How Could Brexit affect trade with the USA?
Even before Donald Trump’s disagreement with the rest of the G7 nations in Quebec, Canada, in June 2018, it was unclear how committed the United States was to a free trade deal with the UK.
Though the UK has now established a trade agreement with the EU, the US remains the next major hurdle. A free trade agreement with the United States seemed promising during 2020, however, the US election in November soon created delays in UK-US trade discussions. As the US prepares to inaugurate Joe Biden on Wednesday 20th January, it’s thought that US trade talks will now be deferred to Spring 2021.
What are the prospects for a UK-US free trade agreement?
So says former UK Shadow Chancellor, Ed Balls, and colleagues in their Harvard University working paper, On the Rebound: Prospects for a US-UK Free Trade Agreement.
The paper, the third in a series exploring the impact of Brexit on British businesses, examines the prospects and impact of a free trade agreement (FTA) between the United States and the United Kingdom.
The research is based on interviews with senior government officials, economists and trade experts, as well as companies and trade associations from the UK, US and Europe.
Could a UK-US free trade agreement happen in the near term?
The paper, which was written in 2018, concludes that “it is highly unlikely that a free trade deal between the US and the UK will be secured in the near term and that the likely potential benefits for British businesses are less than often suggested.
“Many of the officials and experts we spoke with concluded that in reality, when taking into account the complexity of the technical issues, the interdependence with the UK-EU and NAFTA negotiations and the political constraints, it is hard to see how a UK-US Free Trade Agreement of the depth and breadth required to deliver significant economic benefits can be secured.”
Although 2020 saw significant progress in UK-US trade discussions, it’s likely that negotiations will not resume for several months, with US President-Elect, Joe Biden, stating that trade deals will not be prioritised when he enters office. Biden was outspoken in his objections towards Brexit, which has restricted optimism towards a UK-US free trade deal being reached in the near future.
How much attention has the free trade agreement in the US?
The prospects and potential impact of a Free Trade Agreement have attracted considerable press and political attention in the United Kingdom since before the referendum on Brexit in June 2016, but much less so in the United States, the paper argues.
In the UK, the opportunity to negotiate a Free Trade Agreement with the US has been consistently put forward as one of the principal advantages of Brexit from the beginning of the referendum campaign.
What do Donald Trump and Joe Biden think about a UK-US free trade agreement?
President Donald Trump has expressed positive sentiments towards a UK-US trade deal, as he tweeted, “working on a major trade deal with the United Kingdom. Could be very big and exciting. JOBS! The E.U. is very protectionist with the U.S. STOP!”
The paper explains, “The US and the UK have an exceptionally deep and broad economic relationship. The US is the UK’s single largest trading partner (if one treats other EU Member States as individual countries) and is by far the largest trade partner with which the UK does not yet have a free trade agreement with. It should, therefore, not be a surprise that in the aftermath of the Brexit referendum, the UK Government was quick to open discussions with the US about a possible ‘Brexit free-trade deal’.
“For some who voted to leave the EU, leaving the Customs Union and thus regaining the ability to strike trade deals, would mark a return to Britain’s heritage as a trading nation, a vision perhaps best captured by the Prime Minister’s evocation of a more ‘Global Britain’. Since a trade deal with the US represents by far the biggest prize from an independent trade policy, the potential for such a deal has loomed large in the Brexit narrative, both before the referendum and ever since.”
As mentioned previously, President-Elect Joe Biden, has already stated that a trade deal with the UK will not be a priority when he enters office. He also announced that no trade deals would be considered until the United States becomes more competitive, looking to improve US manufacturing, education and the protection of American workers.
Free trade deal may not happen quickly
Despite President Trump’s initial enthusiasm, additional political circumstances within the US mean that any form of a trade deal is unlikely to happen quickly. Ed Balls and Pete Sands note that “it takes the US an average of 45 months to negotiate bilateral trade agreements. Trump’s recently aggressive and “mercantilist” approach to trade raises questions about US enthusiasm for negotiating any trade deal. Unless that is, such a deal is demonstrably to the advantage of US companies and puts ‘America First’.”
What does the paper say?
The paper summarises the prospects and potential benefits of a UK-US FTA across five dimensions – strategic interest; timeline and capacity; tariffs; non-tariff barriers and regulations; and politics and negotiability.
Its main findings are:
- The UK needs a deal, but it is unclear how committed the US is
- There is a clear power imbalance between the US and UK
- The US demands on non-tariff and regulatory issues will be politically contentious and difficult for the UK to meet
- The US cannot, or will not, concede on many British non-tariff and regulatory objectives.
Doubt over a meaningful free trade agreement deal
The paper concludes, “Both US and UK officials are doubtful that a meaningful Free Trade Agreement deal can be reached. Despite the enthusiasm expressed by politicians on both sides of the Atlantic, officials directly involved, and experts with experience of such negotiations, express scepticism that a deal of any significance can be achieved.”
