Brexit or Bust
August 19, 2019Once again, I am engaging in an effort to avoid spending an entire column on China. Not because it’s unimportant but because there are only so many times one can say the same thing. Although each week seems to bring new, largely unpleasant, surprises, the fundamentals remain the same. China is not going to agree to our demands, and eventually, the president will either accept a weaker agreement or continue the trade war. He will most likely choose the former but do it shortly before the 2020 election, so the agreement’s shortcomings are not obvious until after people have voted. So, look for the status quo to waddle along for a good while, as the president comes up with new ways to stretch out the process without making it look like that’s what he’s doing.
Now, on to today’s main subject, which is the U.S.-UK trade relationship. I was going to discuss it last week as another myth to be punctured, but since nothing has actually happened yet, that would be premature. Liz Truss, the United Kingdom’s new secretary of state for international trade, was in town two weeks ago for private meetings and a public speech, all of which stressed the United Kingdom’s enthusiasm for a trade agreement with the United States. Various U.S. officials said the same thing right back at her, culminating in John Bolton, the U.S. national security adviser, expressing his enthusiasm for it on his visit to London last week. I also think a trade agreement is a good idea, but both sides are seriously underestimating how easy it will be. The assumption is that the long, close relationship between our two countries (forgetting that ours was founded by revolting against theirs), many similarities (including language, more or less), and the United Kingdom’s distaste for EU regulation will make negotiating an agreement simple. I doubt, however, that Secretary Truss or Ambassador Lighthizer has that illusion, and I don’t either.
What will, in the end, make the talks complicated will be the U.S. desire to make the United Kingdom choose between us and Europe, and the United Kingdom’s realization that, for all its antipathy toward the continent, their economic ties in that direction are much more significant. The United States may be their largest single trading partner, but, looking at the rest of the European Union as a whole, 46 percent of the United Kingdom’s exports and 54 percent of its imports come from there. (Germany, France, and the Netherlands are the major markets.) There are numerous, largely regulatory issues—data privacy, genetically modified organisms, geographical indications, to mention a few prominent ones—where the United States is at odds with the European Union and where we can be expected to demand that the United Kingdom adopt our approaches. Doing so, however, will cut them off from Europe in some significant ways. This is not to say there are no solutions. (Indeed, the best one would be regulatory harmonization between the United States and the European Union, which would make these issues moot, but we have been working on that for 40 years without much progress.) But the solutions are not likely to come easily or quickly, and therefore, both sides should prepare for a complex, difficult negotiation.
Some observers, including Mr. Bolton, have suggested that an agreement might be undertaken in stages, which has also been suggested in the cases of Japan and the European Union. However, there are two problems with that. One of the two fundamental World Trade Organization (WTO) principles is most-favored-nation (MFN) treatment, meaning that a concession given to one must be given to all. (The other is national treatment, which means treating the foreigners like you do your own people.) Knowing that MFN treatment would get in the way of nations making bilateral or regional agreements, WTO Article XXIV provides an exception to MFN treatment for smaller agreements that cover “substantially all trade.” This term is left undefined but has generally been assumed to mean 90 percent or more. That means that a free trade agreement between two or more countries may contain concessions that apply only to those countries so long as the agreement covers substantially all trade. The North American Free Trade Agreement is a good example. An agreement that addresses only autos, for example, would violate Article XXIV. A negotiation in stages would also presumably violate the rule unless there was agreement that none of the stages would go into effect until all of them had been negotiated, which is probably not what the proponents of that approach are contemplating.
The other problem relates to negotiating tactics. There is a natural tendency in negotiations to do the easy bits first and save the difficult ones for last. If there is a single unitary negotiation, that doesn’t matter because nothing will be agreed to formally until everything is agreed to, so the low-hanging fruit must wait for fruit higher up the tree to be plucked. However, in a staged agreement where the pieces are put into effect as they are concluded, saving the worst for last usually means the worst never gets done. A good negotiator will want to put off concluding an agreement until the most difficult topics have been agreed to. And, of course, if you don’t do that, then you risk ending up with an agreement that does not cover substantially all trade because it includes only the easy bits, which takes us back to the Article XXIV problem.
All that means there is no easy way out. The UK will have to choose whether it wants to look east or west, and that will be a more difficult choice than the current government expects.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
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