U.S. Trade Deal with the U.K. Dies Quietly. Rest in Peace.

When Joe Biden was elected President, many on Wall Street and some on Capitol Hill believed it would be a return to the pre-2018 years of no trade disputes with China and the pursuit of new free trade deals.  Biden delivered nothing of the sort. Despite a handful of legislators bemoaning the fact that the U.S. under Biden is not promoting trade with countries around the world, there was one nation that had a chance, albeit a slim one, to get it done: The United Kingdom. The U.S.-U.K. trade deal was a hot topic for a little while. Then it was not. And now it is dead.

The deal was quietly shelved this week ahead of the 2024 election — following Senate opposition and disagreements over the scope of the deal, Politico reported.

A draft outline of the pact and its 11 proposed chapters, prepared by the United States Trade Representative’s office earlier this year, indicated negotiations would begin before the end of 2023, Politico wrote, citing two unnamed sources.

“It was a bad idea from the word go,” said Jeff Ferry, CPA’s chief economist.

On the U.S. side, the main drivers were the pharmaceuticals industry and Big Ag, namely processed foods. The U.S. pharmaceutical industry was hoping to use this deal to find a way to force the U.K. to pay more for patented drugs. As it is, the U.K. National Health Service (NHS) has a near-monopoly grip on the pharmaceuticals market and can negotiate lower prices than what the same companies can charge here. But with the National Health Service constantly on the verge of financial collapse, this portion of the trade chapters was a no-go, said Ferry.

Then there’s the U.S. processed foods industry, which wants to unleash raw competition in the U.K. food business because U.S. companies can win a price war with the Brits. But importing frozen foods and snack items would go against NHS’s interests, too.

The U.K. seems to have given up on this deal before the White House.

Back home, next year is an election year and opening U.S. manufacturing to fresh competition, even from an ally, will not be well received by voters already facing layoffs in automotive, and pharmaceutical/biotech companies too. These are two of the top five items the U.K. exports. Obviously, these sectors would want easier access to the U.S., even though their entry barrier tariffs are already low.

The U.S. is the U.K.’s largest single trading partner, accounting for 16.3% of trade in 2022, according to the Office for National Statistics in London. The U.K. is the seventh biggest trade partner of the US, making up 2.7% of total trade, according to Census.

Free trade deal modeling almost never includes the impacts on the labor market. This deal with the U.K. would have led to thousands of job losses in the U.S. automotive sector. And maybe in biotech, too.

CPA opposed the deal since it became a rumor.

CPA’s own economic modeling of the U.S.-U.K. free trade agreement that cut tariffs to zero between the two countries showed in 2021 that the deal would increase unemployment by more than 2,000 jobs and reduce U.S. GDP by $142 million. The CPA economic model includes a methodology for estimating job losses due to worker displacement, meaning jobs lost in each country due to increased import penetration. Free trade models rarely account for such impacts. The model showed that the trade deal would result in U.S. job losses in manufacturing, especially in the automotive sector. The U.K. would gain jobs in manufacturing but lose jobs in financial services, where U.S. asset managers, insurance companies and investment banks would possibly increase their presence in the U.K. market.

Read CPA’s Working Paper here and the academic article on SSRN.

The deal was as bad for the Brits as it was for those of us across the pond, Ferry said. It seems Prime Minister Rishi Sunak – a Stanford University MBA alumni – is already on his way to try and convince India to do a free trade deal instead. (India will reject this idea as it is one of the largest, closed economies in the world after China.)

“What would the U.K. get out of such a nutty deal with us? After Brexit, Sunak has been desperate to show the voters that he can do free trade deals to keep the U.K. engaged internationally,” Ferry said. “Since deals with low-wage nations like India bump up against the fact that high-wage Britain can scarcely sell much more into low-wage India (apart from branded products like Scotch whiskey), those deals are mostly cosmetic,” Ferry said, adding that they might win some votes but the net economic effect would likely be negative. “A U.S. deal on the other hand looks very good for the British voter because they still cherish the idea of being America’s best ally on the world stage. Also, there is a possibility of exporting more to America in some industrial sectors such as autos–that’s where the 2,000 job losses in the U.S. comes from in the CPA economic model,” he said.

For the U.K., free trade isn’t going to save them.

Like the U.S., the only way to improve prosperity is to make the U.K. more amiable for companies to grow, and for new industries to take root. Manufacturing is always the area that offers growth prospects and broad employment opportunities for the blue-collar worker not interested in learning to code or selling insurance.

“Sunak and his team do not understand economic growth,” Ferry said. “They, like many people on Capitol Hill, are captured by the financial lobby who argue that free trade is the answer, although their version of free trade will wipe out manufacturing and the heartland in favor of a narrow, financial elite working in maybe a handful of sectors.”