Where Post-Brexit U.K. Would Stand in the Trade-Deal Queue

By Simon Nixon When President Barack Obama last week told Britain it would go to the “back of the queue” for future free-trade deals if it quit the European Union, Brexit campaigners accused him of bullying an ally. An alternative view is that Mr. Obama was merely stating reality: that if the U.K. does vote for Brexit, there would be little point in the U.S. and U.K. starting trade talks until both had clarified their relationship with the EU.But what might a U.K.-U.S. trade deal involve, and how would it compare with the EU-U.S. Transatlantic Trade and Investment Partnership now under discussion? A good starting point is to consider why there hasn’t been an EU-U.S. trade deal already.Part of the explanation is that the potential gains from a traditional free-trade agreement simply haven’t been large enough to justify the effort. The U.S. and EU are already among the most open markets in the world. Average tariffs are low — the EU’s average external tariff is just 3% — and constitute only a limited barrier to trade in most sectors other than agriculture, where both impose quotas and high tariffs. Barriers to investment are also low, reflected in existing high levels of trans-Atlantic capital flows, not least into the U.K.As a result, it has been clear that any meaningful U.S.-EU trade deal would need to focus on the far more politically sensitive non-tariff barriers to trade, including regulation and rules governing public procurement.For years, the political will just wasn’t there on either side. But three years ago, the stars appeared to align: Governments urgently needed to find new ways to boost flagging growth. At the same time, Western countries feared the growing power of developing ones. TTIP was initially billed as an “economic NATO” — a defensive pact to safeguard trans-Atlantic leadership of the global trading system in the 21st century.Whether the stars remain aligned is unclear. Both Mr. Obama and EU leaders including German Chancellor Angela Merkel and U.K. Prime Minister David Cameron have publicly backed the negotiations that resumed again in New York this week. But the two sides still remain far apart on crucial issues.Reconciling very different regulatory philosophies is proving every bit as hard as feared. In a nutshell, the EU tends to regulate more broadly, but when the U.S. regulates, it tends to do so more deeply.U.S. agencies such as the Food and Drug Administration, for example, have far more power than their European equivalents. At the same time, the U.S. federal government is reluctant to invoke its constitutional right to agree on international treaties to overturn “Buy America” public procurement policies adopted at the state and local level, a key EU demand given the importance of the procurement market.Meanwhile, domestic politics on both sides of the Atlantic have turned against free trade. In the EU, opposition has focused on the use of tribunals to resolve disputes between investors and governments. These tribunals are a feature of all free-trade deals: Foreign investors rarely have confidence they will be treated fairly by local courts.And even developed countries have been known arbitrarily to change laws to discriminate against or even expropriate the assets of foreigners. Under the World Trade Organization, these disputes are settled government-to-government. But as the volume of global trade — and therefore disputes — has grown, this has proved unsatisfactory: Governments lack both the administrative capacity and political appetite to take on multiple cases.The solution adopted in most bilateral free-trade deals, including all EU deals, has been to allow companies to challenge governments directly in tribunals. Faced with the growing public backlash, the EU has proposed a further reform. It wants the judges in TTIP tribunals to be selected from a permanent panel and the process made more transparent.But it isn’t clear that this will prove acceptable to the U.S., which is reluctant to allow the creation of a permanent new legal apparatus, or indeed sufficient to assuage European public opinion.Is the possible failure of TTIP an argument for Brexit? Britain on its own might find it easier to agree a free-trade deal with the U.S. but the deal itself would almost certainly be far less ambitious than TTIP and largely confined to eliminating remaining tariffs.If the EU with a market of 500 million people cannot convince the U.S. to make concessions on regulation and public procurement, then it is unlikely that the U.K. could do so alone. In any case, the U.K. would be unlikely to want to drift too far away from EU regulations, given the need to preserve favorable access to the U.K.’s largest export market; nor is it clear there is public appetite in the U.K. for large-scale deregulation.Ultimately, the U.K. would have to weigh whether the potential gains from a U.S. deal focused on tariff reduction would be sufficient to offset the political costs of dismantling protection for sensitive sectors, notably agriculture. It would also need to consider the cost of forfeiting participation in existing and future EU trade deals, where the size of the EU market and its leading role in setting global standards gives it considerable leverage.After all, what matters when it comes to trade deals isn’t where you stand in the queue, but what you can put on the table.

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