The United Kingdom (UK) and United States (US) are seeking to establish a new trading relationship underpinned by a comprehensive free trade agreement (FTA). Both sides have set out their respective negotiating objectives and have started negotiations to gain an understanding of where there is alignment and where the tensions might lie. This briefing provides an analysis of the negotiating objectives and discusses how the prevailing political environment might impact the outcome of the negotiations.
The trade negotiations between the UK and US formally commenced on May 5, 2020, with a video conference held between Liz Truss, UK Secretary of State for International Trade, and Robert Lighthizer, US Trade Representative. Future rounds of negotiations are expected to take place every six weeks. While the coronavirus (COVID-19) pandemic will impact the ability of negotiators to meet in-person, both sides are determined to push ahead with the discussions with a view to securing an FTA.
In advance of the negotiations, both parties have set out their respective negotiating objectives. An FTA between the UK and US has long been argued as one of the major benefits of the UK’s withdrawal from the European Union (EU) (Brexit), in particular by the Leave Campaign during the 2016 referendum on EU membership. The UK has formally left the EU and the transition period, unless extended, is due to end on December 31, 2020, and intends to establish an independent trade policy. HM Government has therefore been giving serious consideration to the trading relationships that it hopes to build with countries around world, with the UK-US FTA being a priority. The US is an economic powerhouse and there is already a high volume of trade between the UK and US (£220.9 billion in 2019, including 19.8 percent of UK exports) with scope to grow this relationship if barriers to trade are removed. However, HM Government’s estimates of the net benefit of a FTA are modest, predicting a boost to UK GDP in the long run of around 0.07 percent (within a range of between 0.02 percent and 0.15 percent) or 0.16 percent (between 0.05 percent and 0.36 percent) under scenario 1 and scenario 2 respectively of below 0.1 percent.1 There is some scepticism among the British people as to the purported benefits of a UK-US FTA, particularly if it necessitates the lowering of UK regulatory standards and limits the UK’s access to the EU markets.
In March 2020, the UK’s Department for International Trade published a policy paper setting out the UK’s approach to trade negotiations with the US (“UK objectives”).2 The document sets out the UK’s negotiating objectives for the UK-US FTA, HM Government’s response to the public consultation on a UK-US trade agreement (which had been published in July 2018), as well as a preliminary assessment of the long-term impacts of a US-UK FTA. In February 2019, the US Government set out a summary of specific negotiating objectives in the US-UK negotiations (“US objectives”).3 While there is significant common ground between the US and UK positions there is the potential for considerable tension, particularly on issues such as agricultural standards and the export of pharmaceuticals. In addition, the UK will need to balance US demands for reducing regulatory barriers with the need to maintain a degree of alignment to EU law in order to secure continued access to the EU markets.
The upcoming US Presidential Election in November may also have a significant impact on the UK-US FTA negotiations. While Donald Trump’s administration has demonstrated its keenness to negotiate a UK-US FTA, an administration led by Democrat candidate Joe Biden may have other priorities. It should be remembered that President Barack Obama, under whom Biden served as Vice-President, had warned before the 2016 referendum that the UK would be “at the back of the queue” for a trade deal with the US. Biden would likely see the need to nurture the relationship between the UK and EU, and may decide against giving precedence to negotiating a UK-US FTA over reviving discussions with the EU on the Transatlantic Trade and Investment Partnership (TTIP). The composition of the House of Representatives and the Senate following the 2020 elections may also affect the UK-US negotiations through its role of approving or rejecting the resulting FTA.
In the following sections we explore the key areas of trade, analysing the likely tensions and the impact on businesses.
Cross-cutting measures – goods
HM Government is aiming to secure broad liberalisation of tariffs on a mutually beneficial basis, taking into account UK product sensitivities, and secure comprehensive access for UK industrial and agricultural goods into the US market through the reduction or elimination of tariffs. The US Government is seeking to secure comprehensive duty-free market access for US industrial goods and strengthen disciplines to address non-tariff barriers that constrain US exports, and comprehensive market access for US agricultural goods in the UK by reducing or eliminating tariffs. It seems that the liberalisation of tariffs is an area where the UK and US negotiators will find little difficulty in reaching an agreement. Indeed, many goods traded between the UK and US are already subject to relatively low tariff rates, although high tariff rates are applied to certain goods (such as food and beverages). As discussed below, the real battleground is likely to come in resolving differences in regulatory standards in order to enable market access.
HM Government is also seeking to develop simple and modern rules of origin that reflect UK industry requirements and consider existing, as well as future, supply chains supported by predictable and low-cost administrative arrangements. The US Government considers that rules of origin should be developed that ensure that the benefits of an FTA go to products genuinely made in the US and the UK, alongside origin procedures that streamline certification and verification of rules. This is an area where the UK and US would be likely to establish common ground where it had been difficult in the TTIP negotiations. The US Government considers that the EU rules on origin labelling of products would place unrealistic demands on US goods, and was therefore an obstacle in the US-EU negotiations. The UK is likely to take a more flexible approach which would help pave the way for an agreement on goods.
