RSM Global

Prospects for a UK-US free trade agreement

blue-brexit.pngThe scope for a tariff-reducing Free Trade Agreement between the UK and US is narrower than that of FTAs with emerging markets like India, as average WTO-bound tariffs in the two countries are already low. Moreover, nearly half of imports to the United States enter the country duty-free. Similarly, British trade negotiators face limited scope for preferential FTAs with other non-European developed economies like Australia, Japan, and New Zealand. Accordingly, the foremost benefits of a post-Brexit FTA between the UK and US and other developed countries would emanate from reductions of Non-Tariff Barriers.

As the leading destination of British exports and second ranking source of British imports, the United States plays a critical role in the UK's post-Brexit foreign trade. UK-US trade registered steady if unspectacular growth after 2009, with bilateral trade turnover surpassing pre-recession levels by 2015. During this period, balances in merchandise trade fluctuated between deficits and surpluses. However, the UK consistently runs deficits in service-related trade with the United States. Total British-American trade reached $226.9 billion in 2016, of which services comprised 51.6 per cent.

Machinery/transport equipment and chemical products generated the biggest shares of bilateral merchandise trade, with the UK posting a deficit in the former and a surplus in the latter. In bilateral service trade, the UK enjoyed a surplus in business/professional and government services, but deficits in other service categories (finance, travel, transport, royalties/licenses, ICT, maintenance/repair). 

These data illustrate the growing importance of services in UK-US trade, which subsume both traditional services in which Britain has long excelled (e.g., banking and insurance) and emerging tradable services with close links to merchandise trade (e.g., cloud computing, data analytics, predictive maintenance). 

However, Brexit raises certain complications in service-related trade between the UK and US. For example, withdrawal from the Single Market may undermine the United Kingdom’s commitment to the “single passport” protocol that allows the British subsidiaries of American-based banks to deliver cross-border financial services within the EU. 

Exploiting growth opportunities in service-related trade between the UK and US thus necessitates a Free Trade Agreement that squarely addresses Non-Tariff Barriers: regulatory compliance costs, duplicative administrative procedures, misaligned intellectual property protections, etc. Before Brexit and Donald Trump, TTIP was viewed as the primary vehicle for the reduction of such “behind the border” barriers to transatlantic trade. (see David Bartlett, “The Transatlantic Trade and Investment Partnership”, RSM Talking Points, November 2014). With TTIP now off the table for the United Kingdom, British trade negotiators face a new and complicated bargaining dynamic with the U.S. without the support of the European Union.

 

This article was written by David Bartlett. David Bartlett is an Economic Adviser and Writer for RSM. He is Executive in Residence and MBA Director at the Kogod School of Business, American University in Washington, DC. Bartlett’s research, teaching, and consulting focus on International Corporate Strategy with special attention to emerging markets and emerging technologies. He has published widely on these topics while leading interdisciplinary research projects on the global economy.

 

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