British negotiators race to make up for loss of EU market. Downside comes into play as pandemic puts nations on defensive
The UK's trade deal with the European Union isn't the only massive project that British negotiators must contend with before they quit the bloc at the end of the year.
With just months to go until Britain exits, with or without a deal, Prime Minister Boris Johnson and Trade Secretary Liz Truss are also racing to keep the many trade deals the UK currently enjoys as a result of its membership with the EU.
All told, there are about 70 of them covering about 15% of the UK's trade, and while Britain has made considerable progress, so-called "continuity deals" with some of the most important countries in that group including Canada, Japan and Turkey have yet to materialize.
If the UK leaves the EU with no agreement, it will trade with those 27 countries under terms set by the World Trade Organization. Fresh agreements with the US, Australia and New Zealand are also a priority; one of the main arguments for Brexit was that Britain would be free to pursue better deals unshackled from Europe.
Economically speaking, though, none will be enough to make up for the UK's membership of the single market.
"Deals with the likes of Australia, New Zealand and the US, the gains will be very small in aggregate and they'll be nowhere near enough to make up for the losses that will come from the added trade frictions with the EU," said Julia Magntorn Garrett, a fellow at the UK Trade Policy Observatory at the University of Sussex. "In terms of continuity deals, it's not so much about gains to GDP, because we already gained from those agreements -- it's about mitigating any losses."
The government's own analysis shows that leaving the EU will lead to GDP loss of around 5% in the long term even with a free-trade agreement in place. A pact with the US would only add a fraction of that to UK growth.
Asked about the government's figures showing only minimal benefits from the accords, Truss told a panel of lawmakers last month that because the deals haven't been negotiated yet, their upside could in fact be larger than the calculations now suggest.
But the downside could come into play, as the economic carnage wrought by the pandemic and the ensuing collapse in global trade could prove problematic. Trade negotiations are all about playing a good offense (opening up markets for your exports) as well as a good defense (protecting your domestic industries).
Struggling to revive their ecomomies, countries may put extra effort on defense.
"In this climate, it's possibly going to be even more difficult," said Swati Dhingra, a fellow at the Centre for Economic Performance, a research group at the London School of Economics. "People are going to be thinking of job creation in their own countries. There's going to be less of a coming-together around the negotiating table."
With the UK set to face the worst economic fallout from the pandemic among developed economies, Johnson could use some wins -- but it won't be easy. While the EU and US usually limit their trade negotiations to two or three major agreements at a time, Britain is now pursuing almost a dozen at once.
"Even if you were an incredibly experienced negotiator it would be a really tough job," said James Kane, an associate working on trade policy at the Institute for Government, a think tank in London.
Here's how the UK's non-EU negotiations are going so far:
The US is already Britain's largest bilateral trading partner, with trade between the two worth $270 billion in 2019. In March, the British government estimated that a comprehensive free-trade agreement with the US would only have modest benefits for the UK economy: a 0.16% increase in GDP over the next 15 years, and a 0.2% increase in real wages.
A priority for the UK in the talks is tariff elimination. The US has imposed various punitive levies on British goods in recent years, including steel, aluminum and Scotch whisky, many in retaliation to EU subsidies for Airbus SE. Britain is also hoping to open up the US market for services trade, such as in the digital and financial sectors, where the UK is strong.
The two sides have completed two negotiating rounds so far, with the next slated for late-July. Truss has said there is no deadline for reaching a deal and that talks are progressing well. The top US negotiator recently downplayed chances of a deal this year.
A key obstacle to overcome will be disagreement over agriculture: The US sees greater market access for its food exports as a big prize, whereas the British government is under pressure not to allow products like chlorine-washed chicken and hormone-treated beef into the country. It may also be difficult to finalize a comprehensive agreement before the US presidential election in November.
The EU's free-trade deal with Canada, which came into effect provisionally in 2017, is wide-ranging and Britain would like to roll it over once it leaves the EU. The UK imports about 8.4 billion pounds ($10.5 billion) of goods from Canada, and exports about 5.7 billion pounds. While Truss tweeted a photo of pancakes and maple syrup on Canada Day this month, negotiations with the Commonwealth country haven't been completely smooth.
Tariffs have proved a major sticking point. As part of its preparations for a no-deal Brexit, the UK last year slashed its global tariff schedule, leaving little incentive for Canada to maintain a FTA with Britain. The UK has recently revised those no-deal tariffs, however, which could give it more bargaining power in the negotiations.
For Canada, the main priorities are increasing trade in services and building on existing arrangements for allowing professionals to move more freely between the two countries.
The UK and Japan have agreed to negotiate a new agreement using the existing EU agreement as a base, though they don't have much time. Tokyo's chief negotiator, Hiroshi Matsuura, warned last month that both sides need to "limit their ambitions." Because Japan must pass the deal in parliament's autumn session, negotiations need to be complete by the end of July, he said.
Earlier on, Japan seemed keen to make changes from the existing EU agreement in areas like agriculture. The EU-Japan agreement also phases out tariffs on cars over time, and Japan will likely seek to eliminate those levies immediately in any agreement with the UK Renegotiating trade in services will also be important to Britain. With the accelerated time frame for talks, though, the agreement will likely be heavily based on the existing EU-Japan deal, with a few areas having moderate tweaks.
Australia is the UK's 20th largest trading partner globally, with total trade between them worth $21 billion in 2018. A free-trade agreement with Australia would be expected to boost UK GDP by 0.02% over the long run, according to British government analysis.
The limited expected economic gain is due to Australia's tariffs already being very low on most products. The UK sees the main potential benefit in services, which comprise 60% of its exports to Australia, and has said it wants to secure easier access for professionals such as accountants, auditors, engineers and architects.
Negotiations started in June, and Australia has indicated it would like to complete a deal by the end of 2020. Britain also sees the talks as a step toward membership of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a pact covering 11 nations including Canada, Peru, Singapore and Vietnam.
A deal with New Zealand, Britain's 53rd largest trading partner globally, is expected to have a negligible effect on the UK's GDP, according to a UK government analysis. Northern Ireland may even be negatively affected by a deal, the government's modeling suggests, because of greater competition from New Zealand-based farmers. The talks started in mid-June.
Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.