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Forging a trade deal with the United States now looks like a top British priority – with trade officials from both sides meeting last week in Washington. Prime Minister Boris Johnson could frame it as a win that offsets the economic hit from a United Kingdom exit from the European Union.
But the economic reality will be less forgiving. Nearly half of all U.K. exports go to the EU, compared with 13% to the U.S.
Any free-trade deal with the U.S., moreover, involves a strategic decision that cuts to the heart of Brexit as an economic and geopolitical project. Should the U.K. sign onto U.S.-based rules and standards that govern sectors like agriculture, digital data, and pharmaceuticals – and stop adhering to Europewide regulations after four decades of ever closer alignment? What happens to British companies that compete in Europe’s single market?
Economist L. Alan Winter, at Britain’s University of Sussex, says, “Even if we signed an agreement with the USA that approached the single market in terms of regulations ... it’s likely not to replace the lost trade.”
With two-and-a-half months to go before the United Kingdom is due to leave the European Union, with or without an exit deal, Prime Minister Boris Johnson last week dispatched his top diplomat and trade minister on their first overseas visits – to Washington.
Foreign Secretary Dominic Raab and International Trade Secretary Liz Truss met their counterparts in the Trump administration, which has renewed bilateral talks about a free-trade agreement between the world’s first and fifth largest economies. President Donald Trump has said he’s ready to sign a deal and claimed that two-way trade of $262 billion could triple in future.
Such enthusiasm isn’t new: Mr. Johnson’s predecessor, Theresa May, also courted U.S. trade negotiators. What has changed is the political calculus in London after Ms. May failed to win Parliament’s backing for an EU withdrawal pact and was forced to delay Brexit until Oct. 31. Mr. Johnson, who took power last month, has all but given up on an exit deal and ramped up plans to crash out of the bloc and to fast-track trade deals with the U.S. and other non-EU partners.
Any free-trade deal with the U.S., however, involves a strategic decision that cuts to the heart of Brexit as an economic and geopolitical project. Should the U.K. sign onto U.S.-based rules and standards that govern sectors like agriculture, digital data, and pharmaceuticals – and stop adhering to Europewide regulations after four decades of ever closer alignment? And if it does, what happens to British companies that compete in Europe’s single market?
“The EU regulatory system and the U.S. regulatory system are not compatible,” says William Reinsch, a trade expert at the Center for Strategic and International Studies in Washington. “This [U.S.] administration tends to be pushy about these things, and what they’re going to do is to ask the U.K. to choose between the EU and the U.S.”
And while the Trump administration may also covet a trade win to showcase amid a deepening standoff with China, analysts in both countries say British negotiators will be under far greater pressure to conclude a pact if a no-deal Brexit gums up commerce with Europe.
“It’s far more economically important for the U.K. and it’s massively more important politically,” says L. Alan Winter, a professor of economics at the University of Sussex and director of the U.K. Trade Policy Observatory.
Commerce and “chlorinated chickens”
One point of departure between the two sides is agriculture. Across much of Europe, U.S. factory farm products are viewed with disdain and alarm, a view that U.S. producers say is protectionism in the guise of sanitation. Strict EU rules on the use of antibiotics, hormones, and other inputs, as well as genetically modified organisms, keep out most U.S. meat and dairy exports.
This clash between U.S. rules on food safety and Europe’s cautious approach helped sink trade talks between Washington and Brussels under both Presidents Barack Obama and Trump.
Now U.S. agriculture exporters want to see the U.K. recognize U.S. food safety standards as part of any free-trade pact. “Our expectation is that the U.K. is not going to ask for a special dispensation that other countries didn’t get” in their trade agreements, says Nick Giordano, vice president for global government affairs at the National Pork Producers Council.
So far, the British public has been fixated not on U.S. pork but on its chicken, which is dunked in a chlorine bath to kill any microbes before public consumption, a practice banned in the EU, which requires inspections of all poultry carcasses after slaughter. U.K. newspapers have seized on fears of “chlorinated chicken,” infuriating the U.S. ambassador, Woody Johnson, who said “inflammatory and misleading terms” were part of a smear campaign against U.S. farmers.
