DC Rumor Mill: A Possible US-UK Free Trade Deal?

You can probably count on one hand the number of Senators who actively campaign for free trade deals. Most of them are from farm states, looking to open markets in Asia for potatoes and soybeans. But for the most part, talk of creating a new free trade agreement (FTA) with anyone has been pretty much shelved. There was a time when Trump talked about the possibility of a U.S. FTA with the U.K., but that died on the vine. Now, according to a leaked proposal to Politico magazine, the White House will try to sign an FTA with the U.K. before next year’s election.

President Joe Biden and Prime Minister Rishi Sunak are preparing a “foundational” trade agreement called the U.S.-UK Trade Partnership Forum (TPF) before they face re-election next year, Politico reported out of their European bureau on Oct. 3.

The negotiations are scheduled to start this month with the initial set of trade chapters wrapped up by spring 2024, according to a draft plan prepared by the United States Trade Representative’s (USTR) office in late August. The outline deal did not yet include the coveted “market access” commitments required to be considered a formal free trade agreement by the World Trade Organization. But the TPF would be a free trade deal, no doubt, if it ever saw the light of day. The USTR proposed ways to deal with issues like agriculture across 11 trade chapters which include labor laws, comparable environmental regulations and digital trade, among others.

“We’re discussing and considering a range of things, but all is very much in early stages and nothing has been finalized yet,” Politico EU quoted someone anonymously about the TPF.

In April, Bloomberg reported that the U.K. was hoping to restart trade talks with the U.S. post-Trump, and that they were hoping to make that a topic of discussion when Biden visited there in the spring. It is unclear what was discussed. The unpopularity of free trade deals today has likely led the White House to keep this under wraps until both sides agreed to really move forward with this. For now, this is just a discussion and odds are not high for a deal before next year.

For starters, the Biden administration wants concessions on agriculture, but the U.K.’s Department for Environment Food and Rural Affairs is “blocking this,” said a U.K. government official granted anonymity. U.K. farmers, already burdened with new environmental regulations, are unlikely going to open their markets to American dairy and beef. U.K. farmers have long complained about Brazil’s overweight position in their food market, especially beef and chicken.

In his new book, “No Trade is Free”, former USTR Robert Lighthizer – who was part of the Trump team to first consider a trade deal with Britain – said tariffs were already near zero. A free trade deal didn’t bring anything new to the trade relationship.

“When we were considering an FTA with the United Kingdom in 2020, I called several manufacturing CEOs and asked what I could do to increase our exports to Britain. The short answer was that, for the most part, tariffs are already low and patterns of trade are set. They could not identify any significant potential for new sales. I always tried to analyze specifically where improvements would come from proposed changes. Generally, staff would just look at tariff models (most of which have repeatedly been proven wrong) and then come up with presumed benefits without tying them to real products.” – From No Trade is Free, Robert Lighthizer, page 32.

Citing a study on free trade by well-known Harvard economist Dani Rodrik, Lighthizer said that new FTAs essentially help consumers save a dollar, while taking $50 from producers and giving it to importers.

“There is no way that is in the national interest,” Lighthizer wrote. “We need to prioritize producers, and that means reversing the hollowing out of our manufacturing capabilities.”

CPA put the proposed U.K. FTA through a trade model to see what the deal would look like back in July 2021. The TPF was nothing to brag about.

From that CPA study:

• If a U.S.-U.K. free trade agreement cut tariffs to zero between the two countries, it would increase unemployment by more than 2,000 jobs and reduce U.S. GDP by $142 million.
• The U.K. would suffer job losses of 1,841 jobs but see growth in GDP of $202 million. The U.K. gains in GDP in part because it increases exports to the U.S., which is its largest market in many commodities.
• The U.S. job losses are primarily in the manufacturing sector, including motor vehicle and machinery production. The U.K. would gain jobs in manufacturing but lose jobs in financial services and other sectors where the U.S. would increase its share of the U.K. market.
• Both countries would see a small rise in their trade deficit, by $1.3 billion in the U.S. and $1.1 billion in the U.K.

Using the GTAP model, CPA’s simulation of the effects of a U.S.-U.K. trade agreement showed no substantial gains for the U.S., with manufacturing being the biggest loser and financial services being the biggest winner. The model found much smaller benefits than what the U.K. model found, including only $303 million in benefits for the U.K. economy, 94% smaller than the U.K. estimate, and only $98 million for the U.S. economy, 99% smaller. The disparity between the two models is likely due to the U.K. model’s inclusion of the removal of non-tariff barriers in their model. For example, health and safety regulations that keep out foreign imports – known as phytosanitary barriers – were kept in the CPA model.

With average tariffs of just around 3.4 percent, the strongest, most overvalued currency in the G7, and duty-free shipments for global e-commerce priced under $800, the U.S. does not need a free trade agreement with anyone.

“Our view is that trade agreements and other trade shocks can and do impact domestic unemployment levels locally, regionally, and nationally, and these effects can last for years or decades,” Jeff Ferry, chief economist with CPA and author of the July 2021 U.K. trade deal study wrote in 2021. “You only have to visit Detroit, Michigan, or Oldham, Lancashire, to see the effects of trade and import competition in destroying jobs and making cities poor and deprived.”

Asked about a U.K. free trade agreement today, Ferry commented: “The U.S. is running a current account deficit at $200 billion a quarter, or 3.2 percent of GDP. The United Kingdom’s current account deficit, at 3.7 percent of their GDP, is even worse. A free trade agreement between these two countries would be like putting a child with malaria in the same bed as one with typhus. What both of these countries need is to abandon destructive trade agreements and focus on their domestic economic growth by supporting growth sectors, especially manufacturing. I give Joe Biden credit for his efforts in this direction, with the Inflation Reduction Act. As for Rishi Sunak, he is a former investment banker married to a billionaire’s daughter, badly advised by naive free-trader economists, and his economic policies are only digging Britain into a deeper hole.”

CPA Model: US-UK Trade Agreement Would Make Over 3,000 Unemployed, Reduce GDP in U.S.