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This commentary is part of the Strategic Trade series supported by the Atlas Network.
In the nineteenth century, the United Kingdom was the most powerful trading nation in the world. The United States took its global place in the twentieth century. If indeed the twenty-first century is the Pacific century, with China as the new dominant trading nation, can the combination of the world’s largest and fifth-largest economies (the United States and United Kingdom, respectively) create a sufficient geo-economic ballast, in the form of a U.S.-UK free trade agreement (FTA), to balance China’s rise? Would these two digital trade innovators, with a shared culture and language, be able to “win the future” of technological innovation and shape the digital economy? Can they infuse the digital future with democratic standards?
As these two maritime nations chart new bilateral trade waters, there will be exciting economic benefits to navigate and dangerous shoals to avoid, all while using a new navigational compass: the United Kingdom’s departure from the European Union and its single market. For the past 47 years, the United Kingdom has been in alignment with EU, not U.S., standards and regulations. The United Kingdom’s market reorientation away from the European Union, its largest export market, is in itself a significant strategic decision. The overall economic impact of Brexit could decrease UK GDP by 5 to 10 percent. Alongside a U.S.-UK FTA, Britain must also negotiate its trading relations with other countries, in particular Commonwealth countries such as India and Australia, which may hold great promise and potentially challenge or diminish elements of a U.S.-UK FTA. But what will the country move toward in the future? A selective independent path? The United States or a North American trade orientation? A Commonwealth approach? A Pacific focus?
We do not yet know the answers to these questions. We do know that the EU-UK trading relationship will be very likely be minimal, at least initially, which could unlock new trade and investment possibilities and strategically reorient the United Kingdom toward the United States and North American markets. This alignment would be propelled by an Anglo-American free trade agreement. And with a new strategic economic and trade orientation comes even greater defense and security cooperation as well as stronger people-to-people ties.
Unlocking the Trade Potential. A free trade agreement between two advanced economies has little to do with lowering tariffs, which are already considerably low (some of the highest UK tariffs are at 10 percent, in the case of cars). The benefits, as would be the case in a potential U.S.-EU FTA, come from aligning and harmonizing standards and regulations. Credible estimates suggest this could amount to an extra 0.16 percent of GDP for the United Kingdom over the next 15 years, with tariffs eliminated and other barriers reduced by 50 percent. Fully or partially untethered from EU regulations, the United Kingdom could adopt more U.S. standards for its goods and services, with some exceptions for those transiting through Northern Ireland. Conversely, the United States could choose to adopt more UK or and European product norms in a select number of areas.
A weathervane in this regard will be the agricultural sector and whether the United Kingdom retains its current European food standards (e.g., forbidding certain types of genetically modified organisms and U.S. chlorinated chickens), or whether it will make a decisive shift to acceptance of U.S. standards. It appears that the winds have already shifted as London leans toward Washington’s agricultural standards while protecting UK farmers through a dual-tariff structure. In return, U.S. consumers may now enjoy less expensive Welsh lamb in U.S. supermarkets.
While agriculture is domestically and politically vital, it is not necessarily a strategic sector for the future. The future of the digital economy is, however, and it makes the digital chapter of a U.S.-UK FTA (or perhaps as a stand-alone effort) one of its most important features. Together, both sides are the world’s leading exporters of digitally delivered services and digital innovation; the United Kingdom takes in 23 percent of U.S. digitally deliverable services exports. They are also each other’s largest e-commerce markets. A recent CSIS report offers a roadmap for future U.S.-UK digital trade. Here again, the United Kingdom may need to make some tough decisions about privacy standards and digital services taxation that will impact this bilateral trade. London has stated that it will continue to follow the European Union’s General Data Protection Regulation but will not adopt the future e-privacy regulations.
In the near term, the greatest impediment to greater U.S.-UK digital trade cooperation is the United Kingdom’s decision to impose a 2 percent digital services tax on technology firms, which are disproportionately American. The United States has just announced a formal Section 301 investigation into this perceived discriminatory tax. Another policy challenge, which the UK government appears to be in the process of adjusting, is the United Kingdom’s telecommunications reliance on Chinese firm Huawei for its 5G broadband requirements. The United States would most certainly seek guarantees that Huawei equipment would not be involved in future digital innovation.
Unlocking the Security Potential. A closer trading relationship between Britain and the United States will also reinforce an already robust security and defense relationship. Both countries have closely integrated their nuclear and intelligence capabilities for well over half a century. A closer U.S.-UK trading relationship would make it easier for the Department of Defense to procure from UK manufacturers and for the British Ministry of Defence to buy U.S. equipment and weapons. This enhanced procurement will be particularly important for the next generation of military capabilities, such as directed energy weapons, autonomous warfare assets, and artificial intelligence. Although the United Kingdom has participated in the U.S. National Technological and Industrial Base (NTIB) since 2017, this arrangement has yet to overcome numerous procurement blockages to enhance Anglo-American capability collaboration despite its stated aim to improve the quality and resilience of the military industrial base. Hopefully, a future FTA will succeed where NTIB seems to have failed so far.
The negotiation of a U.S.-UK free trade agreement occurs at a moment of enormous economic and political uncertainty. The economic ramifications of Covid-19, which has had a devastating impact on the United Kingdom, have fueled an unprecedented, large-scale government borrowing program to mitigate the downturn. There is also the increasing likelihood of a minimal EU-UK agreement—or none at all—by the end of the year, which could make the British pound lose significant value against the dollar. Although UK exports would become cheaper, making the market more competitive for goods, services, and intellectual products, household budgets would be under great strain and thus limit the potential to purchase U.S. goods.
UK and U.S. negotiators have laid a broad framework for a comprehensive free trade agreement, but the upcoming U.S. presidential election puts pressure on the timeline to reach a broad agreement (the U.S. Trade Promotion Authority, which enables Congress to fast-track any potential agreement, ends in July 2021). January 2021 may also be a particularly difficult time for the United Kingdom should there be an abrupt stop in its participation in European supply chains and standards. But if both sides can overcome these obstacles, a U.S.-UK FTA could reorient the UK economy toward North American markets, perhaps justifying closer steps toward integration with the United States-Mexico-Canada Agreement. If a UK-U.S. FTA cannot be agreed to by the end of the year, the UK government will be left unable to immediately demonstrate Brexit benefits while the British people will vividly experience its costs.
Heather A. Conley is senior vice president for Europe, Eurasia, and the Arctic and director of the Europe Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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