Cross-cutting measures – services
HM Government will likely place considerable emphasis on securing favorable trading conditions for the export of UK services to the US, given the strategic importance of the services sector to the UK economy. The UK objectives would be to secure ambitious commitments from the US on market access and fair competition for UK service exporters, and agree best-in-class rules for all services sectors as well as sector-specific rules to support the UK services industry. The US Government has set out a similar objective to secure commitments from the UK to provide fair and open conditions for services trade, including through rules that apply to all services sectors. The US objectives go further by specifying the types of rules that would need to be removed, such as those which prohibit discrimination against foreign services suppliers, restrictions on the number of services suppliers in the market, and requirements that cross-border services suppliers establish a local presence. On regulatory transparency, HM Government is aiming to ensure certainty for UK service exporters in their continuing access to the US market and transparency on US services regulation, which is reflected by the US Government’s objective to improve the transparency and predictability of regulatory procedures in the UK.
The UK objectives would expand opportunities for UK financial services to ease frictions to cross-border trade and investment, complementing cooperation on financial regulatory issues. The US objectives seek to expand competitive market opportunities for US financial service suppliers to obtain fairer and more open conditions of financial services trade. In addition, the US Government is aiming to improve transparency and predictability in the UK’s financial services regulatory procedures, and ensure that the UK’s financial regulatory measures are administered in “an equitable manner”. There may be difficulties for the UK in maintaining equivalence with relevant EU financial services legislation while ensuring that its regulatory measures are administered in “an equitable manner” should that involve demands for the UK to deviate from EU law in order to facilitate greater access to the City of London for US banks and financial services firms.
The US Government is also seeking commitments to ensure that the UK refrains from imposing measures in the financial services sector that restrict cross-border data flows or that require the use or installation of local computing facilities. HM Government’s ambition is to include provisions that facilitate the free flow of data, whilst ensuring that the UK’s high standards of personal data protection are maintained. Indeed, this will be particularly important for the UK to maintain its access to the EU financial markets, which may require commitments around continued application of provisions on cross-border data transfer under the General Data Protection Regulation.4 In any case, the EU and US currently have in place a Privacy Shield which could be used as a model to facilitate the transfer of personal data between the UK and US. Data protection is unlikely to be a stumbling block for the UK-US negotiations although it will certainly be an important technical issue for which a solution will need to be found.
An important area for a prospective UK-US FTA will be the flow of investment between the two parties. HM Government intends to agree rules that ensure fair and open competition, and address barriers to UK investment across the US economy, and establish comprehensive rules which guarantee UK investors investing in the US the same types of rights and protections they receive in the UK, including non-discriminatory treatment and ensuring that their assets are not expropriated without due process and fair compensation. The US Government is aiming to secure for US investors in the UK important rights consistent with US legal principles and practice, while ensuring that UK investors in the US are not accorded greater substantive rights than domestic investors, and also establishing rules that reduce or eliminate barriers to US investment in all sectors in the UK. The UK and US are aligned on the general approach to investment between the two jurisdictions, but detail of the rights and protections that would be available to investors may be subject to some negotiation, with both sides keen to ensure that the principles of their respective legal orders are upheld.
HM Government is aiming to secure “cutting-edge” provisions which maximise opportunities for digital trade across all sectors of the economy, promote appropriate protections for consumers online and protect users against emerging online harms, while ensuring that customs duties are not imposed on electronic transmissions. On this last point, the US Government is very much aligned and intends to prioritise commitments not to impose customs duties on digital products (e.g. software, music, video, e-books). While the UK objectives do not elaborate on what is meant by “electronic transmissions,” it is likely that HM Government would have similar products in mind. The US objectives also discuss establishing rules that limit non-IPR civil liability of online platforms for third-party content, subject to the parties’ rights to adopt non-discriminatory measures for legitimate public policy objectives or that are necessary to protect public morals. Given that HM Government is contemplating the introduction of a new regulatory framework for online safety which envisages a new statutory duty of care with compliance enforced by a regulator, there may be some disagreement among the UK and US negotiators.5 HM Government’s view is that online platforms should have a responsibility to users to ensure that they are protected from harmful content, which must be enforced through fines and even senior management liability. This view is unlikely to be shared by the US Government given its objective to avoid restrictive rules being placed by foreign governments on US tech giants in Silicon Valley. This is nevertheless an area where regulatory cooperation could be established to find a proportionate approach to regulating online platforms.
