In between stories of the lockdown and its ongoing consequences the UK Government has been keen to spin out stories of the “trade benefits” of Brexit. Central to this official narrative is the progress of the talks between Britain and the United States.
The notion of a comprehensive trade agreement with the United States has long been held out by the Brexiteers as some kind of alternative to the UK’s trade with the rest of the European Union. For the past 47 years the EU has negotiated trade deals with other nations on behalf of all of its member states. The ability of the UK to negotiate and close its own ‘trade deals’ was held out as one of the main ‘positives’ of leaving the EU and, importantly, its customs union (1).
International trade is a complicated business the detail of which is known to only a dedicated few. Many of the politicians who engage with trade in concept, either at EU or national level, are more than happy to leave the detail to the specialists (I hasten to add, I am not an expert, though the trade nerds have darkened my door to educate me in the basics). The spectacle of pro-Brexit campaigners carrying placards demanding “WTO Rules Now!” was one of the more absurd sights of a surreal time in public life. Few people could name a single rule of the World Trade Organisation (WTO) or even what the organisation actually is and why on earth should they? After all, this is a subject with which the great majority of people rarely if ever come into contact.
What is a trade deal anyway?
You may know this, but just so all readers are clear, some basics. In a nutshell, the WTO, an international organisation to which most of the world’s countries belong (2), sets the rules for international trade that apply to all countries except where other bi-lateral (like an agreement between the UK and the US) or multi-lateral treaties (like the EU or EEA) apply. In this respect the WTO is, ironically, a bit like the EU - it’s a collection of governments making decisions for the benefit of everyone (you can argue about whether it works - but that's the idea).
The idea of trade agreements is to make trade easier and less expensive. If that is the case and more business is done, the countries involved and their populations become better off - that’s the theory and, in general, it seems to work. In a trade agreement - an international treaty between sovereign states or blocs of sovereign states - each side agrees to operate by a common set of rules covering some or all goods and/or services. In order to do so each party gives up its sovereignty over these rules to a common arbitrating body. Most of the time this sovereignty is theoretical, but when disputes or rule breaking arises this is vital to a trade treaty holding. The bigger the trade agreement the greater the benefits and the greater the breadth of the common rules. The biggest trade agreement of all is the European Union single market and the customs union that supports it. The European Court of Justice, to which each member state appoints judges, is the body that rules on trade disputes within the single market (3).
What is so special about a UK-US trade deal?
The USA is the second largest and second richest global market, so it has great potential to any business able to establish a good foothold. It is also, officially at least, English speaking, so UK firms are thought to have a ‘natural’ advantage. The UK’s largest existing trading partner by far is the European Union, accounting for around 45%(4) of the UK’s business. Next is the United States that accounts for 18% of the UK’s exports and 11% of imports. So the EU is currently around three times more important to British business than its US trade. Of course that can change and a comprehensive UK-US trade agreement would certainly improve business between the two countries. At present the UK trades with the USA without a comprehensive trade deal, but it has had some existing arrangements as part of the EU. 20 or so separate agreements govern limited aspects of EU-US trade, though there is no ‘comprehensive’ agreement. If no deal is struck between the UK and the EU that brings about their continuation, after 31 December 2020 Britain will no longer benefit from trade treaties negotiated by the EU with third countries. This includes Japan, Canada, Singapore and many more including the separate agreements with the USA. This is one reason for the urgency on the UK’s part.
Didn’t the USA and the EU try to do a deal?
In an ideal world the EU and the USA would have agreed a comprehensive trade treaty long since. In theory it is win-win business between two enormous and wealthy markets, however the world is far from ideal and the last attempt ended in failure. The negotiations for the Transatlantic Trade and Investment Partnership, (TTIP - generally pronounced ‘T-tip’) as the EU-US deal was known, proved controversial and difficult. After 15 rounds of negotiation over four years covering 27 different ‘streams’ - some sectoral others cross cutting - the talks were ended by Donald Trump - though they had been effectively dead long since. The EU then buried the whole thing in April 2019 - all the detail of the negotiations is in the public domain.
