The main advantage of leaving the EU’s Customs Union is the ability to independently negotiate free trade accords with other countries.
Like all aspects of Brexit, this admittedly comes with its fair share of uncertainties: will these deals be sufficient to replace lost trade associated with leaving the EU; will other countries be interested in deepening trade at the precise time protectionism appears to be on the rise globally; will the upsides of nimbly negotiating alone outweigh the downsides of negotiating without the clout of a larger bloc? Much will also depend on the deal that Britain reaches with the EU.
But it is hard to be pessimistic about a free trade deal with the US, Britain’s largest overseas market outside the EU. “The Trump administration seems to be warmly inclined towards the UK,” says professor David Collins of City, University of London, a specialist in the law of the World Trade Organisation (WTO). “A US-UK free trade deal is highly likely. It’s not going to happen in a couple of weeks, as Trump has implied. It will probably take three or four years [after Britain leaves the EU]. But it’s one of the easy wins for the UK.”
Dr Geoff Raby, a former Australian ambassador to the WTO, now head of trade policy at Policy Exchange, adds that “there is interest in a free trade agreement for broader geopolitical reasons too.”
It is too early to tell what the outlines will be, because the Trump administration is so chaotic, Raby says. But the question remains: what could this deal look like, and what are the opportunities for London? I spoke with trade experts and a trio of partners at newly-combined US-UK law practice Eversheds Sutherland to find out.
Who will benefit?
“Tariffs will be lowered from their already low position,” says Collins. “That’s not hugely interesting. More interesting will be services – particularly financial services. It will involve liberalising financial flows and the commercial presence of British financial services companies in the United States.”
The City cheered the proposed TTIP deal between the US and the EU, which appears to have failed. According to the TheCityUK, it would have raised UK national income by up to £10bn a year. The financial services organisation noted that US barriers for the sector are currently “50 per cent greater than for advanced manufactured goods”.
Would a bilateral US-UK deal follow the same track as TTIP? Yes, says Raby. “That’s the obvious starting point. Given how far they’d already got in the discussions, I wouldn’t imagine it would be very different at all.”
Gary Campkin, director of policy and strategy at TheCityUK, says that, for financial and professional services, the “priorities will be the elimination and prevention of unnecessary behind the border barriers, or non-tariff barriers, and enhancing the compatibility of regulations and standards. We’re pushing for a new, dynamic regulatory environment which will look to solve problems before they arise.”
He adds that the financial and professional ecosystems in both the UK and US would gain greatly from flexible labour market rules written within any agreement, and that mutual recognition of qualifications would be a real boon too.
Other sectors that could benefit, says Collins, include legal services, with potential for fewer restrictions on rights to practice in key states, electronic commerce and data services, where there could be mutual recognition of data protection standards, and procurement, giving UK firms access to US government contracts and vice versa.
There would be no threat to the NHS, he adds. “International trade secretary Liam Fox rightly says that it’s an urban myth [that a free trade deal would force the privatisation of the NHS]. You might see private medical services being exposed to competition from US firms – cosmetic surgery, hair transplants. But not the NHS.”
The Brexit complication
Aside from uncertainty over where the Trump administration will take trade policy, another reason there are so many question marks about what a US-UK deal would look like is that we don’t yet know what our future relationship with the EU will be. “If I were in the shoes of a US negotiator,” says Campkin, “I would want to know the nature of the relationship between the UK and EU27. That would to some extent calibrate my negotiating tactics.”
Andrew Henderson, a financial regulatory partner at Eversheds Sutherland, says this has particular relevance for financial services. “If the UK is serious about maintaining access to the EU single financial market, then the scope for changing the substance of regulation will be very limited.” This is because of the nature of the “equivalence” regime that Britain would have to stick to, to enable UK-based institutions to operate relatively freely within the Single Market in the absence of so-called passporting rights.
“In principle, equivalence is about ‘equality of outcome’ – achieving the same effect roughly as that which EU regulation seeks to achieve.” But the European Commission has suggested, he says, that third countries the EU has particular exposure to – and Britain would top that list for financial services – would likely need to “move beyond ‘equality of outcome’ to ‘equality of means’”.
In other words, a more stringent form of equivalence would preclude the sort of regulatory bonfire that some have called for, and which may be necessary to keep UK finance competitive under more liberalised trade with the US. “If you want equivalence between the UK and US on the one hand, and on the other the UK wants to retain as much access to the EU as possible, you can see a tension arising,” says Henderson.
Collins considers this to be less of a problem. “The beauty of free trade agreements as distinct from WTO terms is that it would enable the UK to adopt a particular regulatory agreement with the US and a different one with the EU. It can be done on a bilateral basis.” Raby says the issue may be more whether the UK will be interesting enough in financial services “if, as seems likely, the UK loses passporting. Is the UK attractive to US firms if, by establishing in the UK market, you don’t get the same level of access to the EU as before?”
Many future regulatory and economic developments will be global rather than bilateral. In the case of financial services, says Henderson, “far more standards are being set internationally now”. While noting that it is unlikely, particularly due to a US view that their regime is the best and others are too stringent, he says that “you can idealistically imagine a universal passport – if we’re confident that your regulatory standards are the same as ours, we will let others sell into our markets without the need to become licensed. In a more defensive way, the financial crisis highlighted the need for greater international cooperation.”
In the case of technology, another sector in which UK and US firms enjoy close commercial ties, the precise trade relationships between Britain, the EU and the US may be less important than other factors. According to Simon Gamlin, technology and outsourcing partner at Eversheds Sutherland, “there is the potential for negative consequences from Brexit, but I don’t think the tech sector will be adversely hit by it. What drives the market is tech enabling businesses to increase productivity. If that technology is developed in the UK, it can be used across jurisdictions. It’s not heavily influenced by location.”
A number of US technology giants have announced significant investment plans since the Brexit vote, including Google planning to create 3,000 jobs in Britain and Facebook seeking to boost its UK headcount by 50 per cent.
Even a protectionist Trump could be good news for the UK tech sector, say Gamlin. “There seem to be more US threats for punitive trade relations with Asia. Asian firms may become less comfortable investing in the US and more so with the UK.” He cites the example of the multi-billion pound takeover of Arm Holdings by Japan’s SoftBank as a sign of things to come.
Pressure on companies to stop outsourcing jobs to offshore locations could be another driver of growth. “There is a vast increase in the use of new technologies such as AI, robotics, and blockchain. Companies can deliver what they need to deliver with more of a technology focus than a people focus. That means technology can challenge the old labour arbitrage model of outsourcing jobs, and it’s therefore good news for smaller UK tech firms that can supply the technology.”
In addition, he says, “the Trump approach to immigration and travel is arguably putting up walls around Silicon Valley. That does enable London to assert itself as an international capital for technology,” provided Britain itself gets its post-Brexit approach to immigration right.
“The problem with discussing this is that it’s still early days,” says Raby. “The main thing is for the UK to work through its future arrangements with the EU.” Eversheds Sutherland’s London head of real estate Bruce Dear agrees: “I’m fundamentally optimistic that the UK will remain open to EU and global trade. Provided both sides bring the vision to strike a balanced bargain on the three essentials: a deal on people that gives good sensible access to talent, a deal on trade that keeps it as free as possible, a deal on the exit terms that does not look too damaging for either party; then the UK will flourish, and the EU will too.”
Nevertheless, it is not too early to be thinking about the principles that will guide an independent UK trade and investment policy with the world beyond the EU, including the United States. “It is important to have a basic set of principles from which to start,” says Campkin. “Everything we do in any market will have this as a starting point.” The size of the potential prize is too great not to get started now.