Prospects for US-UK trade accord are daunting

May 21, 2020 10:30 AM
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REUTERS/Chris Radburn

Undeterred by the COVID-19 pandemic, the United States and the United Kingdom kicked off their first round of trade negotiations on May 5. The initial talks are scheduled to last for two weeks. Both sides claim they want an ambitious high-standard agreement, but some serious disagreements must be resolved to reach this lofty goal. London’s red lines on agriculture and digital trade, and its environmental aspirations, foretell a rough road ahead.

The US Trade Representative (USTR) issued its negotiating objectives in February 2019, and a year later the UK published its version in March 2020. The US version reads almost the same as its objectives for a US-EU deal [1]—meaning all the difficulties for a US-EU agreement that led the Trans-Atlantic Trade and Investment Partnership (TTIP) to a dead end during the Obama administration are now resurrected in US objectives for talks with the UK. But this time there are additional complications from Trump’s protectionist trade policies, which favor the United States to create jobs at home, as reflected in the United States–Mexico–Canada (USMCA) deal that replaced the North American Free Trade Agreement (NAFTA) last year.

The Trump administration’s trade policies are largely based on its claim that bilateral merchandise trade deficits are a sign of US economic weakness. But the United States has sold more to Britain than it has bought for the past few years, running a $6 billion merchandise trade surplus last year. The administration thus seeks “fair, balanced, and reciprocal” trade in goods with the UK without asking for an improved US trade balance.[2] In its new MFN tariff regime published recently, the UK wants to maintain its tariffs on cars and agricultural products post Brexit.

As for its own trade barriers, Britain seeks to keep its current [EU] sanitary and phytosanitary (SPS) standards on agriculture and food safety, which has kept out US beef and other products, and maintain effective geographical indication (GI) protection of place names for wine, cheese, and other iconic products such as Scotch whiskey.[3] Notwithstanding Brexit, the UK may still have a very EU-like mindset, making the gap between Washington and London hard to bridge. Similarly, the UK favors EU privacy standards on internet platforms, while the US sees them as barriers to digital trade. Furthermore, the UK supports the European digital services tax that disproportionally hits Facebook, Google, and other US technology giants. The US Treasury has threatened to retaliate.

A contentious issue looms large over climate change. The UK aims for net zero carbon emissions by 2050, which will lead Britain to demand curbs on greenhouse gas emissions in a trade accord. Under Trump, that would be a nonstarter. Furthermore, the US Trade Facilitation and Trade Enforcement Act of 2015 (HR 644, sec. 914) mandates that US trade agreements should not “obligate the United States to greenhouse gas emissions measures.” As a result, the Obama administration had to demand that climate change be left out of the Trans-Pacific Partnership (TPP) negotiations, and the Trump administration excludes the topic from its trade deals.

Another US objective in these talks is its demand that Britain’s publicly funded National Health Service (NHS) provide full market access for US medical products, pharmaceuticals, and drugs. The US might also seek a role for its health insurers. Prime Minister Boris Johnson has repeatedly vowed to oppose any dilution of the NHS’s autonomy. It is possible that these positions can be reconciled to ensure greater access for US pharmaceuticals without eroding the NHS monopoly, especially since the Trump administration is now advocating “self-sufficiency” for medical supplies in light of domestic shortages during the coronavirus epidemic.

Both countries are relatively open in services trade, including financial services, according to the Organization for Economic Cooperation and Development's Services Trade Restrictiveness Index. A potential snag may occur if the EU negotiates a Brexit agreement that bars London as a “back door” to enter the EU financial market. Otherwise, further liberalization of services trade between the US and UK should be easily negotiated.

The USTR seeks to preserve Washington's ability to impose tariffs on goods deemed to benefit from subsidies or that are “dumped” on US markets at low price and pose a threat to domestic industries. The UK has similar provisions aimed at US imports of steel and certain chemicals. While these traditional trade remedy actions do not look like obstacles to the overall negotiation, the Trump administration's national security tariffs are a different matter. The UK government strongly opposes US Section 232 actions and will press for “swift removal of these unjustified tariffs.”

As an Airbus host nation, Britain aims to reach a settlement on the 16-year-old Boeing-Airbus dispute in these negotiations. In this prolonged US-EU dispute, the WTO judged that both sides illegally subsidized their aircraft companies and authorized retaliation. The UK seeks removal of US punitive tariffs imposed following the WTO’s ruling on government subsidies to Airbus.

USTR negotiating objectives also feature classic “one-way concessions,” such as a ban on binding arbitration, allowing for “Buy America” programs, and a reduction in UK fishery subsidies. The UK wants to secure government procurement agreement–plus (GPA+) commitments and has explicitly opposed “Buy America” in its objectives. It is hard to believe that other one-way demands will be accepted.

Every trade negotiation involves demands that look daunting at the outset. The US-UK talks seem unlikely to conclude before June 30, 2021, when congressional “fast track” authorization expires. More likely is a partial accord on “low-hanging fruit” harvested in 2020 and promises of more to come in future years.

Notes

1. To a large extent, these objectives were set forth in Section 102(b) of the Trade Promotion Act of 2015.

2. “Improve the US trade balance and reduce the trade deficit with Japan/the EU” is listed as the first objective under the “Trade in Goods” chapter, both in the US-Japan and US-EU trade agreement objectives.

3. The gov.uk portal has a list of UK registered products under the protected food name scheme. In a Wall Street Journal op-ed, Senators Phil Gramm and Pat Toomey argued that accurate food labels should resolve UK concerns about US SPS standards. This seems unlikely.