Trump Offers Brexiters a Trade-Shaped Gift

(Bloomberg Opinion) -- U.S. Trade Representative Robert Lighthizer has sent a gift to Brexit supporters. His letter notifying Congress that the Trump administration plans to seek a “cutting-edge” free-trade deal with the U.K. was music to the ears of those who have long argued that leaving the European Union will allow Britain to pursue an ambitious policy of bilateral trade deals.

Getting such a deal done is one thing. The main requirement is political will – and that exists on both sides at the moment. The real question is what Britain would get out of it.

The rationale for a U.S.-U.K. deal goes way beyond sentimentalities about the special relationship or Donald Trump's Scottish golf courses. The U.S. accounted for 19 percent of the value of U.K. exports, is the country's largest single bilateral trading partner, and biggest export market. No country invests more in Britain than the U.S., too. A transatlantic agreement could, according to the Department of Trade and Industry, boost that trade and have knock-on benefits for the U.K.'s lagging productivity.

Reducing trade barriers would benefit both economies, even if the growth benefits from trade deals are generally modest. But there are two reasons for caution here. The first is that this isn't a symmetrical negotiation. Brexiters speak often of the clout the U.K. has as the world’s fifth largest economy. But this is a tussle between a $19 trillion elephant of an economy and a $2.6 trillion minnow. If the U.K. found the EU to be a stubborn counterpart during the Brexit talks, that will be as nothing compared to the impact Congress will have on U.S. negotiating positions.

The real prize in free-trade deals these days is reducing non-tariff barriers. Here the U.S. will be an even tougher negotiating partner. The Transatlantic Trade and Investment Partnership (TTIP) foundered when the EU and U.S. couldn't agree on many things, including food standards. It’s notable that there was no movement on financial services, where the U.K. has a big interest in opening up access to U.S. markets.

Trump Offers Brexiters a Trade-Shaped Gift
European regulatory overkill comes in for constant criticism in the U.K., but the U.S. is far worse. There are some 3,000 health and safety measures, technical barriers and other restrictions in place in the U.S. compared with 672 for the EU, according to the OECD. When the trade talks between London and Washington kick off, expect an almighty row in Britain over chlorine-washed chickens and hormone-treated beef, but the non-tariff barriers go far beyond those headline-grabbing areas to include chemicals, cars and other areas.

Worse, many barriers are at state level, where they will be tough, maybe impossible, to dislodge. Foreign insurers must establish a commercial presence in the U.S. to offer their services. But in New York, they face higher capital requirements than domestic peers and a majority of their directors must be U.S. citizens and residents (and at least one has to be a resident of New York state). In air transport, the CEO and at least two-thirds of the board must be U.S. citizens; foreigners can't own more than 25 percent of the voting shares. Overseas banks with more than $50 billion of assets have to form a U.S. intermediate holding company to act as a parent for their subsidiaries in the country.

Of course, the U.K. has barriers of its own it will be reluctant to remove, especially in accountancy, air transport and architecture. Britain will also want to protect the National Health Service's drug-purchasing model: a trade agreement that allows pharmaceutical companies to appeal pricing decisions could dramatically push up costs for the taxpayer. The U.S., however, tends to dictate terms to smaller trade partners and tell them where to sign – just ask Australia.

Yet the asymmetry isn't the real problem here; as long as the U.K. comes out better overall, it might be able to swallow a deal where it gives more than the other side. The bigger issue is that whatever Britain agrees with Washington will have an impact on the trade deal it secures with the EU – a much larger trading partner.

Trump Offers Brexiters a Trade-Shaped Gift

The EU relies on the “precautionary principle,” where the onus is on the producer to show their product causes no harm. Where doubt exists, sales are banned or restricted. That, at present, is also the U.K’s regulatory environment. The U.S.'s “science-based” approach to regulation permits what isn't empirically proven to be harmful. American regulation is also more decentralized and complicated by multiple agencies, often with overlapping jurisdictions. So the more closely the U.K. aligns with the U.S. in pursuit of a trade deal, the greater the barriers to its future trade relationship with the EU.

One way around this dilemma is to conclude a tariff-only deal with the U.S.; but the benefits would be far more limited. Another option, which Brexiters support, is to seek broad mutual recognition of regulations and technical standards. In a perfect world, that would work – but trade negotiations are all about the art of the possible.

A U.S. deal would be helpful and probably attainable, assuming Britain leaves the EU's customs union, which isn't certain. But as the House of Commons International Trade Committee said in an April report, the devil will be in the detail.

“The government must not make agreements for agreements' sake,” the committee warned. It should probably not break them for the sake of it either – but that ship has already sailed.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael writes editorials on European politics and economics for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

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