Brexit at the crossroads: Why US support for a far-reaching agreement is fundamental

The Rt Hon Owen Paterson MP

The Heritage Foundation
Washington, D.C.

19th September 2018

It is a pleasure to return to Heritage and I would like to thank Nile for, once again, giving me the opportunity to update you on the progress of the Brexit negotiations. I want to highlight why a free-trading, global United Kingdom is so important for the United States and what a huge difference co-operation between like-minded people in Washington and Westminster can make in securing that outcome.

When I last spoke to you – almost exactly a year ago – I outlined the clear democratic mandate on which Brexit stands:

At the 2015 General Election, the Conservatives promised that, if elected, they would hold a decisive in/out referendum on the UK’s membership of the EU. The Party was returned to Government with an increased number of votes and seats in the House of Commons.

When that referendum was held in 2016, 17.4 million people voted to leave the EU – more than have ever voted for any issue or political party in British history. This was a decisive vote to leave, but did not specify the precise details.

In her speech at Lancaster House in January 2017, the Prime Minister gave the detail on what leaving would look like. She said:

“We do not seek membership of the Single Market…Full Customs Union membership prevents us from negotiating our own comprehensive trade deals…We will take back control of our laws and bring an end to the jurisdiction of the European Court of Justice.”

At the 2017 General Election, the Conservatives reiterated this, pledging that:

“As we leave the European Union, we will no longer be members of the single market or customs union.”

The Party won more votes than any Party for 25 years. The Labour Party also endorsed leaving the Single Market and the Customs Union so that 85% of the overall votes cast in the election were for Parties having defined Brexit as leaving the Single Market, the Customs Union and the remit of the European Court of Justice. The principal “Remain” Party – the Liberal Democrats – actually saw its number of votes fall.

Since then, the Government has published its most disappointing “Chequers Agreement”, setting out its proposals for the future UK/EU relationship. This document, however, fails to deliver the Conservative Brexit manifesto pledge in anything but name. It is even “strongly opposed” by the EU’s Chief Negotiator, Michel Barnier. A former President of the Dutch Customs Association has expressed his dismay that the plan does not even explain how cross-border value-added tax would be handled.

It is completely unacceptable and I will vote against it.

The paper proposes that the UK remains as if in a “combined customs territory” with the EU alongside a commitment to a “common rulebook” for trade in goods, including agri-foods.

This would see the UK collecting tariffs on behalf of the EU and, worse still, bound to European rules on all goods, including food and agricultural products. The “common” in “common rulebook” is a complete misnomer; it is nothing but the European Union rulebook, over which the UK will lose its right to vote once we leave the EU. We will not even help to draft the rules. The Chequers Agreement accepts this but meekly states that we “should be consulted” as European rules are changed. A sovereign state merely being “consulted” on the rules imposed upon it would not be taking back control.

We are told that Parliament will have the ability to reject further changes to EU law, yet Chequers also says that the UK will “commit by treaty to ongoing harmonisation” in areas covered by the EU rulebook. Parliament’s supposed independence comes on the condition that the EU can impose “consequences” should MPs ever have the temerity to exercise this theoretical right, leaving us as a permanent rule-taking supplicant without any practical chance of amending laws imposed upon us.

Crucially, accepting the terms of Chequers would severely impede the UK’s ability to strike new trading arrangements around the world, and so embrace the chief economic opportunities of Brexit. That is, obviously, bad news for the UK. But it is also bad news for the US.

To see why, consider the existential battle currently being played out across the world. The battle of ideas between competition-led capitalism and state-led intervention, between competition and cronyism. Our enemies are poverty and wealth destruction.

I believe that wealth can be created or destroyed. I believe it is more difficult to create than it is to destroy. I believe that competition, exercised by a free people based on the quality of their ideas and their capacity for hard work, is the greatest force mankind has ever known to create it.

Where cronyism, protectionism and over-regulation have destroyed wealth, suppressed technology and pushed people deeper into poverty, competition has spurred spectacularly innovative ideas and turned them into companies that employ hundreds of thousands of people.

Over the last two decades – with markets opening after the fall of Communism – 1 billion people have been lifted out of poverty. Over 100,000 every day.

Paul Ehrlich famously wrote in 1968 that:

“The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now.”

Then, the food supply was under 2000 calories per person per day in 34 of 152 countries. By 2013, that was true in only 2 of 173. Technological improvements, open markets and the spread of democracy have seen famine all but disappear outside of war zones.

The key figure was Norman Borlaug, the father of the Green Revolution whose work saved the lives of 1 billion people. Borlaug’s pioneering work created high-yield, disease-resistant wheat and rice varieties which could be grown in varying climates. By 1963, 95% of Mexico’s wheat was Borlaug’s variety, and the harvest had grown by six times from what it had been before his breakthrough.

Borlaug then began shipping his seeds to India and Pakistan in order to combat the appalling starvation crisis. His new technologies were rapidly adopted.

Now, pace Ehrlich, India and Pakistan have been net food exporters for decades. Borlaug is recognised as one of the great heroes of the twentieth century. He is one of only seven to have received the Congressional Gold Medal and the Presidential Medal of Freedom, as well as the Nobel Peace Prize.

