Tough Negotiations Ahead on a UK-U.S. Trade Deal

What happens next in British politics could mean a significant shift in the United Kingdom’s trade ties with the United States – but the hurdles are many and the process to reach results could be lengthy. Voting in the Conservative Party leadership contest closes today, with the winner and successor to UK Prime Minister Theresa May to take up position on 24 July. The two Tory leadership rivals, former foreign secretary Boris Johnson and the incumbent foreign secretary Jeremy Hunt, both have been calling to strengthen the U.S.-UK ​“special relationship” as they vied for the support of 160,000 Conservative Party members. Frontrunner Boris Johnson has pledged to seek an ambitious UK-U.S. trade deal as one of his first acts in office. This would be good news for the more than 40,000 U.S. companies exporting to and operating in the UK, many of which are negatively impacted by uncertainty over Brexit and the possibility of an economic rupture between the UK and the European Union. If - as expected - UK Prime Minister Theresa May hands over the reins to Boris Johnson in two days, a highly topical question will be how his premiership might fare in securing a U.S.-UK trade deal.

On the U.S. side, there is strong political support by the Trump Administration and some Members of Congress for a U.S.-UK trading alliance. Several steps already have been taken to strengthen the Anglo-American trading relationship and mitigate negative impacts of Brexit. In February this year, a U.S.-UK Mutual Recognition Agreement (MRA) was concluded, which rolls over relevant aspects of the existing U.S.-EU MRA, covering electromagnetic compatibility, telecommunication equipment and good manufacturing practice of pharmaceuticals. U.S.-UK agreements on derivatives and insurance also have been agreed. These would take effect immediately after the UK exits the EU in an EU-UK ​“no deal” Brexit scenario or at the end of a transition period in a ​“deal” scenario. UK-U.S. preliminary talks on a bilateral free trade agreement (FTA) spanning the last two years, however, have failed to show any meaningful progress and are considered to be deadlocked. Should the UK leave the EU without a deal at the end of October, World Trade Organization (WTO) terms would govern U.S.-UK trade until such time as a trade deal is agreed.

Much hinges on the UK’s post-Brexit trading relationship with the EU, which still remains a priority for the UK. As Boris Johnson pursues hardline rhetoric on Brexit, insisting both that the current EU-UK deal needs to be renegotiated - which EU leaders reject - and that the UK will leave the EU on the scheduled date of 31 October 2019, with or without a deal, it is difficult to predict how the UK-EU trading relationship will unfold in the coming months. As of now, however, the EU is the UK’s largest trading partner: total UK trade in goods and services with EU countries in 2017 was 788 billion dollars, whereas two-way trade between the UK and the U.S. in the same year totalled about one third this amount, at 236 billion dollars. Boris Johnson, who is previously reported to have said that the ​“massive opportunity” of a U.S. trade deal only is possible if the UK escapes the ​“lunar pull of Brussels,” would be most likely to seek a loose, Canada-style trade deal with the EU, which might be limited in some respects, e.g. as is the case for services in the EU-Canada trade deal, but would eliminate most tariffs and leave the UK substantial regulatory freedom. Given the protracted nature of trade talks (i.e. seven years for the EU-Canada deal), however, Johnson will be pressured to negotiate a transition period with the EU, during which the UK will be able to negotiate, but not enter into, its own trade agreements.

If Johnson secures a withdrawal deal with the EU and a transition period is in place following Brexit, the key question will be whether an alternative arrangement has been reached on the Irish border issue, which now provides for a ​“temporary,” yet indefinite, EU-UK customs union. If the UK were to participate in the customs union, U.S.-UK negotiating flexibility would be restricted and trade talks limited to areas outside of the scope of the customs union, for instance, regulatory cooperation, services, public procurement, intellectual property, and digital trade. If an alternative arrangement has been reached on the Irish border issue which takes the UK out of the EU customs union, the UK would be free to negotiate trade deals and would regain full independence over its trade policy at the end of any Brexit transition period. The UK also would take back control over its national trade policy at once in a no deal Brexit scenario, in which case it would be free to negotiate and enter into FTAs with the U.S. and other countries.

For Johnson, embarking on U.S.-UK trade negotiations from a position of strength will be key from a political standpoint, but raises the question of both sides’ negotiating flexibility. Faced with significant pressures at home not to concede to U.S. trade demands, as laid down this February in the U.S. Trade Representative’s U.S.-UK FTA negotiating objectives, Johnson may be persuaded to exempt certain areas from trade talks - prompting Washington to come back to the negotiating table with more limited trade concessions. A major sticking point for the UK is the U.S.’ bid to incorporate into any bilateral FTA market access for U.S. agricultural goods. Boris Johnson already has stated: ​“I don’t want us to do any deal with the U.S. which in any way jeopardizes our animal welfare standards or our food hygiene standards.” Conversely, it is in the U.S.’ interest for the UK to accept its food and farming standards, and to shift away from the EU’s interpretation of sanitary and phytosanitary standards and technical barriers to trade. With the EU system criticized strongly in the U.S. as being inconsistent with WTO rules and unfairly distorting agricultural markets to the detriment of U.S. farmers, UK regulatory harmonization with the EU in this area could substantially curtail prospects for an ambitious U.S.-UK FTA. At the same time, the opposite would risk frictionless UK-EU trade post-Brexit, including with respect to regulatory checks between the Northern Ireland and the Republic of Ireland. The question as to whether service contracts with the UK’s National Health Service should be included in U.S. trade talks further promises to be thorny. Johnson also supports the implementation of a new UK tax on digital services, which has sparked stiff opposition from U.S. authorities and might create some challenges.

A quick post-Brexit U.S.-UK trade deal moreover is complicated by the fact that the U.S. federal government shares competence to regulate over specific trade-related areas with state and local authorities, making certain sectors such as financial services and public procurement difficult to negotiate. As highlighted by UK Trade Secretary Liam Fox, Brexit also falls ​“very close to the American pre-election year, where it’s quite hard to get things through Congress.” On the UK side, the UK Department for International Trade will continue to have many overlapping priorities, including to negotiate its WTO schedule of commitments on goods, services and agriculture, and taking steps to pursue new trade deals and roll over existing EU trade deals with third countries. The UK trade department may also soon be facing U.S. retaliatory tariffs on up to 25 billion dollars of EU products over a long-running transatlantic subsidy dispute between airliners Boeing Co. and Airbus SE.

Political and other developments further could impact both sides’ plans for an ambitious trade deal. London may pursue trade talks with China as part of plans for a ​“Global Britain,” which could be a deal-breaker for the U.S. for several reasons. On other international foreign policy issues, such as climate change and sanctions on Iran, Johnson will need to make decisions early on regarding whether to maintain the UK’s current policy, which is closer to Brussels than to Washington, or deepen U.S.-UK political ties by edging closer to the U.S. On this point, Johnson’s choice for a new UK Ambassador to the U.S. will likely be a strong indicator of his political agenda, including on Brexit. In sum, a quick post-Brexit U.S.-UK trade deal is improbable; however, a Johnson premiership may yet inject new momentum into the process depending on how he will position himself on the above issues. Furthermore, if a single comprehensive U.S.-UK trade deal proves challenging, the UK’s new leader could opt for a less ambitious target of a series of sector-specific deals.