“The conclusion is clear: a UK-US Free Trade Agreement is only going to happen if the UK makes concessions that are unlikely to be politically acceptable and, in any case, promises relatively limited upside for UK business. However, the importance of such a deal to the overall Brexit narrative (and specifically, to the case for leaving the Customs Union) means that the Government is likely to continue to behave as if negotiating an attractive deal with the US remains a realistic possibility.”
What are the advantages of a free trade agreement between UK AND US?
Service sector
Most of the potential upside for UK business from a United States Free Trade Agreement deal arises in service sectors where UK institutions have particular strengths, such as education, financial services and the creative industries, explains Mr Balls. But these are the very areas where the US was reluctant to make any concessions during the recent failed attempt to negotiate a US-EU deal.
Free Trade Agreement upside of leaving the EU
Ever since the Brexit referendum, the Government has positioned the potential to negotiate a Free Trade Agreement with the US as one of the main upsides from leaving the EU and also a key reason why Brexit had to include departure from the Customs Union. The “Global Britain” slogan, and the underlying argument that Brexit will enable the UK to exploit new free trade opportunities, rely critically on the potential to negotiate a Free Trade Agreement with the US, since roughly half of Britain’s exports to the countries outside the EU and its existing trade deals, go to the US, dwarfing the importance of any other individual market, the paper points out.
Offsetting economic downsides
Securing a trade deal with the US is seen as a way to offset the potential economic downsides from Brexit. With the UK leaving the Single Market, the 48% of UK goods and services exports that go to the rest of the EU and EFTA (European Free Trade Association) will encounter more friction, despite a Free Trade Agreement being established between the EU and UK.
In addition, the UK cannot assume it will automatically retain access to third-country trade agreements which the EU has secured. Countries with which the EU has currently agreed trade deal accounts for a further 13% of the UK’s total trade. In total, this means that 60% of the UK’s trade will be directly affected by the exit from the EU, compared with the 20% of the UK’s total export of goods and services which went to the US.
Why is a free trade agreement with the US not likely?
US does not need a trade deal as much as UK
By contrast, the level of interest of the current US administration in negotiating a Free Trade Agreement with the UK remains unclear at best, despite Trump’s initially positive signals. Ultimately, the UK is a relatively small trading partner for the US and the imminent Biden Administration appears more focused on “levelling the playing field” in existing major trade agreements such as NAFTA, or with bigger trade partners such as China.
Overall, the US is a more important trading partner for the UK than vice versa. The US represents 15% of UK goods exports, while the UK represents only 4% of US goods exports. Similarly, the US represents 21% of UK services exports while the UK represents only 9% of total US services exports.
UK no longer gateway to Europe
Any trade negotiation between the US and the UK would be profoundly shaped by the imbalance in power between the two parties to the negotiation. This imbalance derives from two key differences: the relative size of the US and UK economies; and the relative institutional experience and capacity in conducting trade negotiations. The imbalance in market size
The UK economy is one fifth the size of the US economy and, now that the UK has left the EU, Britain will no longer be a door to Europe for American business. Moreover, the UK will no longer be able to sell itself as a gateway to Europe as a whole.
UK inexperience in trade deals
Exacerbating the difference in scale, the UK demonstrably lacks institutional capacity and experience in trade negotiations, not least because the UK’s trade relationships have been negotiated through the EU for the last several decades. By contrast, since 2000, the US has concluded 12 bilateral trade agreements, one multilateral agreement and has engaged in lengthy negotiations around the Trans-Pacific Partnership (“TPP”) and TTIP.
The special relationship is of little help
While some in the UK have positioned Brexit and the prospects of a trade deal with the US in the broader context of reinforcing relationships in the “Anglosphere” and reinforcing the “Special Relationship” between the US and the UK, the trade experts we spoke to were highly sceptical that such notions would make much difference to the hard-nosed reality of trade negotiations, the paper suggests.
The paper was written by Ed Balls – Research Fellow – Mossavar-Rahmani Center for Business and Government – Harvard Kennedy School and Visiting Professor, King’s College, London; Peter Sands – Research Fellow – Mossavar-Rahmani Center for Business and Government – Harvard Kennedy School Eleanor Hallam – PhD Candidate – King’s College London; Sebastian Leape – MPP Candidate – Harvard Kennedy School; Mehek Sethi – MPP Candidate – Harvard Kennedy School; Nyasha Weinberg – MPP – Harvard Kennedy School Alumni.
The team consulted with more than 120 companies, 40 trade associations, 30 trade experts or academics and 17 Senior US, UK and EU government officials to find out as much as possible on the possibility of a UK-US Free Trade Agreement (or trade deal).
You can also keep up with the latest news on Brexit and how it affects the currency markets in our informative news section.
