Being a Canadian sabbatical visitor in the United Kingdom this year has allowed me to witness Brexit politics at close hand. As an economist, I’ve found it fascinating.
Some Britons feel that Brexit sets the stage for a bright future for the U.K., including a potential trade deal with the United States, while others are deeply concerned about the consequences of Brexit for both the economy and the country’s stature in the world.
The juxtaposition of Brexit and the ongoing renegotiation of NAFTA, however, raises questions about whether negotiating a U.S.-U.K. trade deal will be done “very very quickly,” as U.S. President Donald Trump declared in July.
The U.K. now needs to renegotiate trade arrangements (hundreds in total, according to the Financial Times) with all of its trading partners, key among them the EU itself, which accounts for the majority of British trade.
While Theresa May has asserted that the U.K. is a very attractive partner for negotiating trade agreements, there is no historical precedent for renegotiating such a wide range of agreements in the short time line available. In under two years, the U.K. will need to have settled new trading arrangements if the EU does not agree to a (perhaps lengthy) transition from the current situation where the U.K. has full access to the EU single market.
Large trade surplus doesn’t exist
A key agreement will be with the U.S., which accounts for about 25 per cent of British exports and 20 per cent of the country’s imports.
Given Trump’s warm reception to the idea of a possible U.S.-U.K. free-trade deal, it would seem that the U.K. could negotiate an attractive trade agreement easily enough. The U.K. has a small trade deficit vis-a-vis the U.S., after all, so the hot button of a large trade surplus does not exist.
By contrast, as a presidential candidate, Trump attacked NAFTA as “the worst trade deal ever” and vowed to renegotiate it or tear it up.
Upon Trump’s election, one view was that “tweaking and updating” NAFTA would be easily accomplished and fulfil the presidential promise without risking the sizeable trade and investment relationships covered by the agreement. There were obvious and important updates of particular benefit to the U.S., including those covering digital trade and intellectual property (IP) protection.
But the first U.S. draft proposal went beyond tweaks and included reducing the access of non-domestic firms to American government procurement contracts and addressing the “unfairness on the Southern border.”
Whether the unfairness was related to migration issues or the trade balance was unclear. Neither was the extent that this unfairness could be dealt with through changes to NAFTA. Nonetheless, renegotiation was still viewed as a major but not insurmountable challenge.
Trade deficit demand
Things started to turn nasty when the U.S. asserted that renegotiation would have to help reduce the massive American trade deficit. Many, if not most, economists argue that this goal is unachievable through any trade agreement, since the U.S. trade deficit is more closely related to low savings in the country, and its high government deficit, than to trade policy. This is what is referred to as “twin deficits.”
Nonetheless, the demands in the current American offer are so outlandish that they certainly make Trump’s threat to “tear up the agreement” seem more credible.
As well as the complete elimination of procurement protections, the most recent U.S. proposal includes other potential deal-breakers: The elimination of the existing trade disputes mechanism covering anti-dumping and countervailing duty cases (Chapter 19), and dramatically raising the U.S. content requirement for automobiles to gain duty-free access to the States.
While it was initially felt that renegotiations could be completed this year, the most recent U.S. proposals have put that deadline out of reach. They even led to speculation that Canada and Mexico might walk away from the deal. Indeed, a U.S. proposal to remove Chapter 19 from the Canada-U.S. Free Trade Agreement, the precursor to NAFTA, caused the Canadian negotiating team to temporarily walk out on negotiations in 1987.
NAFTA and a potential U.S.-U.K. trade deal are dissimilar in key respects, but potential sources of American-British friction do exist, including things as seemingly arcane as animal hygiene rules, geographical indications — Cumberland sausage, for example, must come from Cumbria — and government procurement.
In terms of animal hygiene, the U.K. is likely to resist giving Britons access to U.S. poultry cleaned with chlorine. Uncertainty about British access to the EU single market may also complicate talks since it will affect the value to the U.S. of British market access.
And does the recent Canadian experience with the NAFTA renegotiations suggest a quick and smooth conclusion of U.S.-U.K. trade talks? Hardly.
The president views himself as a deal-maker, so positive feelings toward the U.K. may not enter into the calculus of trade negotiations. American demands could be moderate due to the favourable trade balance, or so extreme — and similar to the NAFTA demands —that they’d leave the U.K. vulnerable.
How it will go is anyone’s guess at this point, but at the very least, treating a U.S.-U.K. trade deal as a “slam dunk” seems optimistic.