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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.
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On 28 June 2019, the European Union and the South American customs union Mercosur (Brazil, Argentina, Paraguay, and Uruguay) struck a sweeping trade agreement covering almost 100 billion dollars’ worth of bilateral trade annually. Twenty years in the making, with stop-start trade negotiations having started in 1999, the EU-Mercosur political agreement is considered by the negotiating parties on both sides as a significant achievement. However, the terms of the deal – which have been published in draft individual chapters as both sides undertake a legal review of the text –  have elicited sharp criticism.

The European Commission characterises the accord as its most lucrative to date, saving businesses about 4 billion euros ($4.55 billion) in tariffs on exports, quadruple the amount achieved on its trade deal with Japan. For Mercosur, this would be its first deep trade agreement, which could spur economic growth in the region and strengthen Mercosur’s ability to compete in international markets. The Commission therefore has been quick to defend the deal, highlighting that it includes strong provisions on environmental protection and promotes sustainable development, notably by insisting that both parties maintain commitments and engagement under the Paris climate change agreement. EU Agriculture Commissioner Phil Hogan has been particularly vocal in support of the deal, underscoring that while including some trade-offs, it opens up new markets for EU agricultural producers and protects European food standards. While Irish Prime Minister Leo Varadkar has stated that he would not vote for the deal if it runs contrary to Ireland’s interests, Varadkar recently agreed to Hogan staying on in the next European Commission term, thereby positioning him to continue his strong advocacy in support of the agreement.

EU parliamentarians, several EU Member States and lobby groups, on the other hand, have decried the EU-Mercosur agreement as being detrimental for the environment, food safety and the EU’s agricultural sector. Surrounded by protesting Irish farmers, on 11 July,
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Results of the European elections held in the UK on 23 May resulted in a significant defeat for the ruling Conservative party and a win for the Brexit Party, a single issue political group seeking for the UK to withdraw from the European Union. Several contenders, including former Foreign Secretary Boris Johnson, are taking a hard-line approach to Brexit and have pledged that under their leadership the UK will leave the EU with or without a deal on Brexit day. Other candidates, such as Environment Secretary Michael Gove and Home Secretary Sajid Javid, promise to unite Brexiteers and Remainers and “deliver Brexit”. Whomever succeeds May will inherit a daunting task. For business, the latest developments mean prolonged uncertainty and an increased fear of an abrupt departure from the EU with trade on World Trade Organization terms.

In an attempt to create a majority in the UK Parliament to ratify the withdrawal agreement she negotiated with the EU, Prime Minister May intended to made certain concessions. Among them was the idea of negotiating a new and separate customs union with the EU that would take effect when the UK is no longer part of the EU internal market. The Brexit Party rejects this proposal and it may not be tenable for the next Conservative Party leader. Nevertheless, pressure to avoid a hemorrhaging hard Brexit, may yet result in further consideration of a separate customs union with the EU. It is useful then to consider what a customs union without single market access and EU membership might look like and how it could affect business.


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On 10 April 2019, the European Union granted the United Kingdom a flexible extension, coined a “flextension”, until 31 October.  This additional period of time is intended, to allow the UK to ratify the Brexit Deal, an agreement devised between the EU and the UK for the orderly exit of the UK from the bloc. The Deal includes a transition period, a controversial solution to manage the border between Ireland and Northern Ireland, and provides for such things as citizens’ rights and the legal status of goods in transit at the moment of Brexit. The flextension will end as soon as the Deal is ratified, if it happens before the end of October.  Should the UK Parliament not find a majority to support the Deal, the UK could be forced to seek another extension or risk crashing out of the EU on Halloween.

The so-called “cliff edge” Brexit remains a real possibility considering that the Deal has been rejected by Members of the UK Parliament three times already, and successful cross-party negotiations is not by any means a foregone conclusion.  The UK certainly will continue its no deal preparations, including efforts to strike post-Brexit trade agreements with third countries; to date, the agreements it has secured cover only about 11 per cent of UK trade by value. The UK also could use this time to reconsider its Brexit strategy, which ranges from holding a second referendum to attempting to amend the Political Declaration attached to the Deal which delineates mutual commitments concerning the future UK-EU relationship to abandoning Brexit altogether.
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European Commissioner for Trade Cecilia Malmström was in Washington, D.C. last week for exploratory trade talks with U.S. officials.  Although Malmström does not yet have a mandate to move ahead on EU-U.S. trade negotiations, which requires authorization by the European Council, both sides surely had plenty to discuss at this stage.

