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A US-UK free trade agreement – not as simple as some seem to think

Theresa May seems to have secured the support of Donald Trump for a UK-USA free-trade agreement (FTA).  With the backing of these leaders, negotiating an FTA between these two developed economies with a shared long-standing support for open markets, on the face of it, should be relatively straightforward.  The reality is likely to be much more complex. At this stage, the two main unknowns are how the new US Administration will approach trade negotiations, and what the UK’s starting position will be in them.  So we are left to read the tea leaves. Under this Administration, the American position in any future negotiation is unlikely to reflect the way in which the US has approached trade negotiations in the past.  Lasyweek, Peter Navarro, Director of the White House’s new National Trade Council said trade policy is “pretty straightforward: We know what we want…We think we can build strong relations bilaterally with countries that want to together reclaim their supply chains from…countries around this world which have been dumping components and basically getting the best jobs.”  How this thinking is then developed by officials into actual negotiating positions remains to be seen. For the UK, it is also too early to know what its starting point in any negotiation would be.  The UK’s post-Brexit trade regime, however, is likely to be heavily influenced by its more than four decades in the EU. If so, the negotiations under the Trans-Atlantic Trade and Investment Partnership (TTIP) provide important insights into some of the core issues and challenges that will need to be addressed in a UK-US FTA negotiation. As the EU’s negotiating positions in the TTIP would have to some extent reflected the UK’s priorities, a UK-USA FTA could start from what has been achieved in the TTIP negotiations, and build further.  (It is also likely that some elements of the Canadian-EU FTA may appeal more to London than those under discussion in the TTIP). With the TTIP negotiations, both sides say that they have already agreed on the early elimination of tariffs on 97 per cent of tariff line, but that there may be some products where only “partial” market access will be possible.  Agricultural trade in TTIP has been a problem.   Although the UK will not have nearly the same constraints and domestic pressures as the cross-channel EU members, inevitably there will be sensitive items on both sides that will need to be finessed. Apart from a few agricultural products, trade in goods has, however, been relatively straight forward in the TTIP negotiations.  Other aspects have not been, and it is here that the UK’s decision to take the EU’s position as the starting point for its negotiations with the US will be crucial. For example, the EU’s position in the TTIP negotiations on investment has been that the existing Investor-State Dispute Settlement (ISDS) arrangements should be replaced by one governed by an as-yet-to-be-created system incorporating a new Investment Court, wherein companies could not claim compensation simply because government regulatory systems led to a loss of their profits.  This is unacceptable to the US in its current form. In the case of sanitary and phytosanitary measures (SPS), the EU position in the TTIP talks is that EU animal welfare laws need to be fully respected.  Not so much of an issue, maybe – but the USA has said that non-scientific SPS measures, such as the EU ban on hormone-produced beef, would have to go in an FTA.  This could be an area where the UK and US might find it easier to come to an accommodation than the US and EU could.  On the other hand, EU restrictions on GMO crops and products using GMOs are also a key issue, and one where the UK’s position may be closer to the EU’s than US’s. Geographic Indications (GIs) are also like to be a point of difference between the UK and US, where the UK’s position is again closer to that of the EU’s.  In the TTIP talks, the EU evidently wanted additional (to the WTO TRIPS agreement) geographic indications (GIs) protections for 210 food products.  GIs are an anathema in American trade policy circles. On other important issues, the UK is likely to be closer to the US on some and to the EU on others.  In services, the “cultural” excuse saving the French from Hollywood would not be a big problem for the UK.  However, there was a significant difference between Washington and Brussels on data protection standards. For other aspects of services, as we have suggested before, a good start on services post-Brexit would be the UK’s becoming a full member of the Trade in Services Agreement (TiSA) under negotiation in the WTO.  This would go a long way to setting the stage for the services part of an eventual UK-USA FTA negotiation. While TTIP provides a useful guide to many of the key points of convergence and divergence between the UK and US that will need to be navigated in an FTA negotiation, much remains uncertain until the UK settles its post-Brexit trade regime. As of today, however, the biggest unanswered question about a potential UK-USA FTA is the Trump Administration’s view of international trade.  Trump’s comments about “buy American” suggest, for example, that he may even seek “WTO-minus” deals on topics like government procurement. All the uncertainties notwithstanding, undoubtedly the UK and USA will be able to negotiate a post-Brexit high-quality FTA and that is a good thing for the parties and for the international trading system beyond.  But in January 2017, the degree to which the UK’s negotiating positions will be influenced by its longstanding participation in the EU, and how the new Trump Administration will impact on those eventual talks are both major unknowns. Tea-leaf reading is the order of the day.

