Anyone who has spent any time with millenials will know there’s no consensus easier to reach than deciding to eat out, but none harder than the choice of restaurant. This lesson seems lost on UK media coverage of trade agreements, despite the agricultural lobby’s intractability. US politicos’ pronouncements that they are ready to do a deal, regardless of how divorced they are from the actual process of trade negotiations, are treated as groundbreaking news, no matter how frequent or lacking in substance.
For this piece, and against my better judgement, I am going to set aside my concerns about the political vulnerability of a post-Brexit UK, which has far more political capital invested in a deal than their US counterparts. I will also set aside the fact the US has already signalled a willingness to exploit this weakness, inventing new preconditions for FTA negotiations such as dropping a proposed digital tax and swearing off Huawei.
The prospect of a UK/US trade agreement has always enjoyed a status in the UK well in excess of economist forecasts about its potential impact. The capacity to independently negotiate a trade agreement with the US, contrasted with the EU’s failure to conclude TTIP, was held up as one of the key positive outcomes of Brexit from a trade perspective.
“Trade agreements, when you strip away all the rhetoric and legalese, are overwhelmingly about removing and preventing government-imposed barriers to trade.”
And as the Irish backstop took centre stage, it dragged the prospect of a US deal into even greater prominence. Those opposing the backstop warned it could prevent UK-US negotiations. Their opponents countered that Nancy Pelosi wouldn’t approve any trade agreement with the UK in the absence of an answer to the Irish border question. It’s an interesting debate, but one that sidesteps a critical fact: free trade agreements between distant lands with liberalised economies just aren’t game changers.
I appreciate that sounds counterintuitive and a weird thing for a trade negotiator to say.
“Like adding more lanes to a motorway which never sees much traffic, a US-UK FTA may struggle to dramatically improve on the status quo.”
Trade agreements, when you strip away all the rhetoric and legalese, are overwhelmingly about removing and preventing government-imposed barriers to trade. These barriers take many forms. Tariffs which tax imports and make them less commercially competitive are a common example. Services regulations can also be barriers, for example making it illegal or qualification dependent for foreign doctors to practice or foreign insurance companies to sell their offerings to locals. Even procedures can be barriers, from paperwork requirements to testing regimes, all can prevent or impede imports.
When negotiating agreements, governments exchange commitments to remove (or never to impose) such barriers. For such a commitment to be immediately commercially meaningful, the barrier in question has to be significant enough that it prevents or seriously harms a business from trading. That’s where things with the US-UK FTA get tricky.
The US is already a huge UK trading partner. Clearly, for a huge chunk of UK industry, US government policy is not proving a fatal impediment to competing. Like adding more lanes to a motorway which never sees much traffic, a US-UK FTA may struggle to dramatically improve on the status quo.
This is not to say the US-UK trade motorway is free of barriers. Ask a UK insurance company about the openness of the US market and they’ll laugh in your face. Unfortunately, it is precisely on removing these types of barriers where US largesse and pronouncements of eternal friendship tend to peter out, replaced by the intractability of powerful lobbies, special interest groups, public pressure, the brutal pragmatists of the Office of the US Trade Representative, and an unromantic Congress.
Consider John Bolton’s recent remarks. He suggested the UK-US FTA could take place in chunks, “sector-by-sector,” beginning with “quick wins” like industrials and automobiles and leaving “more difficult” sectors like financial services until later. Let us set aside for a moment (as I’m sure Mr Bolton does) that sectoral deals like this risk running afoul of everyone’s favourite GATT Article XXIV, which requires trade deals to cover “substantially all trade,” and focus instead on the instructive choice of sectors.
It’s easy to see why a quick sectoral on automobiles tempts Mr Bolton, while financial services does not. At 2.5%, the US tariff on automobiles is four times smaller than that of the UK, both as an EU member and under its announced no-deal tariff schedule. From the US perspective, eliminating a nuisance tariff on a UK whose manufacturers are about to find their supply chains disrupted and their access to Europe impeded isn’t a heavy lift. However, eliminating or substantially reducing the UK’s auto tariff of 10% would provide a meaningful comparative advantage to US produced vehicles over European and Japanese rivals.
By contrast, the US seems far less willing to engage on financial services, where the UK is an open economy, a powerhouse of international competitiveness, and where the US has rarely if ever made meaningful commitments. Even at the questionably relevant level of the National Security Adviser, the US is positioning to defend its barriers and assail those of the UK.
These types of cold calculations are the bread and butter of the trade negotiations world, and are miles away from confident pronouncements of imminent transformational FTAs from political leaders. In liberalised economies the barriers which prevent vastly increased trade flows tend to be few but fiercely defended. Removing them requires governments to take on some of the loudest and most politically organised voices in their own system. Their appetite for such fights, like that of the British public for chlorinated chicken, often proves lacking.
And so like millennials with picky friends, governments begin with grand pronouncements of intent and end up eating soggy pizza on the couch. Again.
Dmitry Grozoubinski is a former WTO negotiator, founder of ExplainTrade.com and Visiting Professor at the University of Strathclyde