Uncertainties in UK-EU Trade Relationship Could Hamstring US-UK FTA, CRS Report Says
Clarity on the United Kingdom's relationship with the EU will likely be necessary before the U.S. government and private sector can find a starting point for bilateral FTA negotiations, according to a Congressional Research Service report (here). Goods currently transit the EU tariff-free, and raising UK tariffs to post-Brexit levels akin to most-favored-nation EU tariff rates could have substantial impacts on deeply integrated European markets such as automobiles, according to the report. CRS pointed to a statement from the EU that the “UK cannot have a better trade relationship with the EU outside of the Single Market than within it.” As the UK faces the prospect of losing access to the EU Single Market, U.S. businesses that export from the UK to other parts of the EU face the specter of increased tariffs, the CRS said.
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Market access and intellectual property rights could be areas that the U.S. and UK tackle in any bilateral free trade agreement negotiations potentially undertaken after the UK formally exits the EU, which will happen March 29, 2019, or later. The UK on March 29 officially informed the European Council of its intention to exit the EU, triggering the two-year "Article 50" process for leaving the EU (see 1703290009). Until the “Brexit” actually takes place, the U.S. and UK could pursue preliminary “informal” discussions on a bilateral FTA, but the nature of those discussions might be blurry, with exchanges of tariff offers presumably crossing into “formal” territory, the report says.
Prospects for such an FTA depend on several factors, including the negotiated terms of withdrawal from the EU, and redefined trading terms with the World Trade Organization, the CRS said. Furthermore, the UK’s new terms with the WTO could establish a baseline for U.S.-UK negotiations, as U.S. FTAs have built upon WTO terms and rules for improved market access. “The UK could ‘cut and paste’ the EU's bound tariff rates to its own schedule, though, of course, the UK's internal economic and political dynamics may lead it to pursue different tariff levels,” the report says. It could be tough establishing tariff-rate quotas (TRQs), which would require reallocation of EU quotas under the WTO. The UK will also have to develop a new implementation plan for the WTO Government Procurement Agreement, of which it is a member through the EU. Negotiations for the UK’s WTO transition could happen alongside EU withdrawal negotiations, the report says.
Specific market access areas covered in a U.S.-UK FTA negotiation could foreseeably include tariff elimination, TRQs and public procurement policies, the report says. Tariffs between the U.S. and UK, which are assessed through the EU, are generally low, but there are some higher-tariff areas, it says. American automobiles, for example, are subject to a 10 percent EU tariff. The report notes that public procurement negotiations could be politically sensitive, as the U.S. has previously expressed concerns about the transparency of the EU’s procurement policies, and the EU has expressed concerns about U.S. restrictions on certain sensitive sectors, “Buy American” legislation and foreign access to U.S. state-level government procurement markets. The report also notes that President Donald Trump has advocated a “Buy American, Hire American” policy, and the UK released a “post-Brexit industrial strategy” that, in part, aims to develop UK supply chains. IP protections could also be covered in bilateral FTA negotiations, as both nations view IP as a source of comparative advantage, the CRS said.
The U.S. had a $15 billion trade surplus over the UK last year, exporting $121 billion in goods and services while importing $107 billion from the UK, the report says. The UK accounted for one-fifth of total trade with the EU in 2016. Top U.S. exports to the UK include civilian aircraft and parts, nonmonetary gold bullion, art and light fuels, while top imports from the UK include drug compounds, certain non-gasoline motor fuels, whisky, art and automobiles.
As for the UK’s relationship with the EU, trade arrangements between the bloc and Norway, Switzerland and Turkey could serve as models for how the UK and EU will proceed as separate entities, the report notes. Norway has full access to the Single Market in exchange “for which it must implement EU rules for the internal market”; Switzerland has partial access to it, which requires several sectoral agreements with the EU; and Turkey has access to the Single Market for goods, but not agriculture or services, through its customs union with the EU. UK Prime Minister Theresa May has said the UK is seeking an FTA with the EU, perhaps incorporating elements of single market arrangements, including the export of cars and trucks, or the freedom to provide financial services across national borders.