U.S. and U.K. Begin Negotiations on Free Trade Agreement…

U.S. Trade Representative Robert Lighthizer and U.K. Secretary of State for International Trade Elizabeth Truss announced today [joint statement] the beginning of a series of fast-tracked trade negotiations toward a new free trade agreement. [USTR Release]

In the foreground is a trade agreement between the U.S. and the United Kingdom. However, in the more strategic background context these negotiations create leverage for the U.K. in their post-Brexit negotiations with the European Union. First from today:

LIGHTHIZER – […] The US negotiating team will be led by Dan Mullaney, Assistant U.S. Trade Representative for Europe and the Middle East; and the UK negotiating team will be led by Oliver Griffiths, Director for US Negotiations at the Department for International Trade. Over 200 staff from U.S. and UK government agencies and departments are expected to take part in the negotiations.

An opening plenary today will kick off the detailed discussions, followed by multiple virtual meetings from Wednesday 6 May to Friday 15 May. The negotiations build on the work conducted through the U.S.-UK Trade and Investment Working Group, which was established in July 2017, partly to lay the ground work for these negotiations.

A comprehensive U.S-U.K trade agreement will further deepen the already very strong trade and investment ties between the United States and UK by creating new opportunities for American and UK families, workers, businesses and farmers through increased access to the other’s market.

The United States and the United Kingdom are the first and fifth largest economies in the world, respectively. Total two-way trade between the two countries is already worth about $269 billion a year. Each country is the other’s largest source of foreign direct investment, with about $1 trillion invested in each other’s economies. Every day, around one million Americans go to work for UK firms, while around one million Britons go to work for American firms. (more)

An important geopolitical overlay helps to better understand the specifics of this dynamic.

The United States is essentially a self-sustaining economy. Meaning, if you think about a nation as an independent construct able to sustain itself; our imports are enhancements not priorities. Our domestic resources, energy development, food production and essential internal needs are capable of sustaining our population.  The import of products is valuable, but in the bigger picture not fundamentally necessary for survival.

The United Kingdom is very similar in this regard. The U.K. has abundant energy resources, food and agricultural development, and is positioned as an independent economy absent the dynamic of internal politics regulating those functions. Domestic politics surrounding left-wing climate change (energy development etc), to restrict internal development, are a function of ability, not necessity. The U.K. has abundant coal, oil and natural gas; it also has abundant agriculture.  [The U.K weakness is military defense.]

Because both nations are similar in their ability to be non-dependent on trade, a free trade agreement is essentially a second-tier negotiation on products and services that enhance the independence. This is a unique dynamic not found in all trade discussions. Two independent economic systems negotiating on trade enhancements to each-other.

This is a much different dynamic than negotiation with a dependent country like China. China cannot feed itself, it needs to import raw materials to sustain itself; thus the importance of the One-Belt/One-Road Beijing initiative. China is a massive economy, but China