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A UK-US Trade Stumbling Block: Regulations

Chad P. Bown explains that trade talks between the United Kingdom and the United States may founder over harmonizing product standards and aligning financial, safety, and health regulations.

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Chad P. Bown (PIIE)

Unedited transcript

Chad Bown: Hello. My name is Chad Bown and I'm a senior fellow with the Peterson Institute for International Economics in Washington.

The UK’s Prime Minister Theresa May was the first foreign leader to visit President Donald Trump after his inauguration. Her visit marks an opportunity for the United States and the United Kingdom to negotiate over a potentially historic new trade deal between these two major economies. Is this a good idea? Is this a bad idea? Is this likely to happen any time soon?

First let’s start with the good. The US and the United Kingdom are already involved in a tremendous amount of bilateral trade. Indeed, the United States is the UK’s second largest trading partner after what it exports to the European Union. About 50% of UK exports come to the US and the US ships a lot of manufacturing, agricultural, and especially services products back to the United Kingdom in return.

The two economies are closely related historically. They share a number of common cultural ties and they would seem to be natural trading partners.

Indeed, when Prime Minister May came into power, she noted distinctly that one of her team’s strategies was going to be to go out and negotiate new trade agreements with non-European Union partners out there like the United States.

The Trump administration, for its part, which has been generally relatively negative toward trade deals like the NAFTA having pulled out of the TPP, being very concerned about trade with China. The one country with which it has sent positive signals about a potential trade deal and it signaled interest in doing bilateral trade deals is the United Kingdom.

So, it seems like there is a potential opportunity here for the United Kingdom and the United States to get together. So, what's the concern? Well, the main concern is just that it may not be the right time to do a deal, and certainly not to do a quick deal, a deal that would actually be meaningful in terms of economics.

Why is that? Well, when I look at the trade data between these two countries, what the US and the UK tend to ship to each other are relatively complicated goods. Things like aircraft, automobiles, parts, pharmaceutical products and chemicals, medical devices.

These are all goods that are high-value-added goods and that’s great, but they are also goods that are, in order to keep them safe, importantly regulated by governments and their economies. Well, so then, what is the concern? Regulations are what trade deals, trade negotiators are negotiating over these days. Why don’t the US and the UK just negotiate over these regulations in addition to the standard items like importers, the issues of old?

Well, the main issue, unfortunately is that the United Kingdom isn’t really to begin negotiating over its regulations. It's still in the process of extracting itself from the European Union. As we know, on June 23rd of last year, the population of the UK voted to Brexit, to leave the European Union. And they are now making the decision which of the regulatory functions that have been outsourced to Brussels that the European Union has determined jointly for the UK and all of the other EU member countries over the last 40-something years. Which of those, the United Kingdom is actually going to bring to back to London and start to regain sovereignty over and do themselves.

So, establishing their own equivalent, in the United State anyway about Food and Drug Administration; establishing a new regulatory body to deal with auto-standards, another product, health and safety standards.

So, the concern is that they're not just ready to negotiate yet. And if the Trump administration would actually send its regulators and its negotiators to London to sit across the table that the seats on the other side would still be vacated. The government agencies haven’t yet been staffed up in the United Kingdom to really begin a set of negotiations with countries like the United States.

That’s the main concern. This is unlikely to happen anytime soon, unfortunately because the process of even the Brexit negotiations between the UK and the European Union are only just starting in March and are expected upwards of two years before getting finalized.

So, while it's an important aspirational step for the United States and the United Kingdom to have deeper trade ties, it's probably going to take a long period of time before they actually get there.

I'm Chad Bown for the Peterson Institute for International Economics.