November 4, 2019 | By Justin Millar

Is A Post-Brexit US-UK Free Trade Agreement Realistic?

The United Kingdom will once again head to the polls on December 12, as Prime Minister Boris Johnson seeks to shore up support for his divorce deal from the European Union. With an extension on Britain leaving the European Union until January 31 now in place, it’s worth revisiting the prospects of a future trade agreement between the United Kingdom and the United States.

Since the 2016 Brexit referendum, voices on both sides of the Atlantic have signaled eagerness to pursue a free trade agreement (FTA) after Britain exits the European Union. Brexiteers, those in favor of the United Kingdom leaving the European Union, have championed the prospect of a US-UK FTA as evidence of how freedom from the constraints of the EU’s customs union will propel a more “global Britain.” There are clear economic incentives for such a deal: total trade between the two countries reached $261.9 billion in 2018, and both economies are among the world’s five largest.

Despite this optimism, the roadblocks to an FTA remain significant. Most notably, whatever shape Brexit takes, the United Kingdom will have to choose between regulatory alignment with the European Union or the United States.

The economic and geographic pressures are clearly stronger for Britain to maintain regulatory coherence with the European Union, easily the country’s largest trading partner. But if the final withdrawal agreement effectively fixes London to Brussels’ regulatory framework, it will limit the scope of an FTA and potentially preclude a deal altogether because of longstanding trade disagreements between the European Union and the United States.

Conversely, if the United Kingdom crashes out of the European Union (the “hard Brexit” scenario), or leaves under Prime Minister Johnson’s withdrawal agreement, British negotiators would presumably have far more regulatory leeway. However, negotiations would still be difficult. Adopting US regulatory standards could be met with domestic political backlash, as Washington will likely seek relaxed regulations on food safety, GMOs, digital privacy, and market access for healthcare providers. Many of these issues are viewed as non-starters by the British electorate, having already stoked opposition to the now moribund TTIP agreement.

Another hurdle to clear would be US domestic politics. Because Mexico, Canada, and China collectively represent 45% of total US trade, any FTA with the United Kingdom would fall behind USMCA passage and trade talks with Beijing on the priority list. There is also the inhibiting factor of time. Historically, the United States has averaged 45 months to negotiate bilateral FTAs, meaning trade negotiations would come up against the 2020 presidential election cycle and potentially fall to a new Democratic administration. Numerous Democratic leaders, including House Speaker Nancy Pelosi, have dismissed the possibility of an agreement if Brexit were to undermine the tenets of Ireland’s Good Friday Agreement, a going concern with a hard Brexit.

Yet even if trade negotiations do commence, a sizable economic imbalance will shape the dialogue. Just on pure size, the US economy dwarfs the United Kingdom’s, being approximately seven times larger. While the United States is Britain’s single largest trading partner outside of the European Union, the United Kingdom represents a much smaller percentage for the United States (Figure 1). US trade negotiators may also hold an advantage over their British counterparts, who could lack the institutional capacity and experience from years of outsourcing trade authority to Brussels.

Figure 1: Major Trading Partners by Country

  
With such headwinds, a better route is to pursue a “mini deal” along the lines of what the United States recently completed with Japan. Given the friction that will likely manifest over agricultural regulations and other potential flashpoints, a narrower scope would allow for the agreement to be sector-focused. Such a deal could take the shape of a services harmonization agreement or minor tariff cuts on select products. For a US Congress already focused intently on USMCA passage, a mini deal also obviates the need to legislate a fully-fledged FTA, and could lay the foundation for a more extensive agreement in the future.

 

Barring a striking reversal of the Brexit decision, the future US-UK trading relationship will soon need to be clarified. But despite substantial public support for stronger economic ties and a rosier long-term outlook for the strategic partnership, a fully comprehensive FTA is unlikely to bear fruit in the near term. Instead, leaders on both sides of the proverbial “pond” should lay the initial groundwork for greater collaboration as the United Kingdom finds its way in a post-Brexit world.

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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