The UK stands at a defining moment in the history of its commercial relations with the rest of the world. The 2016 referendum decision to leave the European Union means that the UK will once again be responsible for defining its own trading relationship with other countries, including the remaining twenty-seven EU member states. As the Conservative government threatens to turn the UK into a deregulated offshore tax haven for the benefit of the few, Labour is committed to reinforcing its historical identity as a party dedicated to open markets and a fair, rules-based international trading system that delivers prosperity for the many.
Historical Roots
Labour has a long tradition of promoting an open multilateral trading system, even when this was not the dominant orthodoxy that it is today. In the early years of the twentieth century, the fledgling Labour Party rejected the arguments of Joseph Chamberlain and the Tariff Reform League that protectionism would strengthen domestic industry and result in higher wages. Instead, tariffs were dismissed as being more likely to increase the price of essential goods (especially food) and lead to the immiseration of the already impoverished worker. The Labour Party and trade unions together confirmed this shared conviction with a series of public awareness campaigns against tariff reform across the country from September 1903.
At the same time, Labour rejected the Liberal Party’s unilateral market liberalisation as an equally ineffective means of meeting the needs of working families. The historical tendency towards higher unemployment and lower wages in the later nineteenth century had undermined the strength of free trade’s classic appeal to consumer interest through cheaper prices, and Labour leaders regularly condemned the undercutting of domestic labour through ‘sweated’ imports as yet another failure of unregulated trade. As Keir Hardie, one of the most eloquent opponents of tariff reform, told a Manchester audience in February 1909:
The idea of the Free Trade Party to leave things to take their natural course has resulted in the production of a submerged tenth which cannot be equalled in any other country in Europe. Our people have been driven from the land to herd in the great cities, robbed of the opportunity of working for their own livelihood till they could find a market. The harrying wind of Free Trade Radicalism has swept over the nation and destroyed all that is most beautiful in our nature.1
This rejection of laissez-faire capitalism was a common theme across the left, even if opinions might differ as to what should replace it. Highlighting the overproduction and international antagonism inherent in free trade, Labour theorists called for a new policy of open but regulated commerce that could build peace between nations rather than further exacerbating their rivalries. As the leading historian of the Edwardian tariff reform debate describes it, ‘The left’s re-evaluation of Free Trade represented a watershed in the history of political economy, where progressive politics began to turn from unregulated trade to new collectivist schemes of regulation.’2
This commitment to regulated trade liberalisation was developed during the 1920s and 1930s, just as the Conservative Party was embracing protectionism. Labour’s radical 1934 programme, For Socialism and Peace, pledged that the party ‘would attack the disastrous economic nationalism of the present age by working for an all-round lowering of tariffs, and their substitution by a system of planned international exchange’. The drive for international planning in economic and financial affairs was presented as the corollary of planning at the national level, even if there would necessarily be tension between the two.3
In fact it was the postwar Labour government that was to affirm the party’s belief in a rules-based international trading system with the most far-reaching impact. As well as eliminating half of all the tariff lines it inherited after the ending of hostilities, the Attlee administration persuaded the US of the benefits of a multilateral settlement to govern global trade alongside the international financial institutions already established at the 1944 Bretton Woods conference. Driven through to its conclusion by the skills and perseverance of Labour’s lead negotiator, Sir Stafford Cripps, the resulting General Agreement on Tariffs and Trade would serve as the forum for multilateral trade talks until the birth of the World Trade Organisation (WTO) in 1995.4 The Labour Party’s solution to the twin dangers of protectionism and unregulated trade is rooted in the ‘institutional internationalism’ that created the framework for liberalisation on a reciprocal basis.
