This piece was created in collaboration with Chatham House. Marianne Schneider-Petsinger is the U.S. geoeconomics fellow at Chatham House's U.S. and the Americas Programme. Christopher Smart is a Whitehead senior fellow at the U.S. and the Americas Programme. The views expressed are the authors' own.
Two perspectives on a new chapter in bilateral ties
The Political Advantages of a U.S.-U.K. Trade Deal
By Christopher Smart
A U.S.-UK trade agreement would bring little probable benefit to the American economy, although the benefits to a certain Donald Trump could be huge.
Given how tough it is to secure Congress’ approval of trade deals, it is overwhelmingly in America’s interest to muster limited political capital around a path to expanding trade with the much larger markets of the European Union.
But a deal with the British may nonetheless find a fervent champion in President Trump. So far Trump has spoken of a potential agreement warmly but without specifics. By the spring of 2019 Britain will have formally left the European Union, and President Trump will be planning his re-election bid. Both may be in the market for a political win.
Leaving aside most of the troublesome international security and foreign political dossiers on his desk, it doesn’t take much to imagine a global economic strategy in some disarray.
Mexico will have a new president by then, and a renegotiation of the North American Free Trade Agreement will be difficult to conclude as Trump builds his border wall. In spite of his cordial Mar-a-Lago summit with Prime Minister Shinzo Abe, a fresh bilateral trade deal with Japan will not come quickly given the knotty issues surrounding automobiles and agriculture that were only barely agreed to in the context of the now-abandoned Trans-Pacific Partnership, or TPP. Meanwhile, even if an all-out trade war with China is avoided, bitter exchanges will undoubtedly continue over currency manipulation, cyber hacking, steel dumping, and the enduring U.S. trade deficit with China.
It is of course conceivable that the U.S. economy will be in its 10th straight year of economic expansion and job growth, but more likely America will have tipped into recession or will be struggling to recover from one. If Trump manages to pass large tax cuts and an expansive infrastructure investment program, he may also face a showdown with the Federal Reserve, which will be trying to contain inflationary pressures.
Keep it simple
Make no mistake, even the most eager and cooperative British government will not make the negotiations simple. The “special relationship” may endure, but the deal must be plausibly sold as helping to redress the U.S. trade deficit that troubles Trump so much.
There will also be plenty of work to resolve some of the issues that have plagued the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with the European Union.
A quick deal will also have to sidestep a long list of real issues that make trade more difficult between the United States and the United Kingdom: financial services regulation, agricultural subsidies, dispute settlement mechanisms, and genetically modified foods. Financial regulations may grow even more difficult to align if Washington is rallying pressure against Beijing, while London courts Chinese corporations to float their renminbi bonds.
Perhaps most difficult, U.S. negotiators will want to know just what sort of trading relationship the United Kingdom has settled on with continental Europe. Even if the broad outlines are coming into view at that time, the nettlesome details will likely still be under negotiation, complicating a U.S. deal.
Still, if the purpose of securing a deal is simply to secure a deal, most of these issues can be set aside. Trump might just want to show that his aggressive style delivers results, in a scenario where there will likely be few to show. It is also not inconceivable that the British prime minister in two years’ time will be eager to show that a post-Brexit Britain has friends, which makes the substance of the arrangement secondary.
This may not mark any substantial step forward for the global trading system or even deliver significant expansion of the current U.S.-UK commercial relationship. But both countries share a long tradition of leaders with penchants for glitzy signing ceremonies amid re-election bids.
Even After Brexit, No Quick and Easy Deal
By Marianne Schneider-Petsinger
Now that Article 50 of the Lisbon Treaty has been triggered and the process of exiting the European Union has begun, Prime Minister Theresa May believes she is steering the course toward a new, global Britain. Striking a trade deal with the United States would be an important success -- it would show that London can deliver on that vision. However, it’s imprudent to count on a quick and easy U.S.-UK trade deal, let alone to sell the British public on that prospect. Even once official negotiations can begin in the spring of 2019, those negotiations face significant hurdles.
2020 is an election year in both the United Kingdom and the United States -- with the next general election in Britain held on May 7, 2020, at the latest, and the U.S. presidential election scheduled for Nov. 3 of that year. As much as Theresa May and Donald Trump are eager to declare a deal before then, more important for both is to not give in on politically sensitive issues backed by powerful constituencies. Many of the sticking points that emerged in the negotiations between the United States and European Union over TTIP will re-emerge, but finding compromise will be much more challenging in a pre-election environment. The areas where there is the most to gain or to lose are also the most politically sensitive.
UK’s key defensive interests are in politically sensitive areas
The United States will demand greater access to Britain’s agricultural market. But British farmers and their lobby groups will not favor a deal that opens up competition from the United States right as agricultural subsidies from Brussels will have been cut. Questions surrounding the import of American hormone-fed beef, chlorinated chicken, and genetically modified crops would also cause environmental and consumer groups to voice opposition to a U.S.-UK trade deal. Because food, feed, and drink account for less than 2 percent of British exports to the United States, the upsides of an agreement would be small, whereas the perceived downsides for Britain could be significant.
The public’s attention will be on whether a U.S.-UK deal could lead to the privatization of the National Health Service. Though May and International Trade Secretary Liam Fox have already ruled out access to the NHS for American companies, the Labour Party has warned that a trade agreement with the United States could be “a Trojan horse for NHS privatization.” The NHS will thus be a major defensive interest for the United Kingdom in negotiations with the United States.
Opportunities for UK businesses -- but will the U.S. resist?
In areas where the opportunities for British firms are greatest, Britain is likely to get short shrift. Services account for 53 percent of the United Kingdom’s exports to the United States. Financial services in particular are a key export, and London has a big interest in covering this area as comprehensively as possible in a U.S. trade deal. However, the thorny issue of financial services regulation -- which the European Union pushed into TTIP at Britain’s insistence -- would likely resurface. If the European Union failed to convince Washington to include financial services regulation in a trade deal, why would the United Kingdom by itself succeed?
Improved access to the huge American public procurement market would be very lucrative for British firms and will be another issue that the United Kingdom would want to address in trade talks with the United States. Given Trump’s message during the inauguration to “buy American and hire American,” May should not get her hopes up that he would backtrack during his re-election campaign.
A lopsided power balance
Bringing the potential upsides of a U.S. trade pact to fruition will be further complicated by the fact that London’s negotiation position will be weaker than Washington’s. Size matters in trade negotiations, and the U.S. economy is about seven times larger than the United Kingdom’s. Britain also needs a deal more than America: The United States is the most important single export market for the United Kingdom and the second-largest source of UK imports. In contrast, the United Kingdom is only the seventh-largest trade partner for the United States.
Despite these hurdles to a quick and easy U.S.-UK deal, negotiators should pursue an agreement. But in order to secure an economically beneficial deal, and to avoid weakening her bargaining position further by trying to deliver a deal shortly after Brexit, Theresa May should focus on substance over speed.