01 February 2017

Policy Exchange: What should a US-UK trade deal be based on?

[...]America remains Britain’s most important trading partner, in 2015 accounting for twice as large a share of exports (19.7%) as the next biggest, Germany (8.8%). As the Wall Street Journal pointed out on Friday, each country already exports more than $100 billion to the other each year. While distance does matter for trade, it is not the only determinant. Most estimates suggest that cultural links such as having a common language or historical trade link are also important.

What is more, if there was any country where you would expect distance to matter relatively less, it is Britain, given its global history, international links, language, and the dominance of services. This is only likely to become more so in future as the economy becomes increasingly de-materialised and value shifts towards the kind of intangibles Britain can specialise in, like high end creative, professional and digital services. Given that the centre of world economic gravity is increasingly moving east with the economic rise of China, Britain had better hope that it can overcome pure distance to benefit from the rising global middle class as much of it will be located in Asia.

In the short to medium term, no single international trade deal would be likely to compensate for a bad trade deal with the EU, whose combined members together account for 44% of our exports – and from a negotiating perspective, it would be unwise to depend too much on any one of them. Together however, it is not unreasonable to believe they could make up a fair amount of the difference.

At around 3%, tariffs between the UK and US are already pretty low, but in reality – while definitely not a good thing – the damage caused by tariffs in a world of floating exchange rates can be overstated. As many economists and businesses have pointed out, what matters more in today’s world, are non-tariff barriers such as different standards of regulation. Even taking into account both tariff and non-tariff effects, economists do not quite understand why economies display such strong border effects – trading far more within themselves than without than basic theory would expect. Cultural and sociological barriers can matter as much as administrative and tariff obstacles.

The focus of a US-UK new trade deal should be on looking for opportunities to take advantage of a shared culture and economic model to further lower such non-tariff borders.

A few initial potential themes come to mind:

1) Encouraging innovation, and taking into account the opportunity cost of an excessive focus on the precautionary principle. 

Together, Britain and America share 486 or 45% of Nobel laureates, and 19 of the world’s top 20 universities. One of the real opportunities from Brexit, is the potential to escape the excessive caution of the EU’s precautionary progress in areas like GM crops, energy, chemicals and pharmaceuticals. Not coincidentally, these are many of the areas where US trade negotiators have traditionally complained about EU trade barriers.

Similarly, Peter Thiel, billionaire entrepreneur and economic advisor to the Trump administrationn, has long stressed the slowing effect of regulation on innovation in the physical world. There are intriguing signs that the rest of the Trump team may be taking this seriously too, with many of the names suggested for the role of FDA commissioner noted for their support of encouraging faster innovation.

2) Seeking mutual recognition of regulation, rather than uniform common standards.

It is unrealistic to expect two sovereign countries to completely harmonise their regulatory apparatus. Seeking to do so has often seriously held up past trade negotiations, while giving an opening for special interests to negotiate hidden protection for their industry in the name of some supposed higher goal. For advanced economies with similar cultures Iike the US and UK, a much more straight forward option would be to default to the mutual recognition of each other’s regulatory standards. While there will inevitably be exceptions, these should be the exception rather than the rule.

The FDA, again, is a good example of where such mutual recognition could make a big difference. There is no real reason for every first world country to repeat (highly expensive) testing of every new medication, delaying the day when it can help save lives and improve welfare. Reciprocal approval of drugs cleared by either regulatory system would make a big difference – and is an idea that has already been explored by US Republicans.

3) Being relaxed about potential one-sidedness.

The current White House clearly has more protectionist instincts than Downing Street, particularly when it comes to working and middle class industries. Britain could likely end up being more willing to tear down barriers in, say, agriculture, than America would want to in cars.

While unfortunate, we should not use this as an excuse to keep too much off the table. On the one hand, while many industries are understandably wary of new American competition, this is potentially a powerful new driver of enhanced competition and productivity. Even more important, the consumer interest matters as much or more than the producer interest – and British prices in things like food, clothes and shoes are currently significantly above world prices.

What is more, this trade deal matters not just for itself, but for the precedent it sets for other deals. Britain does not want to get into the habit of carving out protections for special interests, or signal to other potential trade partners that some areas are out of bounds.

4) Opening up easier two way labour mobility for high skill workers, like entrepreneurs or scientists.

Leaving the EU gives Britain the opportunity to undertake a major reform of its immigration system. Whatever their views on immigration elsewhere, most citizens of the UK and US are relatively relaxed over high skilled immigrants from the other. Over the long term, ensuring British and American businesses, scientists and artists can intermingle with relatively few barriers is one of the most powerful ways to build deeper economic and cultural connections.

5) Pricing in the negative externalities of carbon through a carbon tax. 

This is more of a stretch goal, perhaps, but it is possible that the new administration will be interested in an audacious approach to climate change based on a carbon tax, as opposed to President Obama’s more regulatory approach.

Rex Tillerson, the President’s nominee for Secretary of State, has repeatedly expressed support for a carbon tax to tackle climate change, earning him the support of electric car and solar panel entrepreneur, Elon Musk. In the past, parts of the Republican Party have expressed cautious interested in implementing such a tax that would leave the Trump administration with a far more significant environmental legacy than his predecessor.

Given the UK’s experience of both carbon taxes and carbon trading, there is potential for collaboration here between the UK and US.

Negotiating a trade agreement will not be easy. The UK, however, has some real advantages. We are not perceived as a direct economic competitor in the agriculture and manufacturing sectors where middle and working class communities are most worried about their economic security. Britain’s comparative advantage is in services, whereas relative to the UK, America’s comparative advantage is much more in agriculture and manufacturing. Britain is both a recognised friend across the American political spectrum and more pragmatically has a flexibility and willingness to open up areas that other countries would put strictly off limits. Trying to take advantage of these strengths, and build on our long standing common interests is worth a try.

Full article on Policy Exchange

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