Brexit: Forging the New U.K.-U.S. Relationship

The United Kingdom left the European Union on 31 January 2020. Under the U.K.- EU withdrawal agreement, a transition period will end on 31 December 2020 (unless it is extended). During the transition period the U.K. will continue to participate in the single market and customs union and will otherwise be treated as if it were still an EU member state. For its part, the United States (U.S.) has shown strong interest in strengthening ties with the U.K on trade and a host of related regulatory and national security issues, many of which have strong bipartisan support in the U.S. Congress. As a result, a possible U.S.-U.K. trade agreement is likely to be a priority for the U.S. regardless of the outcome of the upcoming November 2020 presidential election.

For the U.K. Government, the end of the transition period is politically symbolic, and it has been reluctant to extend it. Although the negotiations between the EU and U.K. are continuing remotely, the coronavirus pandemic has significantly increased uncertainties. The economic impact of the shutdown of the U.K. economy in order to fight the coronavirus could be substantial and could potentially change the U.K. Government's stated position and political calculations going forward. If the deadline were not extended and the U.K. were to reach the end of the transition period with no trade deal, the relationship would revert to World Trade Organisation rules. U.K. businesses would then be required to deal with the double shock of the coronavirus shutdown, as well as a complete overhaul to the terms in which they operate. The EU is facing challenges as well, since fighting the coronavirus pandemic is testing its resources and the cohesion between Member States.

The timing of the end of the transition period is significant since it will influence the U.K.'s relationships with countries outside of the EU, including the U.S. Although the U.K. can negotiate their future trading relationships, the agreements cannot come into force before the end of the transition period without the agreement of the EU.

Global Britain Strategy

The U.K. already has more than 40 trade agreements with 70 countries around the globe through its former membership of the EU. These include significant trading partners such as Canada, Japan and Singapore. During the transition period, the agreements continue to apply as they did. However, the U.K. is working to replicate these agreements on a bilateral basis so that they will continue to apply after the transition period. As of December 2019, the U.K. has succeeded in replicating the agreements that cover 8.3% of its current trade, with countries such as Switzerland, South Korea and the European Economic Area countries (Norway, Iceland and Liechtenstein).

The U.K. Government has also announced its intention to seek new trade agreements with the U.S. New Zealand, Australia and an updated agreement with Japan. The intention is to negotiate these in tandem. From the U.K.’s perspective this gives a great opportunity to ensure the maximum benefits from each trade agreement as the different territories can be played off against one another. The EU negotiating teams, for example, will know that if the EU were to increase trade frictions, then there would be scope for the U.K. to allow other negotiating partners freer access to the U.K. and so disrupt EU trade and businesses.

The U.K. has recently held a public consultation on its future global tariffs policy and an announcement on what this will be is expected shortly. Once set, this new U.K. global tariff (UKGT) will cover any imports coming into the U.K. from anywhere in the world where there is no free trade agreement in place and will be the baseline for any bilateral negotiations with countries seeking a better deal.

In addition to the UKGT, some countries may want to see what the U.K.'s relationship with the EU will be before determining what they think they can achieve in a trade agreement. A further potential obstacle is that some modern trade agreements have clauses that ensure that anything offered to a third country in a new agreement must be given to the party to an existing trade agreement, if it is more beneficial. For instance, if Japan were to offer the U.K. better terms in their new bilateral arrangement, there are provisions in the existing EU - Japan agreement that require Japan to offer the EU the same terms as they offered the U.K.

Global U.S. Strategy

Under President Trump, the United States has shifted its trade strategy from broad-based multilateralism to more limited, bilateral agreements with key trading partners – as exemplified by the president’s decision to withdraw from the multilateral Trans-Pacific Partnership (TPP) on his third day in office and the conclusion of new or revised trade agreements with Japan, South Korea, Canada, and Mexico. These agreements and related aspects of the trade policy agenda announced annually by the Office of the U.S. Trade Representative (USTR) have received wide-spread bipartisan support – a notable contrast to the reception of other planks in the president’s “America First” agenda.

Against this backdrop, the negotiation of a bilateral agreement with the U.K. – the world’s fifth largest economy and key U.S. ally – is a logical and important next step. Moreover, it is likely to remain a top trade priority regardless of the winner of the November 2020 presidential election. Indeed, a U.K.-U.S. bilateral trade agreement is widely seen by policy makers on both sides of the political divide as a vital bridgehead to strengthen the U.S.-U.K. alliance while increasing leverage on the EU to eliminate some historic and well-entrenched U.S.-EU trade irritants – such as agricultural policies, regulatory standards, and the on-going Boeing-Airbus trade disputes.