Mr. Giordano dismissed European concerns about U.S. farm hygiene as protectionism by a “nanny state” that denied choice to its citizens. Echoing the rhetoric of pro-Brexit politicians, he described Britain’s departure from the EU as a liberation from overregulation and an opportunity to rewrite the rules of the road – in line with U.S. rules.
“This isn’t just a pork industry issue. It’s an American food issue. Anyone who thinks that the U.S. is going to roll over on this is being naive,” he says.
Compromise ahead, or a series of small deals?
Such hardball talk is familiar in trade negotiations. Daniel Griswold, a senior research fellow at the Mercatus Center at George Mason University in Virginia, argues that the U.S. may need to soften its demands of U.K. regulators if it wants to get a deal. “There’s going to have to be room for compromise on standards, particularly in agriculture,” he says.
Mr. Griswold, a staunch advocate for globalization, is more optimistic than other trade experts on the prospects of an agreement in 2020. It would still need congressional approval, and lawmakers have yet to ratify the U.S.-Mexico-Canada Agreement, the successor treaty to NAFTA signed in 2018. A specific hurdle for the U.K. is the question of intra-Ireland trade and implications for a peace treaty that has strong supporters in Congress, including House Speaker Nancy Pelosi.
One alternative path was floated Monday by John Bolton, the White House national security adviser, who met Prime Minister Johnson in London. He said the U.S. could agree to sector by sector minideals on industrial goods and tackle agriculture later, adding that the Trump administration supported Mr. Johnson if he chose a no-deal Brexit.
Brexit’s economic toll
A draft free-trade agreement could be ready by March if the U.K. has no “big asks,” says David Henig, a former U.K. government trade official. For Mr. Johnson, what matters is the symbolism of a U.S. trade deal and framing it as a win that offsets the economic hit from a no-deal Brexit.
But the economic reality will be less forgiving. Nearly half of all U.K. exports go to the EU, compared to 13% to the U.S., and studies show only modest gains from free-trade deals between rich open economies like the U.S. and U.K. The U.K. Treasury forecast last year that a free-trade deal with the U.S., alongside an orderly Brexit, would boost gross domestic product by 0.2% over 15 years.
That bump compares with a projected 6.7% hit to GDP over the same period in reduced trade with the EU if the U.K. signs a similar free-trade deal with Europe, something that the EU says can only be negotiated after a withdrawal agreement is ratified. Should the U.K. revert to World Trade Organization rules, effectively losing all preferential treatment in EU markets, the loss could be as high as 9.3%, according to the Treasury.
“The agreement we have with Europe is far deeper than one could envisage with any other power, and Europe of course is a lot closer. Even if we signed an agreement with the USA that approached the single market in terms of regulations ... It’s likely not to replace the lost trade,” says Mr. Winter.
Then there’s the clash of regulatory regimes in the U.S and EU. A comprehensive U.K-U.S. trade pact would affect U.K. companies doing business in Europe’s single market, both on food safety grounds as well as legal protection of geographical products like Parma ham.
“It’s likely to mean added difficulty getting any goods into the EU. As soon as we’re accepting U.S. food and products that meet U.S. standards but don’t meet EU standards, that’s where the need for greater checks on U.K. products come in,” says Mr. Henig, a director at the European Center for International Political Economy, a think tank in Brussels.
Should Mr. Johnson backtrack on a no-deal Brexit and agree on a withdrawal agreement with Brussels, the dash to a U.S. trade deal would likely fizzle. The U.K. could then remain in the EU trading bloc for some years as it negotiated a comprehensive trade accord.
That may be just fine with British companies, says Mr. Henig. “The U.S. and U.K. already have a fabulous economic relationship. The things that get in the way of our trade from the U.K. side are not things that would be fixed in a trade deal.”