UK hopes trade deal with US could soften Brexit blow

The famous German philosopher and economist Karl Marx once wrote in his 1848 Communist Manifesto that workers would have “nothing to lose but their shackles” in the struggle against their capitalist oppressors.

The famous German philosopher and economist Karl Marx once wrote in his 1848 Communist Manifesto that workers would have “nothing to lose but their shackles” in the struggle against their capitalist oppressors. However, more than a century later, it turned out that the touted “workers’ paradise” of a socialist society wasn’t quite what laborers wanted, and so the hapless attempts at overcoming exploitation miserably failed in the states of Eastern Europe and the Soviet Union.

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Now, US President Donald Trump is more or less singing from the same sheet, extolling in a messianic tone the virtues of free trade to a British public that is deeply unsettled by the likely effects of a hard, or even a negotiated, exit of the UK from the European Union.

Trump has spent the first portion of his current three-day state visit advocating for a potential US-UK trade deal, and tweeted on Monday evening that a pact was possible once the “UK gets rid of the shackles,” — an apparent reference to the country’s imminent split from the EU.

The promise of a quick and “very, very substantial” post-Brexit free-trade pact with Washington is naturally going down well with some of the more euroskeptic candidates in the race to become the next British prime minister after Theresa May will have left office on June 7.

Trump contends that the benefits of such an agreement far outweigh any losses caused by Brexit. But trade experts are hugely skeptical about the president’s prophecy.

Offsetting Brexit losses?

According to latest available data, the UK’s trade with the US is huge, but much less important to the British economy than trade with the EU. In 2017, the US took in about 18% of UK exports, and 11% of total imports to the UK came from the US. By contrast, the 28-nation EU accounted for 45% and 53%, respectively.

The reason why the British economy’s trade relations are clearly tipped in favor of the EU is attributed by economists to three factors: The size of the market, the distance of transporting goods and the existence of clear-cut trade arrangements.

The size of the markets in the US and Europe is broadly similar, with that of America having produced about $20.5 trillion (€18.2 trillion) worth of goods and services in 2018 and that of the EU around $17 trillion, at current exchange rates.

The principal reason why the British economy is doing three times more trade with the EU than the US is distance and regulatory alignment. Alan Winters, the director of the UK Trade Policy Observatory at Sussex University, has calculated that a US-UK trade deal wouldn’t change that.

“Even if we had regulatory alignment with the US, the distance factor would still mean we would do less trade,” he said in a report recently. Winters has calculated that a drop in UK exports to the EU of about 10% after Brexit would require an increase of exports to the US of 37% to make up for the shortfall.

Sam Lowe, a senior research fellow at the Centre for European Reform, shares a similar view and says it’s “nonsensical” to believe there will be a big enough surge in bilateral trade with the US to close the gap. “We are hugely integrated into the EU economy and for any US deal, the most we are looking at is tariff reduction,” he told the British business daily Financial Times recently.

Moreover, a 2018 study of the costs and benefits of Brexit, commissioned by the British Parliament, estimated that a bilateral free trade agreement with Washington would increase the UK’s gross domestic product (GDP) by a mere 0.2% after 15 years. This is tiny when compared with the 2% to 8% loss in GDP after Brexit during that time.

Washington’s wish list bodes ill for the UK

In March this year, the Office of the US Trade Representative (USTR) issued a 500-page report, espousing the virtues of free trade and less regulation, and highlighting Washington’s gripes about restrictions to trade all around the globe.

The UK, as part of the EU, didn’t get its own section in the report, but the 47-page chapter devoted to “unfair” EU trade practices, is already a harbinger for future negotiations with the UK.

Washington wants scrapped “onerous” EU rules on everything from animal welfare to chemicals to the import of crops for biofuel. The USTR’s biggest concern is “a number of measures the EU maintains ostensibly for the purposes of food safety and protecting human, animal, or plant life or health,” the report said.

Essentially, this means the US demands massive changes to current British standards in health and consumer safety which are still based on EU products standards. These measures, the USTR stresses, “unnecessarily restrict trade without furthering their safety objectives because they are not based on scientific principles, maintained with sufficient scientific evidence, or applied only to the extent necessary.”

While the EU public debate still circles around the totemic US chlorine-washed chickens, the USTR’s report clearly shows that few industries are left untouched.

It rails against the burden of EU food labelling as well as restrictions on cosmetics and pesticides. It bemoans the fact that accreditation bodies for product standards must be public and nonprofit, when private American firms could do the job. It complains about the widely recognized CE safety mark, so expect that to go.

On chemicals, the EU’s regulations impose “extensive registration, testing and data requirements on all chemicals manufactured or imported into the EU in quantities greater than a metric ton.”

Restrictions on biofuel crops, which a number of studies have shown can potentially be worse for climate change than fossil fuels, are also highlighted as a burden.

Minimum unit pricing of alcohol, set to be introduced in Scotland, could also come under pressure. The USTR criticizes a public health bill in Ireland which proposes minimum unit pricing as well as labelling requirements for alcohol.

All those measures and many more EU rules applied in the UK, Washington argues, “have the potential to generate additional administrative costs and detrimentally impact the ability of US exporters to reallocate product in the European market.”

So, would a free-trade pact between Washington and London be plain sailing for negotiators? Almost certainly not. Even more so as a meaningful agreement requires a hard Brexit in which the UK leaves the EU’s customs union and scraps all of the bloc’s single market rules. Unless a new British prime minister is willing to take such steps, there would be little to discuss other than relatively minor trade facilitations. And for the British economy the touted free-traders paradise might turn out an economic hell. (DW)

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