The U.K.- U.S. Relationship

Outside of the U.K.'s relationship with the EU, the U.K.- U.S. relationship is arguably the U.K.'s most important. According to the U.K. Government, total U.K.- U.S. trade was valued at £220.9 billion ($274.3b) in the past year which amounted to 19.8% of both countries' exports. Although nearly half of the U.K.'s trade went to the remaining EU27 countries, making the EU as a whole the U.K.'s largest trading partner, the U.S. is the U.K.'s largest bilateral trading partner.

Depending on one's point of view, there are differing scenarios for what comes next in the U.K. - U.S. relationship. Some analysts question whether an agreement with the U.S. could be negotiated without knowing the outcome of the EU negotiations. Conversely, others claim that because of the historical ties, the “special relationship,” and the cultural similarities in trade approaches, a trade deal could be concluded quickly. Already, there are signs that both current governments continue to favour the latter approach, with U.S. and U.K. negotiators continuing to press forward with early-stage discussions despite the disruptions caused by the coronavirus pandemic.
Adding to the complexity are the differing views within the U.K. and U.S. on what a trade agreement should achieve. Many businesses (especially from an American perspective) see a trade agreement as an opportunity to enhance American businesses' access to the U.K. market, and to align the U.K.'s regulatory regime to the U.S. rather than the ostensibly more onerous EU rules.

For instance, the contrary views can be seen through recent public discourse in the U.K. centred around the transatlantic differences in product and food standards. The production process for chicken has been a symbolic example for the British public, but this debate could be around anything from the types of chemicals used in food production, to the use of GMOs in agriculture, and the testing of medical devices. Another politically sensitive issue is the extent to which the U.K.'s National Health Service (NHS) could be opened up to American pharmaceutical and other medical companies. The British public have indicated that they would like little to no access given to American business. Some American Members of Congress have also raised the situation with the border between Northern Ireland and the Republic of Ireland as a potential stumbling block to the future U.K. – U.S. relationship.

For these reasons, the U.K. could be placed in a difficult position and the scope for the U.K.'s pivot towards U.S. regulatory standards may be limited. However, this debate may be somewhat irrelevant to U.S. and U.K. businesses who also have operations in the EU. The so-called “Brussels Effect,” (where a company will adopt one set of standards and harmonize upwards to the highest standard (usually the EU's because they generally are the most stringent) for their operations globally, may in practice, displace any regulatory changes in a trade deal. The theory of the Brussels Effect (a variation on the California Effect which describes the shift of regulatory standards relating to the environment, consumer products and other areas) is that there is little incentive for a company working in multiple jurisdictions to have differing standards for each place they operate. It is more efficient to comply with the most stringent and sell that product or service everywhere. The effect is seen clearly in the global application of the General Data Protection Regulation (GDPR), where some American companies apply GDPR standards to their American operations, even though they are not legally required to do so.

This isn’t to say that the U.K. will stay aligned to the EU, because the more they do, the more chance that difficulties that have prevented an agreement in the past U.S.-EU trade negotiations that took place from 2013 to 2016, could resurface in the U.S.- U.K. context.

The U.K.'s Negotiating Objectives

In early March 2020, on the day that talks between the U.K. and EU on their future relationship got underway, the U.K. Government released their negotiating objectives for the U.S. agreement. In their objectives, the Government states that they believe a Free Trade Agreement (FTA) would increase trade with the U.S. by £15.3 billion over the 15 years after the FTA comes into force. They also say that it will deliver a £1.8 billion boost to U.K. workers' wages, as well as lowering prices on consumer goods.

The U.K. Government wants to focus on potential gains for the 30,000 Small and Medium-sized Enterprises (SMEs) across the U.K. that are already trading with the U.S., and to open new opportunities for other British SMEs. The U.K. Government says that the U.S. currently levies £451 million in tariffs on U.K. exports each year.

To achieve these gains, the U.K. Government wants to secure liberalisation of tariffs on a mutually beneficial basis (taking into consideration the U.K.'s agriculture industry) and will also seek to reduce technical barriers by removing trade restrictive measures in goods (while upholding safety standards).

The Government also says they want to reduce regulatory obstacles to facilitate market access, and also increase their trade in services by ensuring market access and fair competition for U.K. services exporters. They highlight the free flow of data (while upholding the U.K.'s standards of personal data protection) as a particular goal in this area.

A trade dispute settlement mechanism will also be negotiated to promote compliance with the agreement. However, the objective on this point is still extremely vague. This is likely because the investor-state dispute settlement mechanism was one of the most difficult topics in the EU-U.S. negotiations between 2013 and 2016. As such, the U.K. Government is trying to avoid creating too much controversy with the U.S. Government before the talks even begin.