There were a whole number of stumbling blocks and cultural differences between the EU and the USA. Key areas of failure to agree included healthcare markets - in which the US market model clashes with multiple varieties of socially provided care, aspects of public procurement and the social market model protecting European workers and, crucially, agriculture and food standards . These are all ‘non tariff’ matters (5). Tariffs - the taxes on goods applied at the border - have been generally low between the US and the EU - around 3% on most goods and are much less significant in trade talks than non-tariff matters. After the collapse of the talks Donald Trump, enacting his ‘America First’ mantra sought to turn his failures into a trade war, applying 25% tariffs to some EU imports. TTIP is not being revived any time soon.
The issues before UK and US negotiators
It is a long time since the UK negotiated any kind of trade arrangement. It was one of a number of things the UK Civil Service just didn’t have to worry about. Since the referendum in 2016 the UK has sought to recruit trade specialists, but that’s a tough business. A negotiation implies both sides want something and both must offer something to get it. It doesn’t take a genius to work out that all the same issues apply to a US-UK trade negotiation that applied to TTIP. You could take the view that the failure of those talks was all about the bloody minded, restrictive EU getting in the way of free and open trade. Many in the UK may agree with that on the face of it but push below the surface and they appear to be less keen. US negotiators reflect the powerful interests brought to bear on US politicians. American health companies wish to expand their markets. A trade agreement can provide that opportunity, so US negotiators will wish the UK to open the doors of the NHS to US ‘for-profit’ providers. American agri-business, in which hormone-injected cattle roam the prairies - or more likely shuffle in intensive sheds - and chicken is washed with chlorine based bleach toy mask the effects of lower photosanitary standards on farms, also wants access to the tables of British diners. When put in those terms the public is less convinced by the benefits of ‘free trade’. The Trade Justice movement sums up these and other concerns here.
Whether the British public will get the chance to object in any serious way should a deal become possible is another matter entirely. In the European Union a trade agreement must be approved by the members state governments (and in some cases their regional governments) and by the directly elected European Parliament. In the UK international treaties are regarded a matter for the Government alone. In the USA the President drives the negotiations but Congress has to approve or reject the agreement. So unless the meat industry gets what it wants the votes of plains states senators cannot be taken for granted and the same can be said for other vested interests. This doesn’t mean a deal cannot be struck, but it does mean it is a long road from fine words in campaign speeches to an actual agreement.
What is it all worth?
The quantifiable benefits of trade deals are moot. Intuitively more business means more prosperity - just as in a recession less business results in declining real incomes - but the exact amounts are difficult to measure and harder to estimate (7). Remember the UK and the EU trade with the USA as things stand – so we are taking about additional trade/investment benefits over and above what already exists. The additional benefits of TTIP to the European Union had been estimated by the European Commission at €120 billion per year. The UK accounted for a seventh of then EU trade with the USA, so assuming Britain would have benefited proportionately, that would have meant a boost to the US Economy of about €17 billion (£15 billion). So putting an optimistic hat on, were the UK to be able to do a better deal and make more of it - say a third better, then maybe a US trade deal would be worth £20 billion or so each year. That sounds like and indeed is a lot of money, but some words of caution. First, everything is relative - £20 billion is less than 1% (around 0.85%) of the UK’s national income (GDP). Secondly, the European Commission’s estimates of the value of TTIP from which this figure is extrapolated with an appropriate dollop of patriotic optimism, were themselves held by many in Brussels (and by Brexit supporters especially so) to be deliberately optimistic to sell the notion of TTIP and fourth, TTIP included additional inward investment (the clue’s in the name). Additional investment estimates far outweighed the value of additional goods and services traded under TTIP, however, a key reason for US firms investing in the UK - a base within the European single market - is disappearing with Brexit, fifth and finally, by almost every available estimate Brexit is set to cost a great deal more than a potential US traded deal would gain for the UK - just in terms of reduced trade with the EU27 let alone inward investment or the UK’s tax base.
Who needs a deal?
For now, however, let’s stick with €25 billion. Earlier I said that the US was the destination for 18% of the UK’s annual exports (6) and the source of 11% of Britain’s imports - by any measure an important trading partner for the UK. But that 11% of UK imports accounts for 3% of the USA’s total exports. So UK-US trade is much more important to the UK than it is to the USA. The USA, much the larger economy and population, therefore holds much more clout in any negotiation. Add that to whatever concessions the USA might wish to extract and you don’t have to be Mastermind to work out that the UK’s leverage in the current trade talks is limited and that’s before we approach the vexed subject of what in the mind of Donald Trump is a ‘great deal’ or the pressure to get a deal, any deal as the single market exit approaches.