The UK and US have for centuries promoted competition on the basis of that great aspirational principle – the heart of the American dream – that your children can have a life better than yours. From Magna Carta to the Industrial Revolution, you have taken British ideas, forged in the fires of competition and made them an exemplary reality for the rest of the world. I hope you will permit me to say that we played some role in your success.

We have had our differences, of course, and the US staged its own version of Brexit in 1776. But there are clear similarities between the American fight for independence in the eighteenth century and the UK’s desire to govern our own affairs in the twenty-first.

Then, as now, the dissatisfaction stemmed from the over-reach of a remote, unrepresentative power, embodied by the famous rallying cry of “No taxation without representation.” Thomas Paine observed that “there is something very absurd in supposing a continent to be perpetually governed by an island.”

Those same impulses of democratic control – a people wishing to decide who spends their money, who shapes their destiny and having power to remove their rulers by voting – underpinned the Brexit vote. There is something equally absurd in supposing our islands to be perpetually governed by a continent.

There are also lessons from our shared history that any kind of vindictive negotiation settlement is not the answer.

By contrast, following the War of Independence, the extraordinarily magnanimous Jay Treaty of 1794 paved the way for a decade of peaceful trade between our two nations on a mutual most-favoured nation basis, alongside American traders gaining rights to operate in the British West Indies. We agreed that disputes over the Canadian border and a number of wartime debts would be settled by the then almost unknown means of arbitration, setting an example which other nations were to follow.

Chief Justice Jay and the British Foreign Secretary, Lord Grenville, showed extraordinary foresight in recognising the need to move on from the War and the Revolution in favour of:

“…a firm, inviolable and universal Peace, and a true and sincere Friendship between His Britannick Majesty, His Heirs and Successors, and the United States of America; and between their respective Countries, Territories, Cities, Towns and People of every Degree, without Exception of Persons or Places.”

Seeking an agreement:

“…between His Majesty and the United States of America, that there shall be a reciprocal and entirely perfect Liberty of Navigation and Commerce, between their respective People.”

The decade following the signing of the Treaty saw US exports rise from $33 million in 1794 to $78 million in 1804. Over the same period, US imports rose from $36 million to $87 million.

There is surely a lesson here for the UK and EU negotiators as to how a mutually-beneficial, amicable solution can be reached. Any who are tempted to see the negotiations as a means of punishment would do well to remember Edmund Burke’s words On Conciliation with America:

“I can scarcely conceive anything more completely imprudent than for the head of the Empire to insist that, if any privilege is pleaded against his will or his acts, that his whole authority is denied; instantly to proclaim rebellion, to beat to arms, and to put the offending Provinces under the ban. Will not this, sir, very soon teach the Provinces to make no distinctions on their part? Will it not teach them that the government against which a claim of liberty is tantamount to high treason, is a government to which submission is equivalent to slavery?”

Our two nations are now, once again, joined in a common cause and a common struggle. It is a struggle to show the world that where competition is weakened or crushed, where government replaces what the private sector can do, people lose out. The poorest in society lose out most of all. Look at Venezuela.

Brexit is a key event in this struggle. It must be used to reshape the UK as a strong, independent nation and a powerful advocate for global free trade. We can set our own policies to maximise competition – improving quality and driving down prices for all consumers. 

We have heard much on the media about the concerns of big producers, many of which are multi-national businesses. Yet only 12% of our economy is accounted for by exports to the EU. The European Commission itself says that 90% of global economic growth in the next 10-15 years is expected to be generated outside Europe.

We must remember that the costs of EU regulation are felt throughout the whole economy – including by businesses which do not export to Europe and, most especially, 100% of consumers. Outside the Customs Union, Economists for Free Trade suggest that the poorest households will be 15% better off.

If the US and UK can agree a Free Trade Agreement which sees the UK out of the EU’s regulatory sphere, it will be enormously beneficial to the US’s farmers, businesses and consumers. Such an agreement is in the American interest, because the US and UK face the same problems from Chinese market distortions, such as an over-capacity of supply in the steel sector.

Our inability to deal with such distortions has fuelled questions over the whole concept of trade liberalisation and its capacity to alleviate poverty and create wealth. In turn, this has led to a political culture of ever-greater regulation and an ever-weakened private sector.

But a new, independent UK trade policy can make the case for free trade afresh. It can build on four fundamental pillars which reflect what we can do unilaterally, bilaterally, and as a member of global bodies including the WTO. 

Part of the bilateral agenda is an agreement between the UK and US while we are also negotiating an agreement between the UK and the EU. You might be tempted to say: “We will wait and see what your agreement is with the EU before we proceed with you.” That would seem logical. 

As you know, the UK will be negotiating and able to sign new agreements in the “implementation period”, beginning from the point of our formal exit from the EU in March 2019. But it is simply not feasible for you to wait for our negotiation with the EU to conclude and then sign a deal with us, for this reason:                                                 

If our negotiations with the US and the EU are not concurrent, the UK will be forced into the regulatory regime of the EU in some fashion and there will be no prospect of a serious trade deal in the future. If that occurs, the US will have lost a significant opportunity.