Minimising Barriers, Maximising Trade
The rationale behind Labour’s support for international commerce stems from the economic benefit that trade offers working people. In an open economy such as the UK, overseas trade represents a critical source of employment: currently, exports of goods and services account for around 30 per cent of GDP, and millions of jobs depend on continued access to overseas markets. Equally, inward investment to the UK has sustained hundreds of thousands of jobs over many decades, and remains a critical element in the country’s economic success. The positive links between inward investment, innovation and productivity are well attested, as is the trade dividend: over half of all foreign-owned companies in Britain are exporters, compared with 10 per cent of UK-owned firms.5
Recognition of the economic benefits to be gained from trade liberalisation informed the Labour Party’s 2017 manifesto commitment to minimise tariff and non-tariff barriers in all future UK trade agreements.6 The first and most important of these agreements will be with the EU itself – an agreement unlike any other, in that it starts from the unique situation of two trading partners that have shared full harmonisation of regulations and standards within a single market and are moving to a situation of lesser rather than greater integration. Labour’s demand is the same as that of all major businesses, trade unions and industry federations, namely that the UK must retain access to the single market under terms as close as possible to those we enjoyed while a member state of the EU. Leaving with no deal in place for the future is the worst option.
Upholding and enhancing our social and environmental standards will be a crucial element in the future relationship between the UK and EU. In some cases, ‘new generation’ free trade agreements have identified such standards as ‘barriers’ to trade, and negotiations have targeted them for removal or downgrading. Yet high social and environmental standards are not only important in their own right, they are essential if our businesses are to retain access to the EU market. UK exports will be denied access to the EU if they fail to meet the standards that the UK currently shares with the EU – hence the fear of regulatory divergence in the years following Brexit if no mutual recognition frameworks are put in place.
Beyond our commitment to enhancing market access for British goods and service exporters, Labour will actively promote British exports in overseas markets, including the extension of export finance and other support measures (export credits, insurance and promotion) to actual and potential exporters. In order to ensure that the benefits of trade are shared across the country, Labour has committed to setting up a network of regional champions to promote the export and investment interests of businesses throughout the UK, and to include regional representatives on international trade missions so they can have direct access to new markets around the world.
A progressive trade and investment policy is essential for any effective industrial strategy, and vice versa. Only by having mutually beneficial relations with trading partners can we develop the modern industrial base needed to deliver decent jobs and a secure future for working people. By the same token, it is only by sustaining the necessary levels of investment in people, skills and productivity that we will be able to compete successfully on international markets. Labour will prioritise trade support to those high-productivity sectors of the economy identified for development in the industrial strategy, creating a coherent and mutually supportive relationship between the two.
In the UK context, 60 per cent of all private sector jobs are created by small and medium-sized enterprises (SMEs), and Labour has pledged to put small businesses at the heart of its economic strategy. While only 9 per cent of British SMEs are themselves engaged in exporting overseas, a further 15 per cent are integrated into the supply chains of other businesses active in export trade – meaning that one in four British SMEs are involved either directly or indirectly in exporting overseas.7 In addition, there are many SMEs that fall into the category of potential exporters, where strategic government support could enhance their ability to break into overseas markets. Labour is committed to developing a bespoke incentive scheme to help SMEs develop their export potential, as well as requiring trading partners to include market-access opportunities for British SMEs in any new trade agreements.
More generally, once the UK has regained the competence to set its own international trade policy, we must use that competence to negotiate trade and investment agreements that will bring genuine benefits to workers and businesses in the UK. Twenty-first-century trade agreements are about much more than the removal of tariffs on goods and the opening of markets for finished products from one country to be exported and sold in another. In today’s interconnected global environment, value chains that account for some 80 per cent of international trade see raw materials and component parts cross borders numerous times to be incorporated into finished products for consumers across the world.8 This globalisation of supply chains creates opportunities for British businesses to access global markets and for many more SMEs to participate in international trade as component or service suppliers. If managed properly, this can be a powerful engine for growth and prosperity.
