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July

How Brexit could affect trade with the US

Published: Tuesday 17 July 2018

Even before Donald Trump’s spat 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.

Prospects for a US-UK 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.

US-UK trade deal ‘highly unlikely’ in near term

The paper 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 US-UK FTA of the depth and breadth required to deliver significant economic benefits can be secured.”

Free Trade Agreement has less attention 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.

Positive Trump

President Trump has expressed positive sentiments about a US-UK trade deal. “Working on 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 an FTA. It should therefore not be a surprise that in the aftermath of the Brexit referendum, the 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 an FTA 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.”

US more important trading partner to UK

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.

Deal may not happen quickly

Ed Balls and colleague Pete Sands say that President Trump’s initial enthusiasm does not necessary mean that any deal will happen quickly.

“Most components of a potential US-UK trade deal are dependent on the terms of the future trading relationship between the UK and the EU which must be concluded first. Moreover, the US takes an average of 45 months to negotiate bilateral trade agreements.

“And 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’.”
 
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What does the paper say?

The paper summarises the prospects and potential benefits of a US-UK 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 UK must strike a deal with the EU before it can negotiate an FTA with the US
  • The UK will have little to gain and will have to concede more on tariff reductions than the EU offered in the Transatlantic Trade and Investment Partnership (“TTIP”)
  • The US demands on non-tariff and regulatory issues will be politically contentious and difficult for the UK to meet
  • Negotiating non-tariff and regulatory issues will force the UK to choose between regulatory alignment with the US or EU
  • The US cannot, or will not, concede on many British non-tariff and regulatory objectives.
Doubt over a meaningful deal

The paper concludes, “Both US and UK officials are doubtful that a meaningful 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 US-UK FTA 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.”

Upside in service sectors

Most of the potential upside for UK business from a United States 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.

The UK’s future trading relationship with the EU will be a key determinant of the potential shape of any trade deal between the UK and US. Indeed, the UK will not be able to negotiate an FTA with the US unless it leaves the Customs Union; and for this reason, the potential benefits of such a trade deal with the US is frequently used by the Government as a key reason for leaving the Customs Union.

After the UK leaves the Customs Union

Assuming the UK leaves the Customs Union, as Prime Minister Theresa May has declared, the UK will seek to secure an FTA with the EU. The breadth and depth of this FTA will shape any potential deal with the US.

The EU will want to ensure that the UK does not make concessions to the US that are more advantageous than those offered to the EU.

The EU will also want to ensure that the UK does not become a ‘back door’ to Europe, enabling US companies to avoid EU tariffs and regulatory restrictions.

FTA upside of leaving the EU

Ever since the Brexit referendum, the Government has positioned the potential to negotiate an FTA with the US as one of the main upsides from leaving the EU and also a key reason why Brexit must 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 an FTA with the US, since roughly half of Britain’s exports to the countries outside the EU and its existing FTAs, 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. Assuming the UK leaves the Single Market, the 48% of UK goods and services exports that go to the rest of the EU and EFTA will encounter more friction, even if an FTA is established between the EU and UK. In addition, the UK cannot assume it will automatically retain access to third-country trade agreements the EU has secured. Countries with which the EU has currently agreed FTAs account 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 exit from the EU, compared with the 20% of the UK’s total export of goods and services which went to the US.

Focus on ‘levelling the playing field’

By contrast, the level of interest of the current US administration in negotiating an FTA 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 Trump 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.

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, once the UK leaves the EU, Britain will no longer be a door to Europe for American business. Moreover, after Brexit, 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.

Special relationship is 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

For more information on the implications of Brexit for individuals and business, see Halo Financial’s Vision: Brexit paper.

You can also keep up with the latest news on Brexit and how it affects the currency markets in our informative news section.