Firstly, you have said clearly in trade fora that you are not protectionist. The US has been one of the strongest forces for liberalised trade on the planet.  A deal with the UK – a country at a similar socio-economic level so there can be no race to the bottom or offshored US jobs, a country where there is a balanced trade relationship – is the ideal candidate for your bilateral agenda. We are each other’s largest source of foreign direct investment. We both employ over 1 million of each other’s citizens.

Despite his many protectionist actions, President Trump knew this when he proposed a bold free-trading vision at the Quebec G7 meeting in June. “No tariffs, no barriers,” he said, “that’s the way it should be.” He also knew that three G7 members – France, Germany and Italy, bound by the EU’s external tariffs – are not capable of joining that project.

This also highlights my second point. The possibility of a significant European power moving away from the prescriptive approach of the EU’s rulebook to a system based on outcomes could signal a significant shift in the battle of ideas.  

The Chequers Agreement proposes to keep us tied to the EU’s extreme technological risk aversion, which has held back innovation for us in the UK. Once again, it is completely unacceptable and we must now break free of it.

US industries have long complained about the EU’s regulatory system embedded by a ferocious application of the Precautionary Principle. This was exemplified by a recent European Court ruling that organisms created using pioneering gene-editing techniques should be subject to the same almost prohibitive regulatory hurdles as those created by genetic modification must clear. It will have, as plant physiologist Professor Stefan Jansson from Umeå University in Sweden puts it, “a chilling effect on research, in the same way that GMO legislation has had a chilling effect for 15 years now.”

It is an appalling indictment of this regime that the world’s largest chemical company, BASF, has abandoned all further biotechnology research for the European market. Their entire blight-resistant potato project has moved to the USA, which is terrible news for those UK farmers forced to spray their potatoes dozens of times in the absence of a blight-resistant crop. Bayer is soon to follow suit and take its biotech research elsewhere.

Europe’s reluctance to adopt the latest innovations in agriculture diminishes potential yield and uses up more land than is needed. US corn yields have overtaken those of France in the last 20 years. Now, France is missing out on over 4.5 tonnes per hectare compared to the US, amounting to a total loss of 6.1 million tonnes across its 1.5 million hectares. If France had kept pace with US technology, that crop could be worth an extra $1.2 billion to French agriculture, or else France could free up over 500,000 hectares currently used for the corn crop and put it to use for wildlife, recreation, or forestry.

Leaving the EU means that the UK can strengthen our role by retaking a full seat on the world bodies that determine global regulation, at which we are currently represented by the EU collectively. These include the WTO, the World Organisation for Animal Health (OIE) the Codex Alimentarius Commission, which regulates guidelines on food and food safety, and the International Plant Protection Convention. In so doing, we will regain our right to vote on such bodies, as well as our right to initiate new standards and propose amendments to existing ones working closely with like-minded allies.

Thirdly, we are both affected by the kinds of anti-competitive distortions of the market in China and elsewhere. We can do in our agreement what had been the hope in the TTIP – a twenty-first century set of disciplines that could be applied to third parties. 

We wish you well in your negotiations with the EU, but the US must determine whether you think the kind of deal you wish to negotiate – one that lessens distortions and eliminates unnecessary bureaucracy – would be easier with the EU than it would be with the UK. The fact that we will both be negotiating with them at the same time will help us both to reach a better understanding with the EU.

The fourth reason that a US-UK trade deal is so important for both parties draws upon the strength and endurance of the bond between our two countries. We are united by our history, our culture and, perhaps most of all, by our language.

We have a shared system of values. The British Council recently surveyed young Americans, who ranked the UK first against seven other major countries for: “being a force for good in the world; having a free press, fair justice system, and strong non-governmental institutions; valuing individual liberty; and being a strong example of a democratic society.”

We have shared geo-strategic and geo-political interests in sectors like defence, intelligence, financial services, and pharmaceuticals where our industries form part of an integrated whole. 

Broadening that market, with the UK once again becoming a rule setter for the world rather than a rule taker will be most important. Together, we can push back against those who seek to suppress the extraordinary efforts in wealth creation that have lifted so many out of poverty since 1945.

For too long, the UK has languished, unable to play the full partner you have needed to make this case around the world. No longer. But we need your help to emerge as a full member of the WTO and other bodies, undamaged, and we need your help to ensure we break free of too close a regulatory bind with the EU.

It was excellent to hear your Ambassador in London, Woody Johnson, say this summer:

“I'm super confident about the relationship between the US and the UK. I'm very confident about our future together, I'm very confident about what happens after Brexit.”

I share his confidence. Brexit marks a crucial moment in the battle for the heart of the global regulatory system.

The US must act now, with determination and the entrepreneurial spirit that has characterised your nation from its beginning.

The US must take full advantage of this unique opportunity to have the world’s fifth largest economy and second biggest exporter of services push hard for competition-based regulatory and trade policy alongside you.

Together, we can turn back the tide of anti-competitive regulation around the world, and create wealth where previously it has been destroyed.