Trade, Development, and Immigration

US edging towards the front of the queue for a trade deal with the UK

The launch of a US/UK Working Group to discuss the future economic relationships between the two countries marks another important step towards a revival of global trade. The US may still not be first in line to sign a new trade deal with the UK when it leaves the EU (for now the frontrunner here is probably Australia). Nonetheless, substantial progress in talks with the US should illustrate one of the potential benefits of Brexit, both for the UK and for the rest of the world.

To recap, on 24th July the International Trade Secretary, Dr. Liam Fox, will return to the US after an initial meeting in June for the official launch of a group that will lay the groundwork for a new trade agreement following Brexit. Sceptics are keen to point out that these cannot be formal ‘free trade negotiations’, which are not supposed to happen until after the UK has quit the EU. In reality, of course, these meetings would not be taking place if the UK had voted to Remain, nor is there any compelling reason why the US and the UK cannot discuss the broad principles, at least, of a future deal (‘talks about talks’).

The US and the UK are already major economic partners. In 2015, the US accounted for around 20% of UK exports and 11% of UK imports, making it the UK’s single largest export partner and second-largest import partner – second only to Germany – in terms of trade in goods and services. Admittedly, the fact that there is already a close relationship between the two countries may mean that the scope for further gains is limited. However, it also means that a new deal should be easier to conclude, and even a small increase in trade from a high starting point could bring significant economic benefits.

What’s more, a quick deal with the US should set an important precedent for other agreements that the UK will want to conclude with the rest of the world – while reining back some of the more protectionist instincts in the US itself. With the EU intrinsically protectionist and opening up only painfully slowly, a liberated UK could provide a shining example of how to embrace the benefits of free trade.

In contrast, many argue that the UK will be in a weaker bargaining position than the EU because of its smaller size. President Obama notoriously claimed that the vote for Brexit would push the UK ‘to the back of the queue’ for future trade deals.

However, even before the election of President Trump, many US politicians could see the appeal of negotiating with one country rather than the EU’s full complement of 28 (or soon 27), especially where that country is already relatively closely aligned in economic and political terms. President Trump’s more recent claim that “we have been working on a trade deal which will be a very, very big deal, a very powerful deal, great for both countries and I think we will have that done very, very quickly” may well be over the top, but it is surely nearer the mark than Obama’s jibe.

There are still plenty of doubters. One line of attack is simply to claim that increased trade with the US could not realistically be expected to offset any disruption to trade with the EU after Brexit. After all, in 2015, the EU accounted for 44% of the UK’s exports of goods and services, while 53% of UK imports came from the EU. The figures are indeed much higher than the US numbers of 20% and 11%, respectively. But no-one is seriously suggesting that increased trade with the US is the only alternative in the event of a dislocation with Europe. Indeed, the 2015 data already show that the UK trades more with the rest of the world than it does with the EU. The relative importance of trade with the EU has also been declining for years and this trend will continue.

Freed from the constraints of EU membership, the UK could move relatively quickly to conclude free trade deals with Commonwealth countries and open negotiations to join the Trans-Pacific Partnership (TPP, which is a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam). A trade deal with the US could also be a stepping stone to UK membership of the North American Free Trade Agreement (NAFTA, which covers the US, Canada and Mexico). (More on this in a future blog.)

In addition, most analysis of the potential damage that Brexit might do to UK trade with the EU is far too pessimistic. For now, the most likely outcome appears to be some sort of transitional arrangement to cushion the blow before a comprehensive free trade deal can be concluded. But even if the UK switches from single market membership to trading with the EU on World Trade Organisation terms – the “no deal” option – the impact should be manageable. After all, the UK and the US already trade relatively successfully on these terms.

This view runs counter, of course, to the conventional economic analysis promoted by the Remain side, which has suggested that UK trade with the EU could fall by as much as 60% due to increases in tariff and non-tariff barriers under WTO rules. These suspiciously high numbers defy common sense and typically rely on so-called ‘gravity models’ of trade, which have now effectively been debunked.

This still leaves a number of specific concerns about likely elements of the US/UK trade deal. Two in particular come up again and again. One is the impact on the food sector due to the different regulatory standards applied to agriculture in the US. This has prompted all sorts of scare stories, with UK consumers allegedly at risk of being force fed everything from genetically-modified tomatoes to ‘hormone-laden beef’ and ‘chlorinated chickens’.

This is a whole new subject for another day. In short, there is a strong case for arguing that overly-precautionary EU regulation – often in defiance of clear scientific evidence – is hampering UK agriculture and driving up prices for consumers. If people only want to buy food produced in particular ways, the solution is surely clear labelling (as already happens with ‘organic’ and ‘fair trade’ products), rather than outright bans that limit choice for all. Moreover, a trade deal with the US would allow the UK to eliminate tariffs on imports of foodstuffs from the US that it does not produce – such as rice and many citrus fruits – lowering food bills.

The second common concern is that a free trade deal with the US would somehow lead to the ‘privatisation of the NHS’ along US lines – in ways that are never fully explained. This is classic ‘Project Fear’ too. US companies would expect to be allowed to bid for public sector procurement contracts in the UK in the same way as firms from the rest of the EU already can now. But this in itself would not increase the amount of NHS activities undertaken by private firms, or otherwise change how the NHS is run. Instead, by increasing competition for a given amount of business, it seems just as likely to drive down costs and improve efficiency, allowing the NHS to do more for less. And of course, the point of a free trade deal is to increase access to each other markets, so UK companies would also be more able to compete for government contracts in the US.

The upshot is that a US-UK trade deal represents a win-win for both sides. Oddly, due to inconsistencies in the way in which international trade data are calculated, the official numbers produced separately by the UK and US already suggest that the two countries are running trade surpluses with each other! That is obviously a statistical illusion, but more open trade may soon become a reality.


Julian Jessop is an independent economist with over thirty years of experience gained in the public sector, City and consultancy, including senior positions at HM Treasury, HSBC, Standard Chartered Bank and Capital Economics. He was Chief Economist and Head of the Brexit Unit at the IEA until December 2018 and continues to support our work, especially schools outreach, on a pro bono basis.

Madeline is the IEA’s Editorial Manager, responsible for commissioning and running the IEA blog, and creating content for the IEA podcast channel and other media outlets. Prior to joining the Institute, she worked as a Parliamentary researcher and speechwriter, and as a reporter for Newsweek Magazine. Madeline graduated from St Hilda’s College, Oxford in 2014, with a degree in English. As an undergraduate, Madeline was actively involved in university politics, and was elected to Standing Committee of the Oxford Union during her studies.

2 thoughts on “US edging towards the front of the queue for a trade deal with the UK”

  1. Posted 20/07/2017 at 07:40 | Permalink

    The most of the british economy îs based on sevices The Most of the british services are exported to the EU. What relevance would the free trade deal with the USA have on this? And how îs free trade deal going to replace the subsidies for the farms, without whom 50% of the british farms will go bankrupt?.Losing the single market will deliver a hammering blow to the economy that no free trade deal with US or other non EU country will offset.

  2. Posted 04/10/2017 at 16:24 | Permalink

    Actually arguing to be part of NAFTA? Just before Trump rips it up! Claiming a deal between UK and US will be a shining example to the world? Conjecture. Trusting Trump over Obama? Wow.

    Arguing US protectionism will be reined in by the UK whilst at the same time disparaging EU protectionism? Utter nonsense.

    And now Bombardier and Boeing? You have got to laugh at the naivety of the right.

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