The UK is primarily a services economy, with 80 per cent of all jobs now distributed across the various service sectors. In terms of the UK’s balance of payments, our surplus in services trade is an essential counterweight to the large deficit in goods trade – yet trade in services still represents less than half of total UK trade by value.9 Services have represented an essential element in trade agreements for many decades now, with a focus on removing unnecessary barriers to international participation across all modes of supply. Labour is committed to building on the liberalisation of trade in services that has already been achieved in multilateral and bilateral agreements, and to maximising the opportunities that exist in emerging markets in particular: the value of UK services exports to Asia saw an increase of 8.9 per cent in 2015 alone, the largest percentage growth from any continent.10
Labour is equally committed to ensuring that UK businesses can take full advantage of opportunities for exports of environmental goods, where liberalisation of trade could greatly increase the availability of green technologies such as solar panels, wind turbines, recycling machinery and other waste management tools. The environmental goods and services sector contributed an estimated £29 billion to the UK economy in terms of value added during 2014, and supported over 370,000 jobs.11 Labour’s 2017 manifesto included the commitment to back negotiations towards an Environmental Goods Agreement at the WTO, creating the potential for further expansion of UK exports at the same time as encouraging the global transition towards a low-carbon future.
Labour will also safeguard the interests of Britain’s high-quality agricultural producers in future trade agreements. Uniquely among major EU member states, the Conservative government failed to promote the interests of British producers in the negotiations towards the Comprehensive Economic and Trade Agreement between the EU and Canada, which offered protection on the Canadian market for national products with geographical indications, at a comparable level to that offered in the EU. While other EU member states listed their national products for protection, the UK government failed to register a single one of the dozens of British products that qualify for protected geographical status. Labour will seek proper recognition in future trade agreements for quality products such as Scotch beef, Scotch lamb, Scottish salmon, Welsh beef, Welsh lamb and the many British cheeses, pies, pasties and other specialities designated as having protected status.
The Need for Regulation
While the potential gains from increased trade and investment are self-evident, the dangers of unregulated liberalisation must also be clear. The financial crisis of 2008 exploded once and for all the resurgent myth of the self-regulating market, and brought with it catastrophic impacts far beyond the centre of the banking collapse. Global trade experienced its steepest and deepest contraction since the Great Depression, and this became the vector which turned the financial crisis into an economic crisis through loss of industrial production in all major trading nations of the world.12
Regulation is not only necessary to prevent the recurrence of crisis. There is now an open consensus that globalisation produces both winners and losers, with more and more academic studies highlighting the negative impacts of unregulated trade on jobs, wages and workers’ rights. Collating the findings of these studies, a recent report from the WTO, International Monetary Fund (IMF) and World Bank acknowledged the ‘harsh’ consequences for those who lose their jobs as a result of import competition. The report recognises that the negative impacts of these permanent policy changes cannot be dismissed as minor transitional adjustments, as they have been in the past, given that they lead to ‘long-lasting displacements as well as large earnings losses’ in the sectors most affected.
The report further notes that the costs tend to fall especially hard on women and an older and less skilled workers, who can often find it more difficult to find alternative work, and that they have intergenerational impacts: ‘Such long spells of unemployment also lead to worse health outcomes, higher mortality, lower achievements by children of affected workers, and other adverse consequences.’13
Studies of specific instances of trade liberalisation underline the social costs. As a result of the 1994 North American Free Trade Agreement, 2 million agricultural jobs were lost in Mexico and hundreds of thousands of high-paid manufacturing jobs were displaced from the US.14 Official projections for the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US suggested that at least 1 million people would lose their jobs in the resulting economic dislocation, and the European Commission acknowledged there were ‘legitimate concerns’ that many of those people would not find alternative sources of employment.15 Where displaced workers do manage to find new jobs, these can often be at lower skill or wage levels: studies of US workers forced out of manufacturing into service sector jobs as a result of trade liberalisation have found that they typically experience a decline in wages of 6 per cent to 22 per cent.16
