1 February 2020
Originally published by Cato Institute.
With Brexit Day upon us and the United Kingdom poised to reclaim control of its trade policy for the first time in 47 years, it’s worth sharing some preliminary thoughts about an eventual free trade agreement between the United States and the United Kingdom.
The first thing to keep in mind is that this process could take a while. The United Kingdom and the European Union are entering a transition period during which the terms of their existing relationship will continue, while they seek agreement on the terms of a new one. Understanding the rules and contours of that new relationship will be crucial to other governments interested in negotiating with the United Kingdom. In other words, it will be difficult to conclude a comprehensive U.S.-UK trade agreement until the terms of the new UK-EU relationship are settled.
Meanwhile, some less comprehensive deals between the two countries that build toward a full‐fledged agreement are possible. But, eventually, there is likely to be a U.S.-UK free trade agreement, which we hope will move both countries closer to a state of free trade. Such a deal would reflect certain principles and include broadly liberalizing terms, as we described in a collaborative paper last year.
The core provisions of trade agreements concern market access for goods, services, and investment. The U.S.-UK deal should provide for the elimination of tariffs as quickly as possible, on as many goods as possible, and to the lowest levels possible. It should limit the use of so‐called trade remedy or trade defense measures, as well as measures rationalized as national security imperatives. It should open all government procurement markets to each other’s goods and services providers. It should open all sectors of the economy to investment from businesses and individuals in both countries. It should open all services markets without exception to competition from providers of the other country. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or both of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations. Those rules should reflect the fact that globalization has made it difficult—and sometimes arbitrary—to define a product’s origin. Because of cross‐border investment and global supply chains, the DNA of products and services is very difficult to trace nowadays, and that is good. Finally, the agreement should simplify, streamline, and make transparent all administrative procedures governing customs clearance for goods and the admission of all qualifying persons for the purpose of conducting business services.
In addition to those free‐market requirements, the U.S.-UK agreement must also include rules governing e‑commerce. Digital trade—data flows that are essential components in the provision of goods and services in the 21st century—must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architecture that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.
When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. If those regulations are comparable when it comes to achieving the same social outcomes—consumer safety, product reliability, worker safety, environmental friendliness—there may be scope to allow businesses to comply with only one set of rules. A regulatory cooperation mechanism to promote mutual recognition would be a useful innovation, as a means to reducing business costs (provided no deep cultural aversion or science‐based reason exists for considering one regulation better than the other and worth the greater cost).
Finally, the rules must be enforceable. What’s the point of a trade agreement if its terms are just suggestions? To make sure governments keep their promises, the agreement should include a binding and enforceable dispute settlement mechanism. That mechanism would not be a true court, with the power to order governments to comply. Rather, the standard mechanism used in most trade agreements—with recourse to a third‐party adjudicator for a ruling and then self‐enforcement through authorized suspension of the trade agreement obligations—is sufficient.
On the other hand, some common free trade agreement provisions simply don’t belong in free trade agreements. Among the more prominent examples is overly protective intellectual property rules. It is important that intellectual property rules protect what is actually intellectual property and do not go beyond that or create rights where none actually exist.
Other examples include provisions on labor rights and environmental protections. These rules have expanded the scope of trade agreements far beyond traditional trade and commercial issues. The scope and reach of labor laws and environmental protections are a controversial domestic policy issue, and the use of international agreements to create a one‐size‐fits‐all solution in these areas is problematic.
Furthermore, the United States and the United Kingdom are open, transparent, and free market‐oriented economies. But if a U.S.-UK FTA is to be a model that applies to others, it is useful to set it up in a way that deals with issues that may arise down the road. Other countries’ economies are less open and have more state intervention; therefore, it is worth having the United States and the United Kingdom work out rules in this FTA that could apply to others who might want to join later. Examples include rules promoting transparency and disciplining the behavior of state‐owned enterprises. The United States and United Kingdom should be able to agree to very high standards in these areas, standards that other parties might not reach. And then through the open accession clause, parties that wanted to reap the benefits of this agreement would have to accept these disciplines.
Summing up, an eventual U.S.-UK FTA should remove barriers to trade in goods and services, open up all sectors of the both economies to investment, and, ultimately, go as far as possible to remove all administrative impediments to economic integration without encroaching on the sovereignty of governments to pass laws and regulate in the public interest in ways that do not discriminate against foreign goods, services, and companies.
In practical terms, that means (subject to good faith, non‐discriminatory public policy exceptions):
By Daniel Ikenson and Simon Lester (originally published 30 January 2020)
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