Two months ago, both the EU and the United States released their respective negotiating directives that highlight a disagreement over whether to include agriculture within the scope of any trade talks. While the European Commission intends to limit negotiations to industrial goods and conformity assessment, the United States is pushing for a more far-reaching trade deal that also covers agricultural goods.  The EU also wants to include discussions regarding automotive products within the scope of any trade negotiations on industrial goods, which it argues is required under World Trade Organization (WTO) rules on preferential trade agreements (i.e., these must cover “substantially all trade” between members).  Malmström is likely to also seek clarification on whether the Trump Administration intends to impose tariffs on certain EU automotive products.  If it does, the EU has indicated the possibility that it will suspend any trade talks and retaliate.  If the two sides can find common ground on these issues, however, the European Commission has stated that it hopes to conclude trade talks with the U.S. by November 2019.
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Introduction

On 11 January 2019 and 18 January 2019, the United States Trade Representative (“USTR”) and the European Commission (“Commission”) released their respective negotiating objectives for a U.S.-EU trade agreement, potentially marking a new phase in the transatlantic trade relationship.  The release follows from the joint agenda agreed to in July 2018 by European Commission President Jean-Claude Juncker and U.S. President Donald Trump to work together toward “zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods,” increased cooperation on regulatory issues and standards, and protecting European and U.S. companies from unfair global trade practices.  The release could also signify an important expansion of market opportunities for EU and U.S. companies.

The road ahead is fraught with obstacles, however, as the EU and U.S. negotiating positions differentiate substantially.  The USTR’s summary of specific negotiating objectives seeks a broad free trade agreement with the EU, including on sticky issues such as agriculture, while the Commission aims to limit trade negotiations to reciprocal commitments on conformity assessment and industrial goods. This makes any future transatlantic trade negotiations challenging at best and raises the question of whether the two sides will be able to arrive at an agreement at all. The situation is further complicated by the Trump administration’s ongoing 232 investigations on imports of certain automobiles and parts, as the EU stands ready to suspend any trade talks and retaliate with duties on U.S. exports should the investigation lead to the imposition of tariffs on certain EU automotive products.

EU Perspective

EU Commissioner for Trade, Cecilia Malmström, has clearly stated that the EU is “not proposing to restart a broad free trade agreement negotiation with the US,” referring to the breakdown of negotiations, five years ago, of the Transatlantic Trade and Investment Partnership (TTIP).  On 30 January 2019, the Commission published a progress report concerning the joint agenda agreed to in July 2018.  The report indicates that talks between the parties have so far focused on potential regulatory cooperation initiatives.  The EU has also taken some measures to avoid the escalation of trade tensions with the United States.  
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Both the EU and the UK are eager to achieve a Brexit deal.  However, with time running short and red lines continuing to be drawn on both sides, a no-deal Brexit scenario remains a possibility.  For this reason, both the EU27 and the UK are expediting preparations for a hard Brexit.  Absent any temporary arrangements, if the UK leaves the EU without a deal on 29 March 2018, it will become a “third country” EU trading partner overnight.  Trade in agri-food between EU-UK would then be governed by World Trade Organization (WTO), EU and UK rules, and food products would no longer move freely throughout the EU.

Agri-food business operators should roll out their contingency measures.  Contingency planning for a “hard” Brexit includes making possible revisions to supply chains, buying-ahead, stockpiling, warehousing, relocating food production, transferring import function, re-labelling, obtaining relevant authorizations and certifications, and taking other practical measures to avoid business disruptions. Companies need to ensure proper controls are in place with regard to import and export regulations. 
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Brexiteers claim that leaving the EU single market and customs union creates a golden opportunity for the UK to regain power over its international trade.  The potential future post-Brexit free-trade agreement that has received the most attention is that between the U.S. and the UK.  A U.S.-UK Trade and Investment Working Group was set up in July 2017 to lay the groundwork for a potential future U.S.-UK free-trade agreement after Brexit.  Political interest on both sides of the Atlantic was also boosted last week in New York as U.S. President Donald Trump and UK Prime Minister Theresa May reiterated their “mutual desire to form a wide-ranging trade deal.”  The U.S. is, however, the more important market with the stronger bargaining power. The UK takes only 3 percent of U.S. exports, while the U.S. accounts for 15 percent of UK exports, as well as roughly 19 percent of the UK’s total imports of services and nearly 22 percent of the UK’s total exports of services.
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