Will it happen, if so when?
President Obama’s ‘back of the queue’ comments were widely regarded as a mis-step in the 2016 referendum campaign since when Donald Trump has been keen to give the opposite impression to his Brexit supporting allies. Nonetheless, even were the talks themselves to run smoothly it is a tough call that suggests they will conclude before 31 December 2020. let’s remember that the EU’s deal with Canada took seven years. What might be a realistic idea is taking the existing terms of trade from the 20 or so existing US-EU agreements, bundling them and agreeing to carry on as before, perhaps for an initial period pending a full negotiation. However should the US request concessions from a UK Government desperate for a deal, especially on the NHS and food standards, in return for a quick agreement it could all end very badly one way or the other.
In the end it amounts to politics - and the politics of the UK-US trade talks have always been about politics. Donald Trump is facing an election campaign with an uncertain outcome in which he has already demonstrated his unpredictability. He is likely to maintain his hostile protectionist stance on trade. Add that to the fact that the US has an eye watering trade deficit (including a relatively small deficit with the UK and a larger one with the EU) that includes net trade deficits for a number of must-win states where promises to repatriate jobs were made in 2016. The UK is facing a probably cliff edge crash from the single market, in that context the failure to achieve aa trade agreement with by far the biggest ‘Anglosphere’ market would represent a significant PR failure for the Johnson government.
As I said at the beginning, international trade is fiendishly complicated and even in a long read like this one can only scratch the surface of what a trade treaty involves. What ought to be self-evident (and the subject of another piece) is that similar types of difficulty underly every trade deal Britain may wish to pursue. It was always the massive fallacy for the Brexit debate that, outside the EU ‘free trade’ would ride to the rescue of the UK economy.
JH - May 2020
(1) The benefits of “controlling our own trade policy” are easy to argue but highly questionable both economically and in terms of sovereignty. The Cook Islands are a sovereign nation, but lack any significant clout in trade negotiations. The EU is a very large and desirable market and their trade negotiators are not only experienced but are highly rated. Like the EU or hate it, underestimating its ability in this area is just bad strategy.
(2) The WTO includes 164 member states - almost every functioning government with the exception of a few pariahs like North Korea and Iran. The WTO is, ironically, under threat from and being bullied by Donald Trump for whom it is a just another convenient whipping boy. Expect the popularity of "WTO Rules" to fall away pretty fast.
(3) TTIP involved a system of tribunals, know as Investor-State Dispute Settlement (ISDS) which were criticised as beyond the control of the parties and thought likely to support corporate interests against the nation state and could make binding rulings on matters such as state aid. Any US-UK deal will involve some sort of court of appeal of this type - which is obviously why we were so keen to leave the jurisdiction of the ECJ.
(4) The EU is, of course, proximate to the EU. A great element of ‘ease of doing business’ is about proximity - gravity applies and size matters in trade. On the precise value and the quoted numbers - all come from state published figures in various jurisdictions, however, a problems with quoting exact comparative trade statistics are 1) they move on with time 2) they change with the values of currencies. So all of the percentage and other figures quoted in this article are approximate - which is good enough.
(5) Even non-trade matters matter more than tariffs. For example if the UK wished to do a trade deal with India it would not get signed unless the UK was prepared to grant visa-free travel and a great deal more student access to Indian citizens. Conversely, the EU’s trade negotiators have been encouraged to use their negotiating clout to seek improvements in the human and social rights of employees in third countries - sometimes they have done so, but not always. Neither example is trade as such, but both important politics. More of this in another article.
(6) Of the 18% only about one third of US-UK trade is in physical ‘goods’, the rest is services, though this is an increasingly difficult distinction. The point is a ‘goods only’ trade deal is of limited value to an economy like the UK which is now 80% services.
(7) Who really benefits from trade deals is also moot. Many economists argue that the benefits of trade deals do not get into the pockets of the general population in any significant way and the benefits are largely retained at corporate level. Others argue that, while there are benefits to the economy and population in general, they are mostly concentrated in the sectors that benefit most directly through job creation and sectoral growth.
