United States

The case for a U.S. – U.K. free trade agreement

Negotiation will not happen overnight

THE REAL ECONOMY  | 

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The business cycle is clearly closer to its end than its beginning. Increasing uncertainty about the policy direction of the United Kingdom (U.K.) as it approaches a March 29, 2019, deadline to negotiate an exit from the European Union (EU) hangs heavy over the British economy. Unresolved questions over whether the U.K. will remain within the EU orbit or operate outside as “Global Britain” contribute to a weak environment for business investment and consumption. While moves toward a U.S. – U.K. free trade agreement (FTA) may seem counterintuitive, given the lack of answers to those questions and rising protectionism from the Trump administration, now is the time to begin laying the groundwork for such a partnership.

Since the Brexit referendum, active trade associations inside Washington, D.C., have quietly been preparing for the day when the U.K. and EU resolve the treatment of third parties. Inside the U.S. political authority, the construction of a U.S. – U.K. free trade caucus has already been formed and the Trump administration has clearly signaled enthusiasm to negotiate a bilateral FTA.

The relationship between the two economies and their complementary political and legal institutions make this a natural move. U.S. foreign direct investment in Great Britain until 2017 steadily improved, cresting at $682 billion in 2016 before falling to $337.9 billion in 2017, mostly due to uncertainty over the U.K.’s economic direction following the 2016 Brexit referendum.

 

MIDDLE MARKET INSIGHT: In a time of transition for the global economy it would make sense for the US and the UK to engage in a free trade agreement that places the middle market at the center of that treaty.

Despite the decline in U.S. direct investment, the trade relationship between the two economies remains robust. U.S. – U.K. trade in goods totaled $119.9 billion in 2017, while services reached $71.2 billion. Moreover, dense links between the financial sectors of the two economies, as well as strong relationships between cities such as Chicago and Birmingham, England, have fostered deep and enduring trade alliances in heavy manufacturing tied to the defense industrial base in both countries; those alliances illustrate that the countries are more than just allies in commerce.

To be sure, the negotiation of a U.S. – U.K. trade agreement will not happen overnight. Public discussion that an FTA could be agreed upon in a matter of hours or weeks is counterproductive and not tethered to any economic, financial or political reality. A reality check on timing is important.

The better parallel would likely be the U.S.-Australian FTA, which took 14 months from start of negations to agreement and 22 months from origination of talks to implementation. With respect to all bilateral trade agreements that the United States has negotiated, the average duration from start to agreement is 18 months and start to implementation is 45 months. Thus, policymakers on both sides of the Atlantic should begin to put in place appropriate personnel and budgets for a period of negotiations that will at least stretch over a two-year period, with additional time included to account for the gap between the end of negotiations and implementation.

Inside the U.S. political authority, the construction of a U.S. – U.K. free trade caucus has already been formed and the Trump administration has clearly signaled enthusiasm to negotiate a bilateral FTA.

U.K.’s negotiating difficulties are an open secret

It’s an open secret on both sides of the Atlantic that the U.K. finds itself in a very difficult negotiating position. Should Britain exit the European Economic Community, it will need to strike a deal quicker than it otherwise would have to support economic activity. So how can a mutually beneficial deal be reached? First, both London and Washington, D.C., need to accelerate cooperation between the U.S. – U.K. Regulatory Working Group ahead of any final status agreement with the EU. Discussions on harmonization of financial services regulation should be given priority and moved forward over the next several months on the assumption that the U.K. will be exiting the European economic orbit. Given that financial services account for roughly 17 percent of U.K. exports to the United States and conversely 21 percent of U.S. exports to the U.K., the natural industrial ecosystem requires the start of negotiations.

MIDDLE MARKET INSIGHT: One of the innovations in trade that wasn’t around during the time of NAFTA or the World Trade Organization is the fact that US bilateral trade treaties carved out special exemptions for middle-market firms.

Second, it’s critical that industry trade associations on both sides of the Atlantic get to work on expressing preferences on potential trade alignment in sectors, including agriculture, pharmaceuticals, technology and telecommunications.

Third, while these negotiations will be tough and at times contentious, the two sides must keep in mind that the benefits of a bilateral FTA will be tremendous. Not unlike the U.S. – Australian FTA, impending talks will test a longstanding special relationship and both parties will likely exit bruised. Indeed, there is a strong probability that negotiations could get bogged down around nontariff and regulatory concerns surrounding the issues of cybersecurity, food safety, genetically modified organisms, information access by U.S. health care firms and privacy protection.

The benefits of a U.S. – U.K. agreement over free trade are quite clear.

Once an FTA is agreed upon, there will be more agriculture coming from the United States than there are stars in the sky. Food prices will fall significantly inside the U.K., and Scotland will find a deep and wealthy export market for its whiskey and Angus beef. The logical integration of the Anglo-American financial services and defense sectors can proceed. And what of chlorine-washed chicken? It’s been banned since 1997 in the EU but is now receiving outsized attention in Britain as the U.K. considers its post-Brexit import options from the United States. Contrary to popular opinion across the pond, the United States has a healthy supply of free-range and organic poultry that can clearly meet U.K. standards.

MIDDLE MARKET INSIGHT: A risk for middle market would be a slowdown in consumption over the next few months due to rising import prices on both sides of the Atlantic.

The benefits of a U.S. – U.K. free trade agreement are quite clear. Currently, the trade-weighted tariff for all goods is 2.7 percent in the U.K. and 2.2 percent in the United States. In agriculture, these tariffs are 8.5 percent and 3.8 percent, respectively. Bringing these tariffs to zero would boost economic activity and improve the living standards in both economies. Free trade is the solution and not the problem—something both sides of the Atlantic would do well to remember so as to not miss a major economic opportunity that lies just over the horizon.

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