The Realities of a US-UK Free Trade Agreement

February 3, 2017

Theresa May seems to have secured the support of Donald Trump for a UK-USA free-trade agreement (FTA).  With the backing of these leaders, negotiating an FTA between these two developed economies with a shared long-standing support for open markets, on the face of it, should be relatively straightforward.  The reality is likely to be much more complex.

At this stage, the two main unknowns are how the new US Administration will approach trade negotiations, and what the UK’s starting position will be in them.  So we are left to read the tea leaves.

Under this Administration, the American position in any future negotiation is unlikely to reflect the way in which the US has approached trade negotiations in the past.  Lasyweek, Peter Navarro, Director of the White House’s new National Trade Council said trade policy is “pretty straightforward: We know what we want…We think we can build strong relations bilaterally with countries that want to together reclaim their supply chains from…countries around this world which have been dumping components and basically getting the best jobs.”  How this thinking is then developed by officials into actual negotiating positions remains to be seen.

For the UK, it is also too early to know what its starting point in any negotiation would be.  The UK’s post-Brexit trade regime, however, is likely to be heavily influenced by its more than four decades in the EU.

If so, the negotiations under the Trans-Atlantic Trade and Investment Partnership (TTIP) provide important insights into some of the core issues and challenges that will need to be addressed in a UK-US FTA negotiation.

As the EU’s negotiating positions in the TTIP would have to some extent reflected the UK’s priorities, a UK-USA FTA could start from what has been achieved in the TTIP negotiations, and build further.  (It is also likely that some elements of the Canadian-EU FTA may appeal more to London than those under discussion in the TTIP).

With the TTIP negotiations, both sides say that they have already agreed on the early elimination of tariffs on 97 per cent of tariff line, but that there may be some products where only “partial” market access will be possible.  Agricultural trade in TTIP has been a problem.   Although the UK will not have nearly the same constraints and domestic pressures as the cross-channel EU members, inevitably there will be sensitive items on both sides that will need to be finessed.

Apart from a few agricultural products, trade in goods has, however, been relatively straight forward in the TTIP negotiations.  Other aspects have not been, and it is here that the UK’s decision to take the EU’s position as the starting point for its negotiations with the US will be crucial.

For example, the EU’s position in the TTIP negotiations on investment has been that the existing Investor-State Dispute Settlement (ISDS) arrangements should be replaced by one governed by an as-yet-to-be-created system incorporating a new Investment Court, wherein companies could not claim compensation simply because government regulatory systems led to a loss of their profits.  This is unacceptable to the US in its current form.

In the case of sanitary and phytosanitary measures (SPS), the EU position in the TTIP talks is that EU animal welfare laws need to be fully respected.  Not so much of an issue, maybe – but the USA has said that non-scientific SPS measures, such as the EU ban on hormone-produced beef, would have to go in an FTA.  This could be an area where the UK and US might find it easier to come to an accommodation than the US and EU could.  On the other hand, EU restrictions on GMO crops and products using GMOs are also a key issue, and one where the UK’s position may be closer to the EU’s than US’s.

Geographic Indications (GIs) are also like to be a point of difference between the UK and US, where the UK’s position is again closer to that of the EU’s.  In the TTIP talks, the EU evidently wanted additional (to the WTO TRIPS agreement) geographic indications (GIs) protections for 210 food products.  GIs are an anathema in American trade policy circles.

On other important issues, the UK is likely to be closer to the US on some and to the EU on others.  In services, the “cultural” excuse saving the French from Hollywood would not be a big problem for the UK.  However, there was a significant difference between Washington and Brussels on data protection standards.

For other aspects of services, as we have suggested before, a good start on services post-Brexit would be the UK’s becoming a full member of the Trade in Services Agreement (TiSA) under negotiation in the WTO.  This would go a long way to setting the stage for the services part of an eventual UK-USA FTA negotiation.

While TTIP provides a useful guide to many of the key points of convergence and divergence between the UK and US that will need to be navigated in an FTA negotiation, much remains uncertain until the UK settles its post-Brexit trade regime.

As of today, however, the biggest unanswered question about a potential UK-USA FTA is the Trump Administration’s view of international trade.  Trump’s comments about “buy American” suggest, for example, that he may even seek “WTO-minus” deals on topics like government procurement.

All the uncertainties notwithstanding, undoubtedly the UK and USA will be able to negotiate a post-Brexit high-quality FTA and that is a good thing for the parties and for the international trading system beyond.  But in January 2017, the degree to which the UK’s negotiating positions will be influenced by its longstanding participation in the EU, and how the new Trump Administration will impact on those eventual talks are both major unknowns. Tea-leaf reading is the order of the day.

This blog originally appeared on ConservativeHome

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