Those now arguing for post-Brexit Britain to regress to unilateral trade liberalisation are aware of the social and economic devastation such a policy will cause. Professor Patrick Minford of Economists for Free Trade has acknowledged that the adoption of his preferred free trade approach would ‘effectively eliminate manufacturing’ in the UK, wiping out not only the 2.7 million jobs currently provided in direct industrial employment, but also many more in associated service industries.17 Similarly, unilateral liberalisation of agricultural tariffs would expose British farmers to unequal competition from producers in other countries who are not required to meet the same high quality and animal welfare standards as pertain in the UK, with devastating consequences.18 Agriculture currently provides direct employment to 466,000 people in the UK, and many more in the upstream and downstream supply chains.19
There needs to be a recognition beyond political rhetoric of the commercial and economic realities facing Britain as it leaves the EU. The main ‘losers’ on the world stage from the past three decades of rising inequality are known to be the lower-income families of affluent countries, whose experience of globalisation has been one of wage and income stagnation, just as the winners are the middle classes of certain Asian economies and the ‘global plutocrats’ who have seen their vast wealth grow even greater.20 In the UK, the divergence has been even more acute than elsewhere, in that working people have seen their share of national income collapse still further in the years since the financial crisis. Average wages fell in the UK by a full 7 per cent in the decade up to 2015, at the same time as average wages in competitor countries such as France, Germany, Canada, Australia and the US all rose.21 With a further downturn in real wages during 2017 obliterating any recovery seen in the past two years, official statistics reveal that the British workforce is now living through the worst period for pay since the Second World War, and that the average worker will still be earning less in 2021 than in 2008.22
Rather than dismissing the genuine reasons for popular resistance to globalisation, there needs to be an open recognition that the free trade programme of the past four decades has brought with it challenges as well as opportunities, although evidently not to the same social groups. Governments need to acknowledge the deep disaffection that has resulted from the divergence in people’s life chances, and the danger of allowing racist and extreme right-wing groups to capitalise on that disaffection, as witnessed across Europe over recent years. In our economic policy – and particularly in our trade and investment strategy – Labour must seek to redress the imbalances that have developed and to forge instead a model of inclusive, sustainable growth.
Policy Space
First and foremost, any progressive trade and investment strategy needs to safeguard the policy space for governments to act in the public interest. Labour has committed to ensuring that trade and investment agreements cannot undermine future governments’ ability to regulate on social or environmental grounds, and we will seek to promote the highest possible levels of regulation in trade negotiations, not the downgrading of standards and decrying them as ‘barriers’ to trade. On leaving the EU, Labour is committed to rejoining the Government Procurement Agreement in the WTO, but we will insist on safeguarding the capacity of public bodies to make their own procurement decisions in keeping with public policy objectives. Despite repeated assurances from Conservative ministers that public services are safe from free trade agreements, even the EU’s own trade lawyers have confirmed that progressive moves by future governments to reverse public service privatisations could fall foul of liberalisation commitments under international trade rules.23
Upholding the right to regulate in the public interest requires a fair and balanced legal framework within which to adjudicate any disputes with overseas investors. Many ‘new generation’ trade agreements such as TTIP include sweeping powers for foreign investors to challenge host governments in specialised parallel judicial systems if they can argue they have been denied ‘fair and equitable treatment’ through having to abide by social or environmental regulations. In keeping with more and more governments around the world, Labour rejects the model of investor–state dispute settlement that grants foreign investors such treaty rights. The UK ranked higher than any other European country in the 2017 index measuring quality of judicial process in the enforcement of contracts, so foreign investors can have full confidence that they will be able to secure justice in the same way as domestic British businesses, in the same courts.24
An open trading environment requires controls to ensure that there can be no abuse of the system by producers that have been granted an unfair advantage by government subsidies or other means. Successive UK governments have blocked the EU from imposing higher anti-dumping duties on countries such as China, requiring the European Commission to stick to the ‘lesser duty’ rule that limits the level of response available. Working together with business and trade union representatives, Labour will develop the full range of trade remedies necessary to support those sectors of the UK economy affected by unfair trading practices, and the capacity to use those remedies effectively.
