The Art of the Trade Deal

A UK-US Trade Deal?

We continue to see the Conservative leadership contenders whittled down further, with the various debates and media briefings substantially covering the Brexit strategy of each. At the time of writing, Dominic Raab is the most recent runner to be eliminated and five candidates remain. We’ll know the final two by the end of Thursday, 20 June, after which the decision as to who will be the UK’s next Prime Minister will be handed over to the grassroots members of the Conservative Party.

What the future UK/EU relationship looks like, and when it will take effect, is still impossible to say. However, the UK’s future trading relationships with the rest of the world are often raised as one of the key opportunities of Brexit. A UK/US trade deal has been touted as one of the biggest, in fact it could potentially be “phenomenal” in President Trump’s words, so in this week’s blog I look at how a deal could work.

How do you ‘do’ a trade deal?

The road to a trade agreement is a long one and can take years from start to finish. There are key milestones along the way, and the UK-US negotiations are at the very first stages – in fact, they can only be informal until the UK has actually left the EU. The UK has conducted an initial consultation with business, NGOs and other stakeholders, while the US has published its negotiating objectives.

What comes next is for each side to organise its negotiating team, and give them a mandate within which they’re authorised to horse-trade. The two negotiating teams then undertake many rounds of trade negotiations – perhaps as many as twenty to thirty rounds - ranging from the overarching structure to highly technical provisions.

Then comes the finalisation of the negotiating text, the ‘legal scrub’, domestic ratification, and then finally implementation of the Free Trade Agreement. In between all of this, there are usually a few moments of crisis and high politics thrown into the mix.

Each side needs to know that what is being promised is acceptable back home, and can actually be delivered in practice. If a deal is agreed that cannot subsequently be approved in the ratification stage then the negotiation has failed - which is exactly what happened to the negotiated UK-EU Withdrawal Agreement and to the currently stalled US-Canada-Mexico Agreement, which has been signed but not yet ratified.

So what is actually on the table?

I asked Sally Jones, Director of International Trade Policy here at Deloitte, for some of the detail.

“A US/UK deal could lower nuisance tariffs. Tariffs between the two countries are already very low, averaging 1.8% on US imports according to the World Bank. But that 1.8% number hides wide variations – particularly on products such as food and beverages (around the 16/17%) or steel, so there are potential big wins for some sectors.

“Another aspect that could bring wins for both sides would be harmonisation of certain regulatory standards. The insurance market, for example, might find its administrative burden reduced if the UK chose to align with US rules, although doing so would inevitably involve the UK moving further away from EU rules. The volume of US/UK insurance business might make that a price worth paying.

“Discouragingly, a US/UK trade deal won’t tackle many of the non-tariff barriers that prevent UK firms doing business in the USA. In part, this is because some barriers are created by State not Federal law and therefore are extremely difficult to include in a trade deal. Legal services, for example, are regulated at the state level - so a New York qualified lawyer can’t practise law in, say, California. It would be impossible for the US to give greater freedom for UK lawyers to work in the US than its own lawyers enjoy.

“Further, there are a number of other topics which will continue to be contentious during the negotiations for political reasons, including agriculture and the NHS.”

Ultimately what comes out of the US/UK negotiations will depend on what each side is willing to accept. Negotiators are prepared to live with a position in one area that they might not otherwise choose, in order to prevail elsewhere. As long as both sides feel that overall the benefits outweigh the challenges then a deal can be done. And, of course, the nature of trade is that it is inter-related; the closer you get to one market the further away you potentially get from another.

Could a successful trade deal offset less trade with the EU?

Probably not, at least in the short to medium term, as the EU represents a much larger proportion of the UK’s exports than the USA (44% compared to 18%) according to research from the House of Commons.

But, that said, a US/UK trade deal is expected to be net positive for the UK economy - in the past, the UK government has estimated that an ambitious agreement with the US would raise GDP by 0.35% annually (which would equate to £9bn per annum based on 2018 figures).

And, let’s not forget, a US/UK trade deal doesn’t preclude a UK/EU trade deal. It’s not an “either/or” situation. If the UK could agree decent deals with both the US and the EU then it could retain its enviable position as the gateway into Europe for US businesses.

What should business be doing now?

In the context of the future of US/UK trade, now is a good time for businesses to make sure they understand the barriers that stop them trading in the US in the way they’d like – and vice versa. There are genuine restrictions that could be dismantled in a US/UK trade deal, provided that business makes its voice heard in government consultations on both sides, by clearly articulating the opportunities that could come good.

Look further afield than just the US and the EU and there are many other countries with both ‘lower hanging fruit’ and astonishing growth prospects over the next decade, so a holistic view of trade policy is advised.

If you would like further insight into trade policy post Brexit, contact our team at brexitsupport@deloitte.co.uk.