UK-US trade deal: what you need to know
The UK government hopes to strike a transformational trade deal with the US after it breaks free from the EU, but it will not be easy.
Why does the UK want a trade deal with the US?
One of the main reasons the UK is leaving the EU is so it can break free from the restrictions of the trading bloc and strike its own trade deals with the rest of the world – and who better to start with than the world’s largest economy and one of the country’s most important allies?
While around 45% of the UK’s trade is with the EU as a bloc, the US is the country’s single largest trading partner, followed by Germany. One hope is that any loss of trade with the EU post-Brexit can be countered by boosting trade with countries like the US.
The UK is aiming to strike new trade deals with the EU and the US simultaneously. By doing this, it hopes to leverage any deal it makes with one on the other. If the UK can make progress with the US, then it hopes this will prompt the EU to agree to a better deal, and vice versa. However, freeing itself from the EU and all the trade deals it benefits from (including those signed by the EU with other countries) while trying to sweeten the US makes the UK vulnerable to the demands of both sides and risks leaving the country with nothing. UK chancellor Sajid Javid has said the priority is to agree a new deal with the EU because there is a tight deadline of 11 months, whereas no time limit has been set for talks with the US. This has not pleased the US, but it makes sense to protect existing trade and minimise any potential disruption when the transition period with the EU ends on 31 December 2020, before trying to capitalise on any new trading opportunities with the US.
How important is a trade deal to the US?
The mood in the US toward a trade deal with the UK has been mixed. The country has previously said it wasn’t a priority, but the US’s attitude has warmed more recently after President Donald Trump said the UK was ‘top of the list’ and claimed trade between the two could ‘quadruple’.
The US is always in a powerful position regardless who it is negotiating with and the trade tensions with the world’s other economic powerhouses – including China and the EU – have demonstrated it fears no one when it comes to international trade.
But the timing of Brexit is significant for Trump. With the presidential election pencilled in later this year, Trump is keen to strike a deal with the UK to boost his trading credentials. Plus, he is keen to garner backing for his controversial actions after losing the support of many of the country’s allies in other matters – such as scrapping the Iran nuclear deal, or blocking Chinese telecoms outfit Huawei from aiding the 5G rollout in Western markets. For Trump, there is no better way of securing the UK’s support than by giving it the trade deal it wants.
Still, while trade deals are the result of compromise and negotiation, Trump unashamedly puts ‘America first’ and will want to take advantage of the UK’s weak position on the world stage post-Brexit. Ultimately, the goal for the US is to gain greater access for its businesses in the UK market – but that could pose several problems for the UK.
What do the UK and the US trade: biggest imports and exports
Interestingly, official figures from the UK and the US contradict one another when it comes to trade between them. The US claims to have a large trade surplus with the UK, while the UK claims the opposite. This means the figures are unreliable.
Below are lists of the most-traded goods between the UK and the US in 2017, according to the Observatory of Economic Complexity (OEC):
Biggest US exports to the UK
|% of total US exports to UK|
|Planes, helicopters and aircraft||15.70%|
|Human or animal vaccines||1.80%|
Biggest UK exports to the US
|% of total UK exports to US|
|Human or animal vaccines||2.90%|
But goods are only half the story, with both economies being driven by services more than products. According to US figures, total trade with the UK in goods was worth just over $127 billion in 2018 while services amounted to just under $135 billion.
UK-US trade deal: potential sticking points
Both the UK and the US are yet to formally announce what they hope to achieve from trade talks, but several major sticking points have already emerged.
UK must decide where its regulatory alignment lies
The UK wants to strike the most fruitful deals it can with both the EU and the US, but the single biggest decision it will have to make beforehand concerns regulatory alignment. This refers to who the UK plans to align its regulations and standards with. Will the UK choose to remain close to the EU or diverge in the hope it can boost trade with others like the US?
The US already sells goods and services into the EU but there are many American products that can’t be sold into the bloc because they don’t meet EU standards. Take agriculture as an example – the EU doesn’t allow chlorine-washed chicken or growth hormone-injected beef, while both are popular in the US. The pair have clashed over the issue since the EU introduced the rule in 1989, but still, today, the US can’t export these products to the bloc. The UK must decide its stance on issues like this, and other differences between the EU and the US, spanning everything from environmental rules to workers' rights. Ideally, the UK wants access to both markets, but it will be difficult to adhere to EU standards and regulations while maximising trade with the US. Similarly, if it diverges away from the EU so it can trade more with others, then it may restrict trading with its closest neighbour.
UK chancellor Sajid Javid said earlier this month that ‘there will not be alignment’ with the EU. However, he has also said there is no point in diverging away from the EU if there is no benefit.
Many of the UK’s largest industries fear the UK shifting away from EU rules and standards. It could push up costs because they would have to pay for more checks and testing of their goods if they wanted to continue selling into the EU, and that would bring an end to frictionless trade. Major industries like carmakers, chemical manufacturers and defence companies will have little choice but to continue trading with the EU because of the complexity of their supply chains. Overhauling these would not be cheap and take years to complete. Plus, many goods are produced in the UK so they can be sold into the EU and, if the UK diverges from the bloc and pushes up the costs for businesses, there are fears that more production could be shifted out of the country post-Brexit.
