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Brexit and Outlook for a U.S.-UK Free Trade Agreement

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Brexit and Outlook for a U.S.-UK Free Trade Agreement Updated January 14, 2021 Brexit and Outlook for a U.S.-UK Free Trade Agreement The United Kingdom (UK) is a major U.S. trade and that, even with a deal, the UK’s economic growth will be economic partner, and foreign direct investment (FDI) and lower in the long-term than it would have been if the UK affiliated activity are key aspects of bilateral ties. The had remained in the EU—though not as low as it would United States is the UK’s largest trading partner by country, have been without a deal. Some critics say that the deal while the European Union (EU), as a bloc, is its largest lacks a clear framework for services, which comprise overall partner (see Figure 1). Brexit, the UK’s withdrawal around 80% of UK gross domestic product (GDP) and half from the EU, and the conclusion of a new UK-EU trade of UK exports. The limited treatment of some issues does agreement are significant for a potential U.S.-UK free trade not smooth all trade frictions introduced by Brexit, but may agreement (FTA), initiated by the Trump Administration. If allow the UK more flexibility in negotiations with other a Biden Administration continues FTA negotiations, countries. The implications of the deal—over 1,200 pages Congress may actively monitor and shape them, and could and with exceptions, limitations, and transition periods— consider implementing legislation for any final agreement. will take time to become fully apparent. Figure 1. Share of U.S. and UK Total Trade, 2019 The trade commitments go beyond a typical FTA in some respects, given the unique starting point for the UK-EU trade talks. They cover market access and rules for trade in goods, services, agriculture, government procurement, investment, and energy and transportation; trade-related rules on data flows, intellectual property rights (IPR), and other areas; regulatory cooperation; sustainable development standards; and other issues—enforceable through binding dispute settlement and governed by an institutional framework. A separate protocol governs trade between the EU and Northern Ireland, treated as intra-EU. Source: CRS, based on U.S. Bureau of Economic Analysis and UK The trade deal gives the UK and EU tariff-free, quota-free Office for National Statistics data. access to each other’s markets and secures more nondiscriminatory trade liberalization than if they used UK-EU Trade Relationship WTO-only terms. This avoids the imposition of tariffs that On January 1, 2021, after a post-Brexit transition period would have been, for instance, 50% or more on beef, ended, the UK left the EU single market and customs union, poultry, and dairy; up to 25% on processed fish, and up to shedding its rights and obligations as an EU member state. 10% on autos. Still, the UK-EU trade deal does not fully The UK regained control over its national trade policy, and replicate trading within the far more frictionless EU single is free to conclude its own international trade agreements. market. Brexit introduced new exporting and importing UK-EU trade and economic ties are now governed on a licensing requirements, border checks, and regulatory provisional basis by a new Trade and Cooperation compliance requirements, raising costs and the potential for Agreement. The agreement in principle, which the UK and bottlenecks at borders. The agreement does not eliminate EU reached on December 24, 2020, follows nine months of customs requirements, but aims to simplify them, such as contentious negotiations. In the end, both sides say that they through mutual recognition of “trusted trader” arrangements struck a fair and balanced agreement that respects each to self-certify compliance with the other side’s regulations side’s priorities. The UK has ratified the deal, and the EU is and standards. expected to follow in the coming months. Although UK regulatory frameworks have been aligned Many firms, facing years of uncertainty after the Brexit with the EU, Brexit makes the UK a “third country” from referendum, expressed relief that the deal appears to avoid the EU perspective, meaning that the EU must make the trade and economic disruption that a “hard Brexit” on determinations on whether measures of the UK comply World Trade Organization (WTO) terms was expected to with corresponding EU regulatory frameworks; even with cause. Given the high level of integration of UK-EU trade positive determinations, the EU could revoke them at any and investment and the role of the UK as a platform for time, disrupting UK trade. The deal does not include mutual firms to access the rest of the EU market, Brexit caused recognition of conformity assessments, meaning that UK uncertainty for U.S. firms exporting and operating in the manufacturers now must have their products tested for UK. A number of U.S. manufacturing, financial services, compliance with EU frameworks and vice versa. The deal, and other firms in the UK have been restructuring however, does contain limited, sector-specific arrangements operations due to Brexit changes. While the agreement is for regulatory cooperation, such as for pharmaceutical expected to yield a “certainty dividend” to the UK manufacturing practices, motor vehicles, organic products, economy, which also has been hard hit by the Coronavirus trade in wine, and chemicals. In terms of services, the deal, Disease 2019 (COVID-19) pandemic, most analyses predict https://crsreports.congress.gov Brexit and Outlook for a U.S.