Enhancing Rights
Trade can be an important source of economic benefit for working people in all countries. While comprehensive statistics are hard to come by, EU exports to the rest of the world are said to support an estimated 31 million jobs.25 The impact of trade on women workers has been especially significant in those countries where women have not previously enjoyed other economic opportunities. In Bangladesh, for instance, formal employment in the export-oriented garment industry has provided millions of women workers with a regular source of independent income, which has in turn allowed them to enhance their social status and political participation.26
While integration into the global economy can be a source of social and economic empowerment, many working people have found themselves trapped in situations of extreme exploitation as a result of poverty wages and dangerous working conditions. This is a particular threat to workers at the bottom of global value chains, producing goods for distant retailers that control the terms and conditions under which their suppliers operate. While recognising that trade and investment can make a significant contribution to decent jobs and social empowerment, the International Labour Organisation (ILO) notes that trade via global supply chains ‘tends to generate economic benefits for firms (in terms of higher productivity) but not necessarily for workers (in terms of wages)’.27
The ‘10 Pledges to Transform Britain’ unveiled at the 2016 Labour Party conference included a commitment to ‘build human rights and social justice into trade policy’, and the same conference pledged its support for a progressive trade and investment policy that ‘protects and promotes skilled jobs, human rights and workers’ rights based on internationally recognised labour standards’. Labour further pledged in the 2017 manifesto to ensure that trade agreements cannot undermine human rights and labour standards. Yet the traditional mechanism of including non-binding social clauses and sustainable-development chapters in EU free trade agreements has not been effective in achieving such an aim. Labour will ensure that all new treaties are subject to rigorous impact assessment early in their negotiation, and a Labour government will seek ways to implement social clauses in future UK trade and investment agreements. The ILO has found that including labour provisions in trade agreements increases the value of trade by 28 per cent on average, compared to 26 per cent for treaties without such provisions.28
Even binding clauses in future trade agreements may not be the most effective vehicle for upholding (let alone enhancing) labour standards and human rights. Unequal power relations within global value chains mean that UK-based companies exercise significant control over the practices of their suppliers and subsidiaries around the world. As a result, even the most progressive employers at the bottom of the value chain can find themselves severely constrained if UK buyers will not guarantee their ongoing support for improved conditions and the extra costs they can entail.
Labour will explore ways to hold businesses to account for human rights and labour standards throughout their spheres of influence. The absence of binding rules on corporate behaviour has long been recognised as a major failing of global economic governance, with successive attempts to address the issue at the international level coming to nought. Professor John Ruggie, the UN secretary general’s former special representative on business and human rights, concluded that it is precisely the ‘permissive environment’ created by relying on corporate social responsibility and other voluntary mechanisms over the past four decades that has allowed global corporations to commit human rights abuses with impunity.29
The UN Human Rights Council adopted Ruggie’s ‘Protect, Respect and Remedy’ Framework for Business and Human Rights in June 2011. The framework rests on three pillars: (1) the duty of states to protect against human rights abuse by third parties, including business; (2) the responsibility of business to respect human rights; and (3) the provision of effective remedy, both judicial and non-judicial, for victims of human rights violations. Crucially, however, the UN framework failed to introduce any mechanism of accountability, and left it instead to individual governments to develop their own national action plans to enforce its provisions.
The UK was the first country to publish a National Action Plan on Business and Human Rights, but even its most recent update contains no binding mechanism for corporate accountability.30 Labour’s 2017 manifesto included a commitment to work with business to tighten the rules governing corporate accountability for abuses in global supply chains, and a Labour government will actively support the working group on human rights and business set up by the UN Human Rights Council in 2014, whose mandate is ‘to elaborate an international legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises’.
Non-reciprocal Preferences
Labour is committed to addressing the historical development needs of the world’s most vulnerable countries and communities in its trade and investment policy. This means guaranteeing the countries of the Global South access to the UK market under at least the same terms they have enjoyed while the UK has been part of the EU. Foremost among these is the need to maintain duty-free and quota-free access for exports from the world’s least developed countries (LDCs), as specified in the Sustainable Development Goals adopted by the international community in 2015. Labour included this pledge in its 2017 manifesto, and the new Conservative government announced shortly after the election that it would be adopting Labour’s policy.31
The UK must maintain and develop our relationships with trading partners beyond the LDCs, especially at a time when we seek to re-establish our presence on the world stage and to maintain our sphere of influence. Our trade agenda must recognise the historic failings of established global trade models and ensure that we do not repeat the mistakes of the past. Much damage was done to the economies of Africa and Latin America in the 1980s and 1990s as a result of being compelled to open up their markets under the structural adjustment programmes of the World Bank and IMF. The policies imposed led to such widespread deindus-trialisation, unemployment and increased poverty that even the IMF itself would later admit that it had got it wrong on trade.32 Labour has affirmed that it will never use aid conditionality to force countries to open their markets, a pledge made in the 2005 general election manifesto and repeated regularly since.
Likewise, it is a mistake to think that the poorest countries can simply ‘trade their way out of poverty’. The World Bank’s former research director, Paul Collier, has warned of the perils of export orientation, concluding that reliance on trade is ‘more likely to lock yet more of the bottom-billion countries into the natural resource trap than to save them through export diversification’.33 The pursuit of export markets at all costs has also been responsible for significant human rights abuse, as in Cambodia, where preferences granted to LDCs under the EU’s Everything but Arms scheme have encouraged the expansion of industrial sugar plantations and the forced displacement of hundreds of thousands of peasant farmers from their land.34
These are caveats to the fundamental principle that well-managed trade and investment can form an important part of a country’s development strategy, leading to poverty reduction and social empowerment. On the microeconomic level, fair trade has shown how access to markets on equitable terms can transform the lives of local producers and their communities. Labour will use UK ‘aid for trade’ to support the development of local markets and regional trading opportunities as the most sustainable building blocks of economic growth, as well as strengthening fair trade schemes for wider export.
On the macroeconomic level, Labour will look to build on the EU’s existing Generalised System of Preferences for low-income and lower-middle-income countries.35 Many other industrialised nations already operate such non-reciprocal preference schemes for vulnerable countries, which are permitted under the WTO’s Enabling Clause as long as they are based on objective criteria. In addition, some countries run targeted schemes (such as the US’s African Growth and Opportunity Act) via renewable WTO waivers. The UK has long provided preferential access under the EU’s schemes, and should continue to do so after it leaves the EU.
Reciprocal UK trade agreements with other trading partners must also take into account the needs of more vulnerable countries and communities if they are not to harm their long-term interests. Even trade agreements between OECD states can have negative impacts on third countries through trade diversion, where less powerful producers risk losing market share as they are brought into direct competition with the world’s largest multinationals. Equally, blanket liberalisation of tariff regimes can lead to unintended losses for those countries that see their preferences eroded; Commonwealth exporters, for instance, currently benefit from their preferential access to the UK market by as much as £600 million per year.36
Positive investment environments are equally important in ensuring that countries can benefit from globalised capital flows. Too many of the poorest countries have been denied their just share of the proceeds from the extraction of their natural resources by multinational companies, while tax dodging – which can include transfer pricing in intra-corporate trade – still costs the countries of the Global South around US$200 billion every year in much-needed government revenue.37 Most of the UK’s investment treaties with these countries date back to the 1980s and 1990s, and are in urgent need of revision.38 Labour’s 2017 manifesto included the commitment to review the UK’s historic investment treaties and ensure they are fit for purpose for the twenty-first century, rebalancing the rights and responsibilities of investors to ensure that host communities benefit from the opportunities that foreign investment provides.
Labour’s vision of positive trade and investment is an internationalist vision that seeks to promote mutual benefit through our commercial relations with peoples across the world. We uphold the conviction of the early Labour Party pioneers that global trade can and should be a win–win proposition, building shared prosperity and fostering peaceful relations between nations. For this to be a reality, we need to sustain a trading environment that maximises the opportunities of global markets, not a self-defeating race to the bottom. The task for an incoming Labour government is to articulate this progressive vision of an open, rules-based international trading system that meets the challenges of the twenty-first century and delivers for the many, not the few.