Europe in 2016

Throughout 2016, Europe has lurched from one crisis to another. The British voted to leave the EU. Russia stepped up its interference in domestic politics in several European countries by planting false news stories and financing populist, right-wing movements. Terrorist attacks and the refugee and eurozone crises divided the EU’s 28 member states. On the other side of the Atlantic, Americans elected Donald Trump as their next president on a ticket promising to make the United States great again. Trump professes little interest in what has kept the West together: the transatlantic relationship.
All the above crises have one thing in common. They are having a profound effect on Europe’s future. As 2016 draws to a close, the EU’s extreme vulnerability and growing instability are exposed. The Brexit decision has weakened Europe. If they chose to do so, European leaders could mitigate the political fallout of Britain’s exit. But instead of using Brexit to push for further integration or a two-speed Europe—or even as a chance to get out of their bubble to explain why Europe matters—most leaders are engaged in petty institutional or domestic power games. As they do so, they seem to underestimate how the roles of Russia and the United States are planting the seeds of Europe’s destruction. For centuries, European states were always at war with each other or had various empires vying for supremacy. The EU, which grew out of the ashes of World War II, put an end to this internecine fighting and these power struggles. But the EU is a young construction. Its existence has always relied on the United States. Dean Acheson, who was U.S. secretary of state from 1949 to 1953, believed passionately in a Western Europe knitted to the United States through NATO and the shared values of democracy and liberalism. That dependence on the United States, exemplified by the U.S. nuclear security umbrella, is no longer a given. Yet many European leaders and politicians, especially in Berlin, don’t want to recognise this changing geostrategic reality. They are not prepared to consider the possibility of what happens the day after the United States withdraws from Europe. In practice, that means they are unwilling to consider any alternative to the U.S. security umbrella, such as Europe having its own nuclear defence—which could exist through France. There are Germans who shudder at the idea of a European nuclear deterrent on the grounds that it would provoke Russia. But what world are they living in? Russia is already deploying nuclear-capable missiles in its exclave of Kaliningrad, which is sandwiched between EU and NATO members Lithuania and Poland. Yet Europe is muddling through each crisis without realising that this time round, the EU’s defence and durability are at stake. Vladimir Putin, the Russian president, knows exactly what buttons to press when it comes to Europe. Despite German Chancellor Angela Merkel’s admirable tenacity in confronting Putin—primarily by pushing the EU to keep sanctions imposed on Russia after it annexed Crimea in March 2014 and then de facto occupied the Donbas region of eastern Ukraine—she is practically alone in her consistency. She is also the one leader whom Putin wants defeated as she makes a bid in late 2017 to serve a fourth term as chancellor. Germany’s security services are acutely aware of how Russia may interfere in the federal election. But most EU leaders have a singular lack of political will to act, coupled with a dangerous complacency about the threats facing them. This is despite the fact that Russian interference in the German election—as well as in votes in France and the Netherlands—would weaken Europe. The threat is plain to see: Europe’s democracy and stability are being threatened as they were during the Cold War. Then, Europe had the United States to protect it. Today, efforts by Hungary’s Prime Minister Viktor Orbán, Poland’s Jarosław Kaczyński, and France’s National Front Leader Marine Le Pen to defend their nation-states against the EU are grist to Putin’s mill. Unless Trump radically shifts his stances toward Europe and Russia, the United States will unwittingly hand Russia a silver platter that will lead to the breakup of the transatlantic alliance. That could transform the EU into a motley of discombobulated nation-states. European leaders at the national and EU levels are contributing to the gradual eclipse of what could have been a powerful, confident, and strong European Union. In its place could be a mishmash of nation-states that have neither the security nor the leadership to protect what Europe stands for. Such are the trends of 2016. Such is the specter of 2017 and beyond unless leaders adopt a radically different mind-set to push Europe together. Have a great 2017 everyone.