When the bells peal in the United Kingdom on Friday to mark its formal Brexit from the European Union, they will also signal the opening for that nation and the United States to begin negotiating an ambitious bilateral trade agreement.
A US-UK trade agreement would benefit both countries economically while deepening US ties to a key ally. In an interview in London over the weekend, US Treasury Secretary Steven Mnuchin said he was optimistic that the two nations could reach a deal by the end of 2020, the deadline the UK government has set for exiting the EU’s single market and customs union.
A bilateral agreement would offer both countries the opportunity to lower barriers to trade in such key sectors as motor vehicles, agricultural products, and financial services, as well as allow for the expansion of digital trade. The United Kingdom is the world’s fifth-largest economy and the fifth-largest market for US exports. It is also the country with the greatest foreign direct investment in the United States, with more than 1 million Americans working for UK-owned affiliates here.
As we outline in a new briefing paper for the Mercatus Center, the political will is there on both sides of the Atlantic to complete a trade agreement even under a relatively tight deadline. President Trump and his top trade advisers have signaled their enthusiasm for a deal, and the Conservative government of UK Prime Minister Boris Johnson, shortly after its resounding victory at the polls in December, committed to “begin trade negotiations with other leading global economies.”
Much of the agreement should be straightforward and noncontroversial. The United States and the United Kingdom both have relatively high wages and high standards for health and the environment. These similarities should alleviate misguided concerns that an agreement would somehow undermine US standards or promote “unfair” trade.
In its formal negotiating objectives released last year, the Trump administration’s Office of the US Trade Representative (USTR) called for an agreement that would “secure comprehensive duty-free market access for U.S. industrial goods,” including the reduction of nontariff barriers, and presumably reciprocal access for UK industrial goods. The USTR objectives made no exceptions for motor vehicles, steel, or other sectors that have been the special focus of the Trump administration in the past.
The USTR also will seek an agreement to “secure commitments for the United Kingdom to provide fair and open conditions for services trade,” including rules that would prohibit discrimination against foreign suppliers, restrictions on the number of service providers in the market, and requirements that cross-border service suppliers must establish a local presence. Financial services and digital trade are among the sectors with the best opportunities for more vigorous competition.
Among areas that may be especially sensitive in the negotiations is agriculture, both direct tariffs and nontariff barriers. These include sanitary and phytosanitary (SPS) measures, which concern food safety and animal and plant health regulations. Here the United States needs to secure greater access to the UK market for US farmers. At the same time, US negotiators should offer the same access for UK goods, largely because this will benefit US consumers. It’s an encouraging sign that the USTR negotiating objectives make no mention of exceptions for imports of sugar, dairy, or other politically sensitive US farm sectors.
One of the most difficult areas of the negotiations will likely be SPS regulations, where UK consumers tend to be wary of certain accepted US practices, such as genetically modified (GMO) crops. The United States is one of the leaders in adopting the technology; leading GMO crops include corn and soybeans. Using scientific risk-assessment research and other means, US negotiators will have to convince their UK counterparts to allow market access for US-grown GMO commodities.
One concern on both sides of the Atlantic has been the implications of a future UK-US free trade agreement for Northern Ireland. US members of Congress have raised concerns that a “hard border” between Northern Ireland and the Republic of Ireland could undermine the 1998 Good Friday peace agreement and reignite old sectarian conflicts. However, the Brexit agreement negotiated between the United Kingdom and the European Union largely addresses the issue by maintaining Northern Ireland’s regulatory alignment with the Republic of Ireland, conditioned on periodic review by the Northern Ireland Assembly, thus ensuring a near-frictionless border within the island.
Although complex, a US-UK agreement could conceivably be negotiated in the next 11 months. Indeed, there is no reason why the agreement cannot be largely worked out at the same time the United Kingdom negotiates its agreement with the European Union to leave the customs union. And while some difficult issues remain, the post-Brexit path for a US-UK trade agreement that benefits both countries is now wide open for President Trump and Prime Minister Johnson.