-UK Free Trade Agreement for instance, lacks automatic mutual recognition of intent to enter into comprehensive FTA negotiations with professional qualifications. the UK. The United States and UK conducted five rounds The deal leaves a number of issues open-ended. For of negotiations in 2020, all virtually. Despite high interest financial services, which account for 7% of UK GDP and on both sides and reported progress, the negotiations remain one million jobs, the deal does not address UK financial pending over outstanding issues. services firms’ access to the EU, which previously was It is uncertain if a Biden Administration will continue with through a “passporting” right that allowed banks to use the trade negotiations or engage, for instance, on specific their UK bases to access EU markets without establishing bilateral trade issues first. If negotiations are continued, it is legally separate subsidiaries; the parties aim to establish a not clear what priority they will take in relation to other framework for cooperation by March 2021. Agricultural potential U.S. trade negotiations, such as with the EU. To trade also may face barriers or uncertainty, given the be considered under the current TPA, an agreement must be limited treatment of sanitary and phytosanitary standards concluded by July 1, 2021. As the UK continues to (SPS). Other issues not fully addressed include cross-border conclude other trade agreements, U.S. businesses will lose data flows, with the EU delaying a final decision on advantages in UK markets in the absence a U.S.-UK FTA. whether the UK provides adequate personal data protection; If FTA negotiations are renewed, some experts are many U.S. firms rely on such data flows to communicate optimistic about their success in light of the U.S.-UK with UK and EU customers, partners, and subsidiaries. “special relationship” and historical similarities in trade To try to ensure a “leveling playing field,” the agreement approaches. The UK was a leading voice on trade includes a “rebalancing mechanism” to allow each side to liberalization in the EU. However, any U.S.-UK FTA talks unilaterally reduce market access if it assesses that the other could see flashpoints reemerge (see text box). side’s actions result in subsidies that create market distortions. This may allow the UK to diverge from EU Potential Issues in U.S.-UK FTA Negotiations rules, while allowing the EU to protect the integrity of the Any continued U.S.-UK FTA talks may see debates over: single market. The two sides also committed minimum standards on labor, the environment, and social issues, and Agriculture. Some U.S. stakeholders view UK food safety and to not lower these standards to attract trade and investment. animal welfare regulations as protectionism. Meanwhile, UK farmers and some in civil society voice concerns about the Global Britain implications of U.S. demands for greater access to the UK Since Brexit, the UK has aimed to retain and strengthen its market, and potential changes to UK food safety regulations. trade linkages globally. It negotiated and submitted to the Pharmaceuticals. The United States seeks standards to WTO for certification its own WTO schedules of ensure that government regulatory reimbursement regimes are commitments on goods, services, and agriculture, which transparent and nondiscriminatory and provide full market were previously under the EU. The UK also now is a full access for U.S. products. Some in UK civil society expressed party in its own right to the WTO Agreement on concern that a U.S.-UK FTA could lead to the UK privatizing Government Procurement (GPA). U.S. and other exporters services or raising drug prices; UK officials repeatedly have will need to manage separate customs regimes and maintained that these issues are not up for negotiation. relationships for the UK and EU. Other issues. Financial services, investment, e-commerce, and As of January 1, 2021, EU trade agreements no longer regulatory issues may be among other points of contention. apply to the UK. Since the transition period, the UK has Ongoing U.S.-UK trade frictions. The UK digital services engaged in negotiations to replicate existing EU trade deals tax, the U.S. Section 232 national security-based steel and with non-EU countries (e.g., Switzerland, Iceland, Norway, aluminum tariffs, and various retaliatory measures could add South Korea, and Turkey), and pursued new deals with complications.
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