A UK-US Free Trade Agreement?
And why the Falklands and Pitcairn are at risk
A pretty good rule of thumb is that if lots of people start ringing me or reading this newsletter, then something is either going wrong or about to go wrong with world trade.
Anyhow, hello everybody.
This week, the inbound questions have mainly been about whether the UK will now negotiate a free trade agreement with the US, which is either a very very good idea or a very very bad idea, depending on which polar extreme of the legacy Brexit divide you sit on.
And I get it — for the longest time talk of a free trade agreement with the US was all the rage. Who doesn’t like arguing about whether chlorinated chicken is a) perfectly harmless or b) emblematic of a food standards system designed to cover up poor animal welfare standards?
But in this instance, it’s all a bit wood for the trees.
A normal free trade agreement negotiation goes something like this: two countries decide it would be mutually beneficial to reduce trade barriers; they quickly agree to remove or reduce tariffs on most items and then spend 1-15 years arguing about the more sensitive stuff (usually food-related). They also discuss a range of other things relating to services, IP and procurement that may or may not have a positive economic impact but fingers crossed let’s hope so. The end outcome might be overly weighted in favour of one of the partners, but is generally a net benefit to both.
The context for any negotiation with Trump 2.0 is … quite a lot different.
As in, Trump is threatening a new universal tariff of 10-20 per cent. Countries and companies are now going to negotiate with the new administration in the hope they will be granted exemptions.
My assumption — as discussed in my FT Alphaville piece from earlier in the week (more below) — is that Trump will ask countries to a) buy more US stuff, b) support him in his global endeavours (see: trade restrictions on China and c) treat him nicely and give him other miscellaneous stuff.
So, in reality, given the aim is to stop him from imposing new trade restrictions rather than giving the UK improved access to the US market, it’s best not to think of any negotiation with Trump as a classic free trade agreement negotiation (although, you know, in the context of a) he may ask for lots of the same stuff) but rather a shakedown.
But this also creates some room for creativity.
From the aforementioned FT piece, some examples of how countries dodged some of Trump’s tariffs last time round:
In March 2018, to ensure an exemption from Trump’s Section 232 tariffs, South Korea agreed to a ‘new’ [slightly amended] trade deal which saw it “voluntarily” restrict the export of Korean steel to the US, increase a compliance-related quota for US auto imports from 25,000 a year to 50,000, exempt most US autos from stricter Korean CO₂ emission requirements, accept a delay in the phase of a US 25 per cent tariff on light trucks (originally 2021, now 2041), and change Korea’s medical procurement rules to ensure they pay market value for US-produced medicines.
In a similar attempt to avoid the Section 232 tariffs, in 2019, Japan agreed a deal with Trump that granted the US CPTPP levels of tariff reductions for US food exports (note: Trump had pulled the US out of the then-TPP) without receiving CPTPP levels of access to the US market for Japanese autos in return. But of all the deals done during Trump’s first Presidency, my fave is easily the EU’s.
Erstwhile European Commission President Jean-Claude Juncker managed to talk Trump out of applying car tariffs to the EU by telling Trump the EU would commit to buying more American soyabeans and liquefied natural gas. Did Juncker have any power to actually make this happen? No. Did Juncker simply identify a trend that was happening anyway? Yes. Did it work? Seemingly! Genius.
From a UK perspective, this means that there are options available other than a fully-fledged free trade agreement, although, again, this may indeed be what Trump decides he wants in the first instance.
These could include packaging together a selection of the following (non-exhaustive):
Spending lots and lots of money on US defence equipment. Bonus: this might be something the UK wants to do anyway.
Demolishing a small wind farm off the coast of Aberdeenshire
Agreeing to remove some tariffs on select US exports, such as Japan did in the example above or the EU did when it removed tariffs on US lobster in return for the US dropping some tariffs on cigarette lighters … (seriously).
Trigger some more trade defenceinvestigations into China related things and hope China is forgiving. [More seriously, this is one of those things where the UK might be forced into taking action it otherwise doesn’t want to, so would benefit from some additional analysis assessing the aggregate cost-benefit trade off of US tariffs vs China retaliatory tariffs accross a number of scenarios.]
Chipping in the money to buy Greenland.
The other thing to remember is that there probably won’t be just one negotiation. There will be many.
Here’s a potted history of the EU’s early efforts to get out of Trump’s Section 232 tariffs last time, cribbed from this excellent Peterson Institute timeline.
March 1, 2018. Trump announces forthcoming tariffs on all trading partners of 25 percent on steel and 10 percent on aluminum under national security grounds. These would go further than the Commerce Department recommendations, covering an estimated $48 billion of imports, mostly from allies such as Canada, the European Union, Mexico, and South Korea. Only 6 percent of the imports covered derive from China, due to prior US imposition of antidumping and countervailing duties.
March 7, 2018. The European Union announces its planned retaliatory response if it were to be hit with tariffs. This includes filing a formal World Trade Organization (WTO) dispute, safeguard restrictions of its own, and a “rebalancing” of trade with the United States through almost immediate imposition of its own 25 percent tariff on $3.4 billion of US exports such as cranberries, Harley Davidson motorcycles, blue jeans, and bourbon.
March 22, 2018. Trump issues revised formal steel and aluminum tariff proclamations, further exempting the European Union, South Korea, Brazil, Argentina, and Australia—in addition to Canada and Mexico as previously announced—but only through May 1, 2018. This means another third of the originally covered imports on March 1 are temporarily exempt.
March 23, 2018. Trump’s steel and aluminum tariffs go into effect with exemptions for selected countries. His 25 percent steel tariff applies to countries that exported $10.2 billion of steel products to the United States in 2017, and his 10 percent aluminum tariff applies to countries that exported $7.7 billion. There is no timeline or explicit criterion for the removal of the restrictions.
April 30, 2018. The Trump administration extends the steel and aluminum tariff exemptions provided to the European Union, Canada, and Mexico until June 1, 2018. Korea’s aluminum tariff exemption ends. Argentina, Australia, and Brazil
receive indefinite exemptions for steel and aluminium tariffs while finalising details on “satisfactory alternative means to address the threatened impairment to the national security” by the imports.
June 1, 2018. The United States moves forward with 25 per cent tariffs one percent on alumini steel and 10 percent for the European Union, Canada, and Mexico by ending their previously granted exemptions effective June 1. The three trading partners supplied almost half of US steel and aluminum imports in 2017. As of June 1, Argentina has quotas for steel and aluminum in return for permanent tariff exemptions for both metals. Brazil has quotas on steel, with differing
amounts on semi-finished and finished steel products, and a 10 percent tariff on aluminum. Australia remains the only trading partner for steel and aluminum without trade restrictions.
And on and on and on …
The MAGA index
As mentioned (twice) above, I wrote a piece for FT Alphaville this week.
My primary innovation, developed with the help of the FT’s Louis Ashworth, is the new Measure of American Goods Advantage (MAGA) index, which tells us which countries are persistent offenders of the worst crime of all, exporting more to the US than they buy. (Note: a score above zero means you are on the [s]hit list, a score below zero means you are quite possibly still on a [s]hit list but not because of this.)
Here’s the top 10 MAGA index worst offenders:
Faeroe Islands: 97.79
Falkland Islands: 97.19
Lesotho: 96.89
Pitcairn: 92.19
Cambodia: 92.10
Slovak Republic: 88.30
Madagascar: 85.47
Holy See: 84.47
Vietnam: 82.02
Sri Lanka: 79.02
Good news for the UK, it’s below the line with a score of -6.79. Bad news for the UK: the Falklands and Pitcairn are in play. Turns out you can sell too many molluscs (Falklands) and too much … insulated wire (Pitcairn … yeah, no idea) to the US. Who knew?1
Best wishes,
Sam
Just in case anyone doesn’t realise I am joking, no I don’t think Trump is deliberately going to start a trade war with the Pitcairn islands. But still, kinda funny.
Great overview!
From a defence perspective, we already have a lot of US defence equipment on order, and realistically probably need more of that same kit in the short-medium term. Hence, increasing our orders of, say, F-35 or MLRS (which we are and should be doing anyway) is possibly a good way of keeping the US happy without affecting the long-term goal of boosting domestic defence production.
What the UK needs is a pitch - “this is what we do on the global scene, and this is why you will benefit from us doing it”. In this case, the incentives are two-fold: firstly, there’s a reasonable chance that in the pursuit of resurrecting US manufacturing, a significant portion of the US’s services industry will migrate out the country. Trump himself doesn’t seem to be bothered by this, but one thing that is within his interests is that it doesn’t just go to a China patsy like Hong Kong or Dubai, but instead goes to a solid ally who will spend the dividend in things in the US’s interest. At that point, some effective services concessions that make the UK the best place outside the US to do business with the US is now in the US’s interest.
Secondly, it’s clear the US wants to take a more isolationist approach and focus solely on China and the Western Hemisphere. This is fine, but regions like Africa and Central Asia aren’t going to go away, and it would still be nice for them to be Western allies even if the US doesn’t want to put in the legwork itself to make it happen. The EU is going to be utterly inept here and will have its hands full with Russia anyway, and Japan is already busy in East Asia. However, the UK has both the diplomatic influence, the cultural connections, and sufficient will and competence to leverage these two things in order to best compete with Russia and China over influence. At that point, whilst the US spending time and money directly in Africa may be a non-starter, the US giving a generous trade deal that is mutually beneficial to it and the UK would be, as it can be sure the UK will then turn around and spend the dividend developing and ‘winning’ Africa.
Suddenly, we’ve gone from a situation where the UK is trying to survive a US shakedown, to suddenly the US is giving a deliberately beneficial trade deal in order to better indirectly further its interests around the world.