Standing next to President Donald Trump, Theresa May spoke for rather longer than her host at their first press conference on Friday. The president said nothing at all about trade, while the Prime Minister left it to the end of her remarks to say that both sides aimed to build on their commercial relationship and that a trade deal would be in the interest of both countries. It is a bigger deal for the UK than for the US, but how should we assess the outlook and prospects?
For May, meeting Trump was an opportunity to show to people here at home—and also the European Union—that the UK is making Brexit plans involving the US. For Trump, backing Brexit offered another opportunity to show antipathy for the EU. He couldn’t actually care less about a trade agreement with the UK other than as a further expression of the Administration’s new trade strategies—to focus on bilateral trade deals, where the US can impose its economic heft and leverage, rather than regional deals such as the Trans-Pacific Partnership from which the US has just withdrawn.
It stands to reason that as the UK is proposing to leave the EU, which is the biggest free trade area in the world, it will need—as an exercise in damage limitation—to do bilateral trade deals with economically significant nations. In this respect, at least, May is probably knocking on an open door in Washington. But it isn’t water off a duck’s back, by any means.
As we think about the UK’s Brexit trade options, and a free trade deal with the US in particular, we should remember that there is no such thing as free trade, whatever your favourite politicians tell you. Rather, free trade deals are about trying to reach agreement about how to minimise the regulatory burdens on trade, covering not just tariffs and duties but a vast panoply of what are called behind-the-border trade restraints. These include product standards; rules of origin; public procurement and health and safety rules; environmental and labour standards; and rights of dispute and arbitration. Trump’s decision to renegotiate the North American Free Trade Agreement, for example, is expected to focus largely on the use of VAT in trade, rules of origin governing how much of a product comes from within the free trade area to qualify for benefits, and dispute procedures.
That is why most free trade deals take time to conclude. Even though a trade arrangement with the US is most likely eventually, we should remember that the content will be complex; that broad trade coverage, especially when it comes to services, is even more so; and that there could be much procrastination and delay. We don’t know at what point the British government can even start to negotiate with new trade partners, but little can be agreed before the UK has left the customs union, and American negotiators will want to know what the UK’s trade status is vis-à-vis the EU. Trump himself, moreover, can’t draw up or approve trade deals. This is a task for the Congress, and is a process steeped in complex notifications and procedures.
Even allowing for the time factor, a trade arrangement is far more important to the UK than to the US. Look at the money flows to understand. In 2015, the latest year for which full data are available, the ONS reported that the UK sold £100bn of exports of goods and services to the US, and imported about £61bn. The resulting surplus of £39bn was largely on services transactions (£27bn). The US is the UK’s biggest trade partner after the EU, accounting for 19 per cent of exports and 11 per cent of imports.
It’s a different picture “over there.” The UK is America’s seventh largest trade partner, but it accounts for a mere 3.5 per cent of US exports, 2.5 per cent of US imports. These proportions are about a fifth or less of the trade that the US does with each of China, Canada and Mexico.
When thinking about striking up a bilateral free trade deal with the US, there are two other important issues to consider. First, the US doesn’t have many bilateral deals of significance. At the end of 2016, it had agreements with 20 countries, but, among richer economies, only with Australia, South Korea and Israel. Against that, though, it is clear that the Trump Administration has concluded, in spite of all the economic evidence, that bilateral is the way to go.
Second, the new factor is the overtly protectionist hew of the new US government, which sees trade as a zero-sum game in which there is only one winner. The Prime Minister can wax lyrical about Britain becoming a beacon of free trade, but Trump’s government is all about his “America First” strategy or as he himself put it, “buy American and hire American.” The UK’s trade surplus with the US will be seen as a distortion which should be reduced. We should not expect special favours in the so-called “special relationship.”
Moreover, the US has a major advantage that resides in its economic and commercial size and significance. Some like to boast about how the UK is the fifth biggest economy in the world. This truism, though, is seen through a very narrow lens. The UK is not much more than half as big as Japan, less than a quarter of the size of China and 14 per cent of the size of the US. This gives the US a major advantage in trade negotiations.
The UK and the US will have a lot of common ground when it comes to legal issues and contract enforcement, governance and surveillance, intellectual property rights, and conditionality clauses covering such things as labour standards. In other areas, though, there will be disagreement and tough negotiations. The US Congress, doubtless influenced by intense lobbying, will surely want a good deal under which to export food and agricultural produce to the UK. Tellingly, the US couldn’t break down EU resistance to US food hygiene standard in now dormant free trade talks with the EU in the Transatlantic Trade and Investment Partnership. The UK may be easier. The US will also doubtless seek advantages for its financial services companies, as Britain’s sector adjusts to leaving the EU, and even more sensitively for UK voters, some opening up of the NHS to US pharmaceutical and healthcare companies, seeking greater market access and profit.
The first press conference then revealed nothing at all about a future UK-US trade agreement—not that any details were expected. Yet stronger statements of intent might have been possible. Perhaps the summit discussions were focused on defence and security issues. In an event, trade will surely crop up regularly in this special relationship, but the complexities involved will almost certainly drown out the cheerleading.
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