6 February 2017

Theresa will pay dearly for a deal with Trump

By Garvan Walshe

“Newspaper is as good as fur for insulating your uniform,” was the order allegedly issued to unfortunate Wehrmacht conscripts, as Germany’s Operation Barbarossa ground to a freezing halt in the winter of 1941.

At the most superficial level, newspaper is decent insulator (the thermal conductivity of fur is around half that of paper). But try crossing a river in your newspaper-as-good-as-fur coat and you’ll soon realise its inferiority.

It reminded me of the Brexit White Paper’s introduction, where it insists: “The referendum result was not a vote to turn our back on Europe. Rather, it was a vote of confidence in the UK’s ability to succeed in the world.” There’s something out there, it echoed, that’s just as good as the EU for trade.

The United States may be big enough to replace the EU trade that will be lost when the UK leaves the single market –  but that’s where any similarity ends.

Most obviously, it’s a lot further away. We may like to think of the rest of the world as overseas, but there’s a big difference between the 22 miles of the English channel, and the several thousand of the Atlantic ocean.

It doesn’t cost that much to pop over to Dusseldorf for an afternoon meeting. It’s not so easy when the meeting’s in LA. And good luck bringing your Iraq-born business partner.

More important, though, anyone who thinks you can just replace one market with another is someone who doesn’t understand the reality of business.

Developing new markets takes, as George Harrison might have put it, a whole lotta precious time, and a whole lotta spending money.

In the meantime, British companies that have built business relationships with European companies will lose sales, cut costs to avoid running out of cash, and shed jobs. Many will go bust because they won’t be able to adapt before their creditors call in their debts.

The companies that survive this politically driven creative destruction would, in normal times, be joined by new ones focused on the American market, trading under a new comprehensive free-trade deal. People dependent on the old companies would have lost their jobs, but new jobs in new, probably more innovative and productive startups would replace them.

Changes such as these are behind the claims that Brexit could provide an economic boost.

But the new, quite-possibly-superior jobs, wouldn’t go to the people who feel left behind by European trade. While Britain could plausibly export services and certain niche, high-tech goods to the United States, it won’t be able to compete in semi-skilled manufacturing from the other side of an ocean. Nor is the UK proposing a single market with the United States. Gains from deep integration will be lost completely.

American trade negotiators are among the world’s best. They know Britain has left itself desperate to gain more access to the US economy. They were always going to demand that the UK align its regulations with the US’s. This is not simply a matter of hormone-fed beef on British supermarket shelves, American pharmaceutical companies think the NHS’s buying power (it’s by far the single biggest drug buyer because of Britain’s unusual state healthcare monopoly) keeps drug prices artificially and unfairly low.

And then there’s President Trump himself. His entire career has been built on imposing losses on the weaker parties in any deal: refusing to pay suppliers, declaring bankruptcy and leaving former partners on the hook for accumulated debt.

Theresa May didn’t want to be left on her own negotiating with the Americans. She’s there because of a major mistake in her negotiations with the EU.

She thought she could appease the Leave side of her party by promising to take back control of immigration control and to leave the jurisdiction of the European Court of Justice, while staying in the single market for those areas that matter most: finance and industrial manufacturing.

The Prime Minister hoped, against all evidence, that Germany would somehow persuade the rest of the bloc to endorse this “cherrypicking”. She even hoped, despite Angela Merkel’s firm and repeated assurances to the contrary, that Germany would support British cherry-picking itself.

May’s Government hears what it wants to hear. The Brexit White Paper illustrates this perfectly. By claiming that Britain is set fair to do well outside the EU, it twice descends to cheap propaganda.

First, by comparing trade growth rates rather than total volumes, it tries to suggest that the future of trade is outside the EU (“increasingly we are trading with the emerging markets of Asia and the Americas”). It is great that trade with Chile has grown to almost 20 per cent in the last ten years; but it still amounted to about £1 billion in 2015, five times less than our trade with the Czech Republic.

Second, it artificially inflates the importance of the US, by presenting it as a single trading partner, while also listing EU member states separately. The reality is that the EU takes 40 per cent of British exports and the US, only 16 per cent.

Who are they trying to fool? Mr Trump? His trade advisers have surely worked out that British exports to America would have to double to make up for a fall in a fifth in exports to the EU. He will appreciate the leverage it gives him over Mrs May.

That he knows his position of strength was clear from the two leaders’ press conference in Washington. She tried to bounce him into committing “100 per cent to Nato” in public as well as in private. Her spokespeople insist she got him to agree. They even rustled up a letter from Baltic and Nordic ambassadors who hoped she had extracted the concession.

But the press conference’s tape and transcript (also available in Moscow) tell a different story. He refused to back her up. Because as long as he refuses to commit, he is in the position of power, and she the supplicant.

If Trump has been equivocal in his commitment to Nato, he’s unwavering in his hostility to trade. He will exact a heavy price for the symbolism of a trade deal with the UK. Don’t expect him to open up a new American market for British firms shut out of Europe.

Garvan Walshe is a former national and international security policy adviser to the Conservative Party, columnist for Conservative Home and CEO of Brexit Analytica