Challenges for a U.S.-U.K. Trade Agreement

In his recent visit to the United Kingdom, Speaker Paul Ryan emphasized the importance of a free trade agreement between the United States and the United Kingdom. Although prominent American and British leaders—including President Trump and Prime Minister May—favor a trade agreement, there are key challenges that both U.S. and U.K. economic policymakers will need to address.

Image courtesy of Jay Allen, © 2017.

There are indeed strong reasons to support a U.S.-U.K. trade agreement. The agreement would bind together the largest and the fifth largest economies of the world, which already enjoy a close relationship. It would be particularly beneficial for export-oriented U.S. sectors, such as machinery and agriculture, whose exports would benefit from reduced or no tariffs under a trade agreement.

Despite strong support from both sides, the U.K. government is not well-positioned for trade negotiations with the United States. According to Sir Simon Fraser, former Permanent Under-Secretary at the Foreign and Commonwealth Office, the U.K. government currently employs very few diplomats specializing in trade negotiations since such functions had long been transferred to Brussels, leaving the United Kingdom ill-prepared for trade negotiations with the United States.

There are also concerns that a trade deal with the Trump administration could put the United Kingdom’s National Health Service (N.H.S.) at risk of privatization. However, Prime Minister May has already ruled out access to the N.H.S in a future trade deal. Indeed, a bilateral trade deal will enjoy much greater British support if healthcare is excluded from the deal.

For the United States, there is a sizeable minority that doubts the merits of a bilateral trade agreement. We can classify the trade agreement skeptics into two major camps: protectionists who object to the U.S.-U.K. trade deficit, and pro-trade officials who prefer instead a trade deal with the European Union.

The protectionists argue that free trade agreements increase the U.S. trade deficit and take jobs away from American workers. Developed countries are no exception to this skepticism, as evidenced by the protectionist reaction against the proposed Transatlantic Trade and Investment Partnership. That the U.S. trade deficit with the United Kingdom rose in the last two quarters—buoyed by a weak pound following Brexit—does not help convince this group of the relative merits of a potential trade agreement. However, two major factors could ease protectionist concerns about the agreement.

First, the asymmetry in U.S.-U.K. economic relations would ultimately work out in favor of the United States. Whereas the United States is the largest export destination for Britain, the United Kingdom is only the fifth-largest export destination for the United States. This imbalance would help the United States set favorable terms of trade during negotiation. Favorable terms would allow the United States to reduce its deficit, if not achieve a trade surplus, with the United Kingdom in the long run.

As a recent example, the 2004 U.S.-Australia free trade agreement permitted the United States to set the terms of trade in a way that benefitted American exporters more than Australian exporters. The annual U.S. trade surplus with Australia averaged $6.1 billion in the five years prior to 2004. In the five years following 2004, the annual U.S. trade surplus averaged $10.3 billion, representing a 69.4 percent increase in the U.S. trade surplus with Australia.

Second, a trade deal would relax bilateral investment laws, making it easier for British companies to invest in the United States and create more jobs. In fact, British companies already create more jobs in the United States than American companies do in the United Kingdom. American companies operating in the United Kingdom employed 962,200 people in 2012, the latest year for which such data is available from the U.K. Department of Commerce. In contrast, British companies created 1.25 million jobs—30 percent more— in the United States.

Given the economic benefits of trade, it is not surprising that the Trump administration is slowly softening its position on trade agreements. However, instead of a U.S.-U.K. deal, some U.S. officials are now advocating instead a deal with the European Union. There is no reason why the United States cannot sign two deals—one with the United Kingdom and another with the European Union.

Compared to a U.S.-E.U. deal involving 28 E.U. members, a U.S.-U.K. bilateral deal would be simpler and quicker. Such considerations should be kept in mind when deciding which deal to negotiate at first.

At a time when the United States is steadily losing ground to China in global economic leadership, a U.S.-U.K. trade deal would provide a much-needed boost to U.S. leadership. It will also bring the two countries closer together, creating new economic opportunities on both sides of the Atlantic. However, in order for that to happen, British and American leaders must work together to make the trade agreement a key priority and address the challenges that lie ahead.

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