They have stated clearly in their objectives that the NHS will never be on the table in negotiations. They are adamant that the NHS (including its pharmaceutical procurement system) cannot be opened up to the private sector, whether they are from overseas or domestically based. The U.K. Government also says that it will ensure high standards for both consumers and workers, as well as keep high standards on environmental protection, animal welfare and food standards.

Overall, on their own economic modelling, if these objectives are achieved with all tariffs and half of non-tariff barriers being eliminated, the U.K. Government projects that U.K. GDP will increase by around 0.16%. That is the best-case scenario, and in real money terms this is a significant figure. However, from the obstacles set out above, much will depend on which path the U.K. will decide to go down.

The U.S.'s Trade Objectives

The Trump Administration notified Congress in October 2018 that the President intended to negotiate a trade deal with the U.K. after it left the EU. In their negotiating objectives the Office of the U.S. Trade Representative (USTR) took as a template the recently-concluded U.S.-Canada-Mexico Agreement (USMCA) – the successor to NAFTA – which USTR has described as a “model” for future U.S. trade agreements. Features of USMCA that are reflected in the U.S. negotiating objectives include specific limitations on operations of “state-owned enterprises” – which are included not because Canada, Mexico or the U.K. have significant state-owned enterprises, but as a bulwark to the growing presence of Chinese State-Owned Enterprises on the global stage and as investors in each of these countries. Reducing so-called “non-tariff barriers” such as certification standards, testing requirements, and other regulatory practices is another key U.S. objective in the U.S.-U.K. negotiations. For example, the U.S. wants to eliminate practices that are perceived to unfairly decrease U.S. market access for agricultural goods, especially the non-tariff barriers that they believe discriminate against U.S. agricultural goods. Promoting “greater regulatory compatibility” to reduce burdens within the agricultural sectors, as well as commitments for trade in agricultural products developed through biotechnologies are also on the agenda. Beyond simply expanding bilateral trade, many in the U.S. view this objective as an important fulcrum to gain leverage over the EU in future U.S.-EU negotiations concerning the EU’s own regulatory requirements, such as the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) system.

Trade in services is another important element of the objectives, particularly the financial services market. USTR wants to expand market opportunities for U.S. financial services suppliers, by opening up the conditions of the financial services trade and improving the transparency and predictability of the U.K.'s regulatory procedures. The U.S. seeks to ensure that the U.K. does not impose restrictions on cross-border data flows that require the use of local computing facilities. This will tie into wider agreements relating to data management, given the U.K.’s current commitment to GDPR and ensuring the protection of its citizens’ data. Similarly, the U.S. is pressing the U.K. to scrap proposed taxes on digital services.

USTR would also seek standards for pharmaceuticals and medical devices that ensure government regulatory reimbursement regimes are transparent, procedurally fair and non-discriminatory. They would like full market access for all U.S. pharmaceutical and medical products. As mentioned in earlier sections, this is likely to be a sticking point in negotiations, given the U.K. government’s position on this.

The objectives also include specific provisions relating to Intellectual Property, competition policy, environmental and labour protection. In essence, these seek reciprocal rights or that minimum standards are upheld. In some cases, such as labour and environmental laws, the US is seeking to enforce standards that are currently similar or indeed even higher in the U.K. In the case of Intellectual Property and competition law, there is already some level of reciprocity and operation of international frameworks independent from any specific bilateral arrangements that to some extent provide for much of what is sought.

Similar to the recently-concluded USMCA dispute resolution mechanism, USTR is seeking to ensure that the U.S. and U.K. Governments retain control of disputes and can promptly address situations where they believe decisions made by the dispute resolution panel are wrong.

The Future Relationship

The U.K. is entering an unprecedented new era. The U.K. Government is working on nearly every relationship it has around the globe to prepare for the moment the EU treaties cease to apply to it. This can be an opportunity to redefine the U.K.'s position, however, it is not without its challenges and risks. As the U.K. negotiates its new relationship with its EU partners, the U.K. – U.S. relationship will take on even more importance.

Trade negotiations in the new post-Brexit era have moved beyond the economics of GDP and tariffs. Achieving a trade agreement with the U.S. has become a politically symbolic goal for the U.K. Government. They will be keen to achieve an agreement in order to show that they can move beyond the EU structures. For its part, the U.S. views a bilateral trade agreement as a means to sustain and strengthen ties with its close ally and a lynchpin of future relations with the Continent. Therefore, a U.K.-U.S. agreement is likely to remain a priority for the both governments. However, with the addition of the coronavirus pandemic on the plate of governments on both sides of the Atlantic, the outcome and timeframe are impossible to predict with certainty, as is the question whether the U.K. and U.S.’s negotiating stances will have hardened.