UK: Customs, Borders And Digital Protectionism - The Imperfect Storm

Last Updated: 20 November 2018
Article by Ursula Johnston and Sean Giles

To build on the findings from our whitepaper Protectionism 2.0: Digital forces driving the new protectionist agenda, our latest podcast sees Gowling WLG's Ursula Johnston and Sean Giles talk to national journalist Andrew Cave, a writer for the Daily Telegraph and Forbes magazine. The podcast explores the crucial customs and border issues that are likely to be caused by protectionist laws and barriers that govern the movement of data, as well as tech related goods and services.

The podcast will consider:

  • The practical and realistic implications of these laws and the protectionist approach
  • The issues that this will create where the accelerated race to develop smart tech is concerned
  • The entire product development process - from mining and manufacturing to product development - and the individual concerns that protectionism creates for these

Transcript

Andrew Cave: I'm Andrew Cave, Business Writer with The Daily Telegraph and Forbes Magazine and I'm here today with two experts to talk about trade and protectionism. I'm here with Ursula Johnson, Director of customs and trade at law firm Gowling WLG and Sean Giles, Associate in the European Union Trade and Competition Team at the same firm.

So this is an interesting time for trade being in the news, can you talk a bit about the general perspective with the Brexit talks and the focus on trade, has there ever been a time when trade and customs has been more in the news?

Ursula Johnston: No, I totally agree and thank you for that - it's an interesting open question. So I've been working in the customs and trade space for about 15 years and I've never seen customs and trade so high on the agenda, not only of governments but also businesses themselves as they struggle to come to terms with this sort of wholesale geopolitical change and move from a sort of free and open borders into large trading nations taking a much more protectionist outlook and looking to protect their domestic market. Now obviously that's very sharply felt in the UK, in the context of Brexit as we wait, today, for news and developments around whether Theresa May's proposal for a customs border either to be put between the UK and Europe, whether that will pass, business are really thinking about how can they move goods between the UK and the EU whilst maintaining frictionless trade.

Andrew: That's very interesting. And Sean, what in terms of protectionism, how much of a threat is all this to trade as we know it?

Sean Giles: Well I think you can see from the news agenda and the news headlines nowadaysthat there is a lot of talk about the US and China and the so called trade wall. We're just focussing on what this report calls the traditional protectionist measures, so that's tariffs and quotas that, there's no resource nationalism where you protect a certain resource within your country. But this report highlights a second run of nationalism and protectionism which is this digital protectionism which is a focus on the new oil that is data and the way countries are using legislation to prevent data from crossing borders which in the 21st century, in the digital age where companies are reliant on data ... and this is not just data companies but all companies that use data within their businesses. If you as a company cannot move your data from one country to another within your operations that makes it difficult for you to operate across borders.

Andrew: And this is a really interesting area and it's one where Gowling WLG has just issued a report called Protectionism 2.0 Digital Forces Driving the New Protectionist Agenda. Ursula, how much at threat is the technology sector when you introduce protectionism into what's been relative trade until now?

Ursula: Yes, I mean I think the main impact if I look at it from a business perspective and commercial perspective is you know it tends to lead to a decreased consumer demand and potentially produce a surplus and this really makes for inefficient trade and it generally just increases prices in the market. So, why does that come into fruition? Well, it means tariff increases so that's where individual countries take the decision to increase the customs duty rate on importing material, that pushes up the price to put a finished product into the market. When also you take into account that your natural resource material costs are  higher, you also have a slight reduction potentially in market access for the producers so export subsidies will tend to depress world prices and that will damage our profits, investments and ultimately jobs as well, particularly for those perhaps in the lower income populous of developing countries. Those people really rely on a strong export market for their services and for their goods that they manufacture from their services, so protectionism ultimately can be a rather ineffective and costly means of protecting your domestic labour force. Tariffs also sort of tend to decrease the welfare population just through higher prices and a stricter consumer as well as consumer costs so really the impact is quite wide ranging.

Andrew: Thank you, and Sean from an EU perspective, how much of a threat is protectionism to tech companies in Europe? We hear mostly about the big tech companies in silicon valley but what about the European companies?

Sean: I mean I think the impact's probably global, it's probably spread equally, I wouldn't say European companies are necessarily more or less exposed than US companies. However, there is obviously a high degree of data protection generally within Europe and we've seen that recently with the introduction of GDPR, but I think we should draw a line between data protection and data protectionism and I think what our report's talking about is these countries that are traditionally seen as liberal countries when it comes to traditional measures such as tariffs, that impose legislation that restricts the free movement of intellectual property and of digital data. So Australia would be a good example where they're traditionally seen as quite liberal in terms of their tariffs but then if you look at the laws around data protection and data protectionism in particular you aren't allowed as a foreign company to export health data on Australian nationals for example, unless you have an Australian data centre, which is obviously a non-tariff barrier that can be quite an issue for any non-Australian company that the Australian company just will not fix.

Andrew: So this is an example of unintended consequence is it, in terms of the privacy, GDPR and other privacy legislation and then the general EU talks which are about general trade, having all these unintended consequences on the tech sector?

Sean: I don't know if it's necessarily unintended consequences, I think there are very good public reasons why you would want to have strong data protection laws. I think the data protectionism aspect that then prevents the movement of data is a separate issue, you know on legitimate grounds to prevent the movement of data when you want to protect your nationals, but when it comes to restricting the flow of intellectual property and the flow of ideas and the flow of communications in such a way that it impacts on a business's ability to trade that soon becomes not even necessary ulterior motive but perhaps there is no data protection motive there in the first place, it's purely motivated by protectionism rather than looking at business welfare.

Andrew: So there's a bit of an interesting distinction between almost invisible technology, you know the data protection, IP issues and visible and very tangible technology which is affected by raw material suppliers and minerals and bits that are coming from all around the world lithium and cobalt and all the other things which mobile phones and batteries need. Can you talk Sean a bit about the whole global product development process; is that going to come under threat as protectionism rises?

Sean: I think it's definitely possible and I think that the key part at the moment what we're seeing in the context of Brexit and Trump is this move away from multilateralism which, you know, has traditionally been the dispute resolution mechanism between countries where they've sort of all seemingly agreed that actually we want to reduce barriers, we want to reduce tariffs, but since then, you know, since Trump's come into power and since the US particularly in the last 15 years, we've seen this sort of assertion of nationalism and we've seen this assertion of actually we need to protect our own, we need to put America first for example in the case of Trump and in the case of Brexit we see this move away from the rules based system which allows countries particularly within the EU, within the EU system to prevent one another from putting up trade barriers. Now if we look at a global picture we have the WTO Appellate Body and dispute resolution panels which are all appointed sort of, I consent that the WTO members which is most of the trading companies in this world and one issue that we're facing now is as countries turn away from this consent based system it makes it a lot more difficult at a geopolitical and macro level for tariffs to be reduced and for non-tariff barriers to be taken away and I think, I mean for businesses that's quite difficult unless they're at that table with their governments and they're able to influence policy changes.

Andrew: And that's very interesting, so it's all getting a lot harder for companies and for their boards. Ursula what should boards do about this, how can boards position themselves to deal with this and other threat they have to think about.

Ursula: Yes absolutely, I think protectionism certainly since the first report that we published on this topic has certainly rocketed up the agenda obviously fuelled by Brexit concerns, also the so called trade wars between China and US. So if I was talking to a board about this what would I be trying to pinpoint as perhaps some active steps they can take to address the risks that this throws up? I think the first thing is to understand the market that you operate in, and understand you know what individual countries' approaches to protectionism, what does that mean in terms of your business's strategy around procurement, manufacturing and distribution. Do you for example want to look at your manufacturing footprint globally and to think about shifting where that occurs? I also think businesses will be looking at markets which offer very limited barriers to trade whether that be tariff or non-tariff barriers, so either direct costs or indirect costs as opportunities to sort of achieve savings as they look to put manufacturing strategy together. I also think businesses can conduct a supply chain audit so they look at the commercial effects of the increased protectionism so that could include, for example currency manipulation, a change in regulation or even a wholesale change in government and the sort of political environment of a particular market that they operate in.

I also look, when I'm talking to companies around us about supply change audits and encourage them to look at the network or free trade agreements and look for opportunities again for reducing the costs base of sourcing and manufacturing.

Thirdly and very importantly, protectionism is obviously driven at a political level and therefore businesses that want, to have a stake and have a say in how this influences and how this impacts their business need to think about engaging in discussion with government and being able to demonstrate what is the impact of a particular policy change, either just for them as a business or for the market and for the population as a whole, so therefore the board may want to think about options for login for example.

I think lastly businesses, as the landscape bracket changes need to keep agile, they need to make sure that they understand the long term consequences of making a particular investment commitment and really can they design an operating model that gives them flexibility to move operations globally and be able to react in a way to geopolitical change that gives them a competitive advantage, and you know I think this has been very well summarised towards the end of the report.

Andrew: Thank you Ursula that's really interesting. So the report's called Protectionism 2.0 Digital Forces Driving the New Protectionist Agenda, this is a subject I'm sure we're going to be hearing about a lot more as the Brexit talks continue and this is an issue which isn't going to go away.

Thank you Ursula and thank you Sean, very much.

Ursula: Thank you Andrew.

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