The British Parliament voted this week to hold a national election on December 12. If the Conservative Party holds on to its lead in the polls, the results could deliver an early Christmas present for those who support “Brexit” and a potential US-UK trade agreement.
The dominant issue of the election will be whether the UK will finally exit the European Union (EU), as voters narrowly directed in a 2016 referendum, or whether so-called Brexit will be delayed once again or even scuttled altogether. The UK’s Prime Minister Boris Johnson has pledged that if his Conservative Party wins a majority, he will withdraw the UK from the EU by January 31, 2020—the latest extension date granted by the EU.
If Brexit finally happens, it will open the opportunity for the US and the UK to negotiate a far-reaching free trade agreement that could significantly benefit people in both nations while setting a gold standard for 21st century trade agreements. Whatever one’s view of Brexit, if or when the UK leaves the EU, a comprehensive trade agreement should be a high priority for leaders in both nations (as I concluded in a 2018 Mercatus Center study).
The UK is the world’s fifth largest economy, and already a major US commercial partner. The UK ranks fourth in the world as a market for US exports of goods and services, and it ranks fifth as a source of US imports, with two-way trade in 2018 topping $262 billion. The UK and the US are each other’s largest source of foreign direct investment, with more than 1 million Americans going to work every day for UK-owned affiliate companies, and more than 1 million Brits going to work for US-owned affiliates.
A free trade agreement would allow both nations to eliminate all tariffs and non-tariff barriers that inhibit free trade between their citizens. As a member of the EU customs union subject to its common external tariff, the UK currently imposes import duties of ten percent on cars, up to 22 percent on trucks, and an average of 11 percent on farm goods. The US, in turn, imposes duties of 2.5 percent duty on cars, 25 percent on trucks, and an average of five percent on farm goods, with the highest barriers on imported cheese, sugar, and beef.
A trade deal should also take aim at non-tariff barriers, such as regulations that stifle trade in genetically modified foods that have proven to be safe for consumers but that compete with domestically produced non-GMO foods. PM Johnson has expressed his willingness to break from strict EU adherence to the “precautionary principle,” which has been abused to ban products even when there is no scientific evidence that they are unsafe.
Financial services is another area that the Office of the US Trade Representative (USTR) highlighted in a list of negotiating objectives it sent to Congress earlier this year. London and New York are the world’s two premier financial centers. The USTR committed the US to seek an agreement that would allow US financial service companies “to obtain fairer and more open conditions of financial services trade,” including UK financial regulatory rules that are more transparent and equitable to US suppliers.
Other USTR objectives essential to a future agreement would be reducing or eliminating barriers to cross-border direct investment, protection of intellectual property, higher de minimis thresholds for small package shipments, and elimination of restrictions on the flow of data or the location of computing facilities.
Both the Trump administration and the Johnson government are keen on negotiating an ambitious trade agreement. A recent poll found that 62 percent of Americans support a bilateral US-UK trade agreement, with only 13 percent opposed. A majority believe the US-UK relationship, including commercial ties, will deepen after Brexit.
Even with all that goodwill, hurdles to an agreement remain. If the Conservatives lose in December, the new parliament may decide to put Brexit on hold or to scrap it entirely. The Labour Party’s hard-left leader, Jeremy Corbyn, has denounced what he calls a “Trump trade deal” that he claims would give power to US pharmaceutical firms to raise drug prices in Britain.
In Washington, Democrats on Capitol Hill say any agreement must protect peace in Northern Ireland by ensuring the free flow of goods and people across its border with the Republic of Ireland. The revised agreement Johnson hammered out with the EU keeps the border in Ireland open, but would subject it to future approval by voters in Northern Ireland.
Finally, comprehensive trade agreements take time. The 2005 US free trade agreement with Australia, another friendly, advanced nation, took 14 months to negotiate and another eight months to enact. A US-UK agreement will be at least as complicated. And even if Johnson’s Brexit agreement with the EU is finally approved, the UK would not formally leave the EU’s customs union until the end of 2020. That means a US-UK agreement could go into effect on January 1, 2021, at the soonest.
One way to speed the process would be for negotiators to adopt large sections of an ideal US-UK agreement that was proposed last year by a number of scholars at independent research organizations, including the Initiative for Free Trade in Britain, and the Cato Institute and the Mercatus Center here in the US.
Exiting the EU may or may not be in Britain’s long-term interest, but if Brexit does become a reality, deepening US-UK economic ties would be an important and logical step in the interest of both nations.
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