years ago and the failure in Geneva before that is getting away from a single-member veto. They do not know how to do it, and I do not know that they will come up with a solution other than just going ahead and groups of like-minded countries can find a way forward. It is sort of a Carney approach. Yaoundé was a success because WTO ambassadors and the countries that they were representing said, “We’re going ahead”. In terms of 166 moving together in lockstep? Not a chance, and they are not doing it.
The Chair: A last comment maybe.
Sir Simon Fraser: Very briefly. I am commenting on the general rather than the particular. It seems to me, picking up on this, that this is really the trade policy version of coalitions of the willing, which is very much the spirit of the times.
Baroness Bonham-Carter of Yarnbury: It should not be a binding obligation.
Sir Simon Fraser: It probably is not going to be a binding obligation. Clearly, it cannot be on the entire membership. It is important that we are open to that. It is good if coalitions of the willing operate—this is Alan Wolff’s point—within institutions rather than outside or against institutions. It is a way of giving new life to the structure, which is a good thing. Since we have been focusing on the British position, that is the sort of activity where Britain—we have been talking about the British voice—still can have a voice. We are quite good at creative diplomacy, we have a wide range of relationships, and we are experienced in multilateral fora. We should focus on making the contribution that we can in those areas.
The only other final point that I would make is to pick up your comment, Chair. In all this discussion, it is really important we bear in mind that our policy should be designed with the very important primary objective of creating a context of predictability and stability for business and investment operators. That is what it is all about, and that should always be at the heart of our thinking.
The Chair: Thank you. That is a very good note to end on. I thank the witnesses who came to speak to us today. Alan Wolff, having you online was a huge privilege for us. You have given us some extremely useful pointers, but please visit us in person if you are in the UK. We would appreciate that. Thank you for joining us. Alan Beattie, keep spreading the gospel of trade in the Financial Times. I know you were not representing it today. The more people who understand the importance of trade, the better. To Simon Fraser, it was a great pleasure to have you with us today as well. Thank you for your points.
Please monitor our progress as we head towards producing a report. If any of you have any interesting ideas in terms of other witnesses, we would be very grateful to hear from you, because we want to really try to produce something that will get people to think much more effectively about how to generate economic growth for this country through our trade instruments. In the meantime, thank you very much indeed.
