Many people are now questioning the viability of the Transatlantic Trade and Investment Partnership (TTIP), the free trade deal under discussion between the US and the European Union.
Over the weekend, German Vice-Chancellor Sigmar Gabriel stated that the TTIP talks had collapsed, despite the protestations of his Chancellor and the United States Trade Representative Michael Froman.
This underscores the importance of the UK having its own trade policy in the wake of Brexit with respect to the US and other major markets. To understand why, it’s vital to examine why TTIP has apparently hit the rocks.
It is difficult to envisage a successful conclusion to the TTIP negotiations in the non-tariff related chapters (those addressing, for example, regulatory and technical barriers to trade), as the way in which the US and EU regulate is so completely different. The US relies on a free market in standard setting, utilising private sector organisations, whereas in the EU the major standard setting organisations are part of the government.
The EU’s regulatory system is also based on the precautionary principle, where new regulations are promulgated where a given product might cause harm. Such a principle sounds sensible, and echoes familiar injunctions to look before you leap. But in reality it means that too much EU regulation is based on unproven, potential harm, and not on sound science.
As such, the EU has a range of technical barriers to trade that have plagued EU-US relations for years, including bans on beef hormones, genetically-modified organisms, and the infamous REACH chemicals regulations. The one area where some degree of regulatory cooperation might be achieved is in how regulations might be promulgated. For example, the US and EU could agree to have similar cost-benefit analysis (based on market impact, not just business compliance cost) before regulations are imposed. But this is not being actively discussed.
It is therefore possible that the EU and US will come to some very limited agreement and then declare victory, but such an agreement would not lead to much actual wealth creation in either region. More likely the process will grind on, as either Donald Trump or Hillary Clinton, neither of whom is particularly partial to free trade agreements, ascends to power in the US.
Post Brexit, the UK is not necessarily tied to the fate of the EU. It can – and should – articulate its own approach to the relationship with the US, which, after all is one of the central partnerships of the global economic order.
The UK and the US are by far the largest investors in each other’s economies (the US accounts for 41 per cent of all foreign direct investment in the UK). They have maintained a strong trading relationship for more than two centuries. They have the strongest ties of any two countries in defence and intelligence. The UK and the US share a foundation in English common law. They have the same economics-based approaches to regulation and to competition.
The UK was the birthplace of the modern free trade movement in the nineteenth century and carried the torch for free trade until it was extinguished by protectionism in the rest of Europe in the latter half of the nineteenth century. When free trade was again embraced after the Second World War, it was the UK and the US that rebuilt the global trading system in the form of the GATT.
This shared approach to the centrality of open trade, competition on merit as an organising economic principle, and property rights protection as the key tools to create wealth and grow economies is what has bound the nations together, and could be the foundation of a high level trade agreement that removes existing tariff barriers, eliminates government regulations that damage competition in markets, and better protects investors and other property owners’ rights. This agreement could include other nations that have similar, shared values, such as Australia, New Zealand, Canada, Singapore and perhaps Switzerland, to name but a few.
Rather than tying Britain’s fortunes to an increasingly rocky negotiation between two partners who, while they maintain a vital trade relationship, are not aligned on all economic and regulatory issues, it would be much better for the captains of Britain’s trading ship to steer a new course directly with the US, which promises a much greater impact on the two countries and the world.