The US will want the UK to diverge so American companies, like its farmers, will have greater access to the British market, but the EU has said the UK must stay aligned if it wants tariff-and-quota-free trade to continue when the transition period ends.
The UK’s digital services tax targets US giants
There are several countries that are becoming increasingly irritated about the lack of tax being paid by foreign companies that make money by flogging digital services to their citizens. Nations like the UK and France want big tech firms like Facebook, Alphabet’s Google and Amazon to pay what they see as their fair share. The problem is, all of these companies are American, and the US is not pleased that other countries are trying to harm their profitability.
France was the first country that said it would push ahead with what is being referred to as a ‘digital services tax’, but made a U-turn after the US threatened to impose tariffs on French wine, cheese and handbags in retaliation. France has said it will postpone it until the end of this year. The UK has now taken the baton and has said it will introduce a ‘2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users’ from April 2020. The government says the tax is designed to be temporary until a wider agreement can be reached on an international level.
What you need to know about Britain’s digital services tax
And could prompt retaliation against UK carmakers
But, like it did with the French, the US has threatened to bite back if the UK goes ahead with the digital services tax by imposing tariffs on British cars. Cars are one of the UK’s largest exports and the industry won’t want to see tariffs introduced by the US. Plus, if negotiations with the EU don’t go well then British carmakers could see tariffs pop up there too, which could be catastrophic for the industry.
The UK has said it intends to push ahead with the digital services tax, even though it could prompt retaliation and set a sour tone for trade talks with the US before they have even begun. US treasury secretary Steve Mnuchin has said the UK’s tax plans are ‘discriminatory’ and ‘arbitrary’.
The UK may want to strike a trade deal with the US, but this standoff could result in a trade war.
Will US agricultural and food products gain access to the UK?
The US will undoubtedly seek concessions from the UK in return for any trade deal. One export that the US has tried to boost in its trade spats with other countries is American agricultural goods. As mentioned earlier, agriculture is one example of why the US wants to the UK to diverge from EU rules, but a UK government document leaked last year suggested that the EU won’t negotiate an equivalent agreement with the UK if it chooses to lower standards and allow more American goods in.
But the UK has so far refused to budge on this request from the US either, with environment secretary Theresa Villiers stating earlier this month that the UK will not allow chlorine-washed chicken and hormone-fed beef to be part of any trade deal with the US.
Will the US get access to UK public services, including the NHS?
Another sore point, and arguably the most sensitive among the British public, is the fear that the US’s private healthcare service will begin to rub off on the National Health Service (NHS), which is built on being free at the point of service, under any trade deal. Trump has given mixed messages over the NHS, having said it must be part of any trade negotiations before saying the US wanted nothing to do with it.
The Labour Party released a cache of documents last year that suggested UK and US officials had already met to discuss the NHS, which at the very least suggests the US is keen on gaining greater access to the UK’s health service. Plus, the US has also said that foreign countries, including the UK, can buy drugs made by American pharmaceutical companies for less than the US can.
The UK government remains adamant that the NHS will not, under any circumstances, be on the table in trade talks with the US.
Will the UK jeopardise security ties with the US by using Huawei?
The pair are also set to potentially clash over security matters after the UK government announced it would allow Chinese telecoms firms, including Huawei, to play a role in rolling out the nation’s 5G network despite US warnings that doing so could compromise the country’s sovereignty.
5G is about much more than streaming videos and downloading files at a faster rate (10x faster than 4G), but enabling a slew of new technology that is expected to unleash a new digital revolution – everything from autonomous vehicles to artificial intelligence. This is why countries around the world are taking a cautious stance toward foreign governments playing a key role in supplying the technology – particularly those from China.
The US has banned Huawei and others like ZTE from being involved in 5G and has urged its allies to do the same, but the UK has instead decided to give what are considered ‘high-risk’ firms a limited role. Although it will not allow them to be involved in the ‘core’ parts of the technology.
US defence secretary Mike Pompeo has previously said that allowing Huawei to provide 5G services would make the UK vulnerable to spying and their networks being compromised, which could prevent the US from sharing vital security information.
Where will the UK stand on the world stage after Brexit?
The UK wants to strike new trade deals with both the EU and the US, but maximising the potential of both will be difficult. Businesses want the UK to stay aligned to the EU to minimise disruption, but the UK may have to shift away from its closest neighbour if it wants to increase trade with the US.
Formal negotiations have not yet started with either the EU or the US, but major hurdles have already appeared and more can be expected. The UK wants to forge its own future and says it won’t be taking rules from anyone else - but in reality, it could end in a highly vulnerable position by the end of 2020. If it fails to agree a deal with the EU by the end of the year, then it could be left with virtually no trade deals when we enter 2021. The countries the UK has signed deals with to come into effect at the end of the transition period account for less than 7% of all the its international trade. While it could turn to the US in such an event, it is likely Trump will try to capitalise on the UK’s weak position and seek concessions.
The UK is adamant it won’t be a rule taker, but it is early days and the country is not holding the strongest hand around the table. Expect more clashes, threats and compromise, and for uncertainty and volatility to return this year.
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