The sharing of information between the UK and US authorities will form an essential part of a prospective FTA. HM Government is aiming to include provisions that facilitate the free flow of data, whilst ensuring that the UK’s high standards of personal data protection are maintained, as well as provisions to prevent unjustified data localisation requirements. The US Government states its intention to establish state-of-the-art rules to ensure that the UK does not impose measures that restrict cross-border data flows and does not require the use or installation of local computing facilities.
A major point of political tension between the UK and US has been HM Government’s decision to contract with Huawei to help develop the UK’s 5G mobile network. US President Donald Trump was reported to have expressed strong concerns towards UK Prime Minister Boris Johnson when Huawei’s role in developing Britain’s 5G system was confirmed, largely on national security grounds that the company may use the infrastructure to enable surveillance by the Government of China. This may impact on US Government’s willingness to establish data sharing arrangements with the UK and US due to concerns that Huawei may be able to access sensitive data through Britain’s 5G network. However, following mounting pressure from Conservative MPs, HM Government is understood to be planning a full phase out of the use of Huawei’s equipment from Britain’s 5G networks by 2023. This change in policy stance is likely to alleviate US national security concerns.
In April 2020 a group of senior Conservatives parliamentarians launched the China Research Group (CRG), chaired by Tom Tugendhat MP, to focus on Sino-British relations and to gain a better understanding of China’s place in the world. The establishment of the CRG was driven in part by concerns among Conservatives concerning the Government of China’s handling of the coronavirus outbreak and growing scepticism about what is deemed a “secretive and authoritarian” approach. There is the potential for the CRG to present a strong backbench opposition to further integration with China and in particular against a greater role for Huawei in Britain’s 5G infrastructure. If HM Government aligns itself with the views of the CRG, this would unite the UK and US approaches on relations with China and create a favorable political environment for a UK-US FTA.
Both HM Government and the US Government are fairly well-aligned on issues concerning the telecommunications sector. The UK objectives are to promote fair and transparent access to the US telecommunications market and avoid trade distortions, and secure greater accessibility and connectivity for UK consumers and businesses in the US market. Similarly, the US objectives would promote competitive supply of telecommunications services by facilitating market entry through transparent regulation and competitive safeguards on dominant carriers, while securing commitments to provide reasonable network access for telecommunications suppliers through interconnection and access to physical facilities and scarce resources. The US Government intends to go further by establishing provisions to protect telecommunications services suppliers’ choice of technology, which would be unlikely to face opposition from UK negotiators.
In the UK there has been significant debate around the prospect of the National Health Service (NHS) being the part of any prospective UK-US FTA. Labour, the main opposition party in the UK, has claimed that the Conservative Government will use the NHS as a bargaining chip in the negotiations, allowing it to be sold off to US companies. The Conservatives have consistently rejected this assertion, and pledged in their manifesto for the 2019 General Election that the NHS would not be on the table when negotiating FTAs. In the UK objectives HM Government reiterates that “the NHS will not be on the table. The price the NHS pays for drugs will not be on the table. The services the NHS provides will not be on the table. The NHS is not, and never will be, for sale to the private sector, whether overseas or domestic.” It seems unlikely that the Conservatives would agree a UK-US FTA which unduly impacts the NHS given how politically contentious such a decision would be. There is huge support for the NHS among the British public, particularly in light of the coronavirus pandemic, and the Conservatives would see defending the NHS as a ‘hearts and minds’ issue for voters, particularly in retaining predominantly working class constituencies that “turned blue” at the 2019 General Election. If the US Government insists on provisions that impact ownership of or supply to the NHS, this may create an insurmountable obstacle to the conclusion of a UK-US FTA.
The US objectives do not mention healthcare, but with regard to pharmaceuticals and medical devices, state that the US Government is seeking standards to ensure that government regulatory reimbursement regimes are transparent, provide procedural fairness, are non-discriminatory, and provide full market access for US products. The US Government is also aiming to ensure in a UK-US FTA that the WTO Doha Declaration on the TRIPS Agreement and Public Health fosters innovation and promotes access to medicines, reflecting a standard similar to that found in US law.6 These statements may indicate that the US Government intends to negotiate for US pharmaceutical companies to charge higher prices for medicines sold to the NHS as part of any UK-US FTA, by securing full market access and strengthening IP rights of US medicines sold in the UK. This outcome could significant raise operating costs for the NHS, estimated to be as high as £450 million a year.7 Given that the HM Government has made clear that the price the NHS pays for drugs will not be up for negotiation, this is likely to prove a difficult issue for negotiators to resolve if the US Government stands firm.
