Why We Don’t Need a UK Free Trade Deal

The U.S. and U.K. will restart talks on trade and investment ties, the WSJ reported on Wednesday.

This is jumpstarting the May 2020 negotiations for a post-Brexit free-trade deal, which were suspended last year. Stronger trade and investor relations are one thing, but a free trade deal is unnecessary.

For starters, both the U.S. and U.K. default tariff rates (UK calls their most favored nation default rate their “global” tariff rate) are already low. The Global Tariff averages at 6%, while the U.S. tariff averages at 3.4% across all product lines. Auto imports have a tariff of 2.5%. Pharmaceuticals are tariff-free.

“Trade deals have failed to produce economic benefits, and often foster inequality,” said Michael Stumo CEO of CPA. “Instead of these old ideas, we need to focus on national development policies that are unconstrained by global rules and tribunals that put the volume of trade as the number one priority,” said Stumo. “Balance of payments, full employment, broader income growth, and national and economic security all need to be the primary goals in reforming trade relations.”

The original principles of the General Agreement on Tariffs and Trade, or GATT, signed in the late 1940s focused on full employment and balanced trade. By the 1990s, proponents of a hyper-globalization pretended those points no longer mattered. This led to massive protests against the World Trade Organization, culminating in the famous Battle of Seattle in 1999. People began feeling more excluded from globalization’s free trade push.

The International Trade Commission released a landmark report on free trade deals last year. The report looked at the North American Free Trade Agreement and the U.S. South Korea Free Trade Agreement, showing the deals favored large, global corporations, and had a negative impact on American workers, especially racial minorities and women without college degrees.

CPA Study: Impacts of UK Free Trade Deal

In July, CPA economists chief economist Jeff Ferry, Amanda Mayoral, and international consultant economist Badri Narayanan Gopalakrishnan did an impact study on a free trade deal with the U.K.

The study used the standard Global Trade Analysis Project model, or GTAP, and found that the deal would lead to a slight general improvement in economic output for both countries, but more so for the U.K. than for the U.S.

However, in a second GTAP model that incorporated worker displacement i.e. unemployment as a result of increased imports, the model showed a small negative impact to employment for both countries and a negative effect on GDP for the U.S.

“The standard model assumes trade deals do not lead to any unemployment,” said CPA chief economist Jeff Ferry. “But when we modified the model to allow for unemployment in various sectors resulting from increased imports, we found that U.S. GDP would decline as a result of a U.K. trade deal. This is significant both for anybody contemplating such a trade deal and for economists who claim that trade deals always lead to increased total output or GDP. Once you relax the full employment assumption, they do not.”

CPA’s economic modeling of a U.S.-U.K. free trade agreement that cut tariffs to zero between the two countries shows the deal would increase unemployment by more than 2,000 jobs and reduce U.S. GDP by $142 million.
The model finds that 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 a large market for U.K. made cars and pharmaceuticals.
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.

The trade-weighted average of U.S. applied tariffs on U.K. imports is 2%, while the figure for U.K. tariffs on U.S. goods is also 2%.

Trade agreements can have surprising impacts.

For example, before NAFTA, U.S. tariffs on Mexican-produced autos and auto parts were low, around 3%. Mexico then exported virtually no automobiles to the U.S. In practice, NAFTA turned out to be more of an investment agreement than a trade agreement: it was a signal for the world’s automakers to begin building state-of-the-art auto plants south of the border. Today, Mexico produces around 3.9 million cars a year and exports around 2.5 million of them to the U.S.

Ford’s Mustang Mach-E, its battery-powered version of the iconic Mustang, is made in Mexico.

Like Mexico, the U.K. is also focused on the U.S. auto market.

Before Covid, the U.K. produced around 1.4 million vehicles a year. The U.S. is the number one destination market for the U.K. auto industry. Americans buy around 18% of U.K. auto exports each year, far more than any other country. While U.K-built autos have lost market share in Europe in the decade up to 2019, the U.K. gained share in the U.S., due largely to the success of the Mini and Tata Motors’ Jaguar and Land Rover, which are still made in the U.K. despite being an Indian company now.

Free trade deals are part of the “forgotten man” and “forgotten woman” theme that is so prominent in U.S. politics today.

The purpose of a free trade agreement for any individual country is to enable trading partners to provide goods to that country more cheaply than it can do itself. The standard economic assumption is that the resources thus freed up in the importing country will move into other more productive uses. It’s clear that the disruption caused by increased imports will lead to unemployment for a time. The level and duration of this unemployment has been quantified in many economic studies. We used these estimates to develop what we call the Worker Displacement version of GTAP. – The Economic Impact of Tariff Eliminations in a U.S.-U.K. Free Trade Agreement: A CGE Model with Worker Displacement, August 2021, by CPA’s Jeff Ferry and Amanda Mayoral

The U.S. Bureau of Labor Statistics has been surveying U.S. workers about their experiences following mass layoff events for more than 20 years. The results of these surveys are very consistent, finding that between 25% and 40% of workers are not working after layoff events that took place between one and three years before the survey.

For example, the 2020 survey found that 29.1% of those displaced workers were still not employed in January 2020 after being laid off one to three years prior due to outsourcing.

The U.K., like the U.S., is not culturally or politically equipped to exploit export opportunities, at least not in manufacturing. A strong currency also does not help, as that makes U.S.-made products more expensive regardless of duty-free status.

The U.S. has a track record of decades of trade deficits that have led to manufacturing decline, a disgruntled middle class, and a jet-setting professional class isolated and enamored by free trade as if the U.K. is the 51^st state.

The free trade doctrine may not be the fundamental cause of economic distress. But like an incurable infection, it makes every other economic ailment worse.