Let’s get serious: we need to extend the transition period with the EU | Anand Menon and Angus Armstrong | Opinion

Covid-19 has changed how we interact as a society. But it is harder to know what the repercussions will be for international trade. The prospectus for Brexit was based, in part, on the trading opportunities waiting to be seized by “global Britain”. How does Covid-19 change the balance of risks and opportunities that face us?

The impact of the pandemic on international trade is likely to outlive the health crisis. According to the World Trade Organization, world trade may fall by 32% this year. To put this into context, trade fell 40% in the first three years of the 1930s Great Depression. This time, the fall in trade is self-induced, to save lives. But the contagiousness of Covid-19 exposes vulnerabilities in the trading system.

Economies, like societies, are complex networks of direct and indirect relationships. We may be fairly confident in the health of our immediate trading partners, but as important is the health of the partners they trade with. Covid-19 causes deep problems. Supply chains locate production across the world to maximise efficiency. Unsurprisingly, the WTO expects trade to fall more in sectors with complex value chains.

Equally, the movement of people is fundamental to how we trade services. We have to set up a shop, attract students or locate management. Eight out of 10 UK jobs are in the services sector. Services account for about half our total trade. Yet travel restrictions now apply in 150 countries. They are likely to be lifted slowly, as some nations control the pandemic more quickly than others. Early signs are not encouraging. JP Morgan’s global purchasing managers index shows the fall in services export orders much greater than for manufactured goods.

Our ability to specialise creates the gains from trade, but it has also created a vulnerability. The WTO rules permit temporary export prohibitions to relieve critical shortages. According to the Center for Strategic and International Studies, since the outbreak of the coronavirus pandemic 40 nations have introduced export restrictions on medical equipment. Trade specialist Simon Evenett calls these sicken-thy-neighbour policies. What will this do for trust and reciprocation after the heath crisis has passed?

The impact of the pandemic on global trade, in other words, might well be longer term. Beata Javorcik, the chief economist at the European Bank for Reconstruction and Development, has pointed out that resilience will in future be a key concern for businesses, which might imply some degree of reshoring and potentially moving away from holding near-zero inventories so as to hedge against the possibility of future disruptions to supply chains. The chief executive of Bosch has expressed concern about the future of the company’s supply chain.

In times of economic hardship, the temptation to turn inwards and play the nationalism card has proved too tempting.

Which brings us to Brexit. The transition period agreed in the EU withdrawal agreement and passed by parliament in January provides for frictionless access to the European market and its trading partners until 31 December. This is why leaving the EU has changed relatively little on the ground. The government has until 30 June to decide whether to request and pass legislation allowing an extension of the transition period by one or two years, or leave the single market and customs union by year end, with or without a trade deal.

Some argue that the pandemic strengthens the case to end transition, to free us to sign new free trade agreements around the world in order to revive our recuperating economy. This requires us to rediscover our competitive spirit and reach a mutually favourable agreement with the US and the other nations that will follow.

However, these arguments are unpersuasive. Essentially, they amount to sacrificing our existing trading relationship with the EU, accounting for about half our total trade, for hypothetical and problematic future deals with the US and others in very short order. Given the uncertainty about the future of world trade, this would be a risky moment to make trade with by far our biggest trading partner more difficult, while pinning our hopes on being able to increase trade with the rest of the world.

The disruption caused by the pandemic makes it unlikely that a comprehensive free trade agreement between the UK and EU can be secured before the transition period ends. Surely, under such circumstances, it makes sense to take advantage of the opportunity to extend afforded us by the withdrawal agreement? This certainly seems to be the view of the British public: twice as many think the prime minister should amend his 31 December deadline than do not. Of course, there is a political rationale for the government to fulfil its promise to deliver the end of transition on time. Yet, given what the pandemic has done – and may yet do – to the global economy, there’s an equally strong, if not stronger, practical one for reconsidering.

Anand Menon is director of The UK in a Changing Europe

Angus Armstrong is director of the Rebuilding Macroeconomics network, NIESR

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