HM Government’s sustainability agenda is an important domestic policy focus in the UK which it is aiming to integrate into its broader international trade policy strategy. To that end, the UK objectives would ensure that the parties reaffirm their commitment to international standards on the environment and labour, ensure that they do not waive or fail to enforce their domestic environmental or labour protections in ways that create an artificial competitive advantage, and include measures which allow the UK to maintain the integrity, and provide meaningful protection, of the UK’s world-leading environmental and labour standards. In order to fulfil HM Government’s statutory targets under the Climate Change Act 2008, the UK intends to secure provisions that support and help further the ambition on climate change and achieving net zero carbon emissions by 2050, including promoting trade in low carbon goods and services, supporting research and development collaboration and maintaining both parties’ right to regulate in pursuit of decarbonisation. The ambition to achieve net zero is reflected in the Paris Agreement, which aims to reach the peaking of greenhouse gas emissions (GHGs) so as to achieve a balance between anthropogenic emissions by sources and removals by sinks of GHGs in the second half of the century, in order to achieve the goal of limiting global temperature increases to between 2 and 1.5 degrees Celsius.8 The UK is signatory to the Paris Agreement and a strong supporter of its objectives, while the US Government in November 2019 gave formal notice of its intention to withdraw from the Agreement. The US’ prospective withdrawal may create some tension between UK and US negotiators in deciding on how to maintain compatible environmental standards in respect of climate change.
The US Government has also included various objectives concerning the environment, which focus mainly on ensuring that environmental standards do not impact trade or investment. The US objectives include establishing rules to ensure that the UK does not waive or derogate from the protections afforded in environmental laws for the purpose of encouraging trade or investment, as well as rules to ensure that the UK does not fail to effectively enforce environmental laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the parties. The US Government also aims to establish a means for stakeholder participation, including commitments for public advisory committees, and a process for the public to raise concerns directly with its government if they believe it is not meeting its environment commitments. The US objectives also envisage a framework for conducting, reviewing, and evaluating cooperative activities that support implementation of the environment commitments, and for public participation in these activities, alongside a senior-level Environment Committee which would meet regularly to oversee implementation of environment commitments. It seems clear the US Government would expect a degree of collaboration and coordination in developing environmental standards, which may necessitate alignment in certain areas. It should also be noted that any UK-EU FTA would likely require the UK to commit to upholding high environmental standards, in turn restricting the UK’s ability to lower standards as part of a trade arrangement with the US. HM Government has in any case pledged to not compromise on the UK’s high environmental standards and to build on its international obligations, which suggests that it would be unwilling to agree a UK-US FTA that requires the lowering such standards.
Food and agriculture
It is expected that the negotiations may become particularly contentious concerning issues around the access to the UK market for US food and agricultural products. UK concerns have long been expressed that US food standards are too permissive, allowing for practices such as chlorinated washing of chicken carcasses, hormone treatment of cattle for beef production, and certain rearing practices for pork production, all of which are currently banned under EU and UK law. With regard to Sanitary and Phyto-Sanitary standards (SPS), HM Government makes clear that it intends to uphold the UK’s high levels of public, animal and plant health, including food safety, indicating that it is not willing to lower standards in order to facilitate the import of US food products that are produced to lower standards. The US Government is aiming to provide for enforceable and robust SPS obligations to make clear that each party would be able to set for itself the level of protection it believes to be appropriate to protect food safety and plant and animal health in a manner consistent with its international obligations. This suggests that the US Government would be willing to respect the UK’s right to maintain its current standards in this area. However, the US Government also indicates that it intends to promote greater regulatory compatibility to reduce burdens associated with unnecessary differences in regulations and standards, in addition to eliminating practices that unfairly decrease US market access opportunities or distort agricultural markets to the detriment of the US, including non-tariff barriers that discriminate against US agricultural goods. This suggests that the US might expect the UK to undertake some level of alignment to between UK and US standards in order to facilitate the export of US agricultural products. Indeed, the US agricultural lobby is highly influential and will push for maximum access to the UK market for US food products, which may prompt the US Government to demand such compromises.
The lowering of UK food standards to accommodate US food exports would be highly politically controversial. Any UK-US FTA that compromises on this issue would likely face strong opposition among the British public and in Parliament during the ratification process.9 It may therefore be a better use of negotiating time for the US Government to ensure that barriers preventing US farmers from exporting food products that adhere to UK standards (e.g. non-hormone treated meat) are removed, thereby enabling US farmers to gain market share in the UK by developing separate production lines.
While it is unclear how the negotiations will progress and what a prospective FTA might look like, there are likely to be significant opportunities for businesses on both sides of the Atlantic to deepen their operations in the UK and US, respectively. Market access arrangements for goods and services as well as investment may come with fewer costs and administrative hurdles, making it simpler to do business between the two countries. It is therefore important that businesses understand the impact that the future trading relationship between the UK and US will have on their operations in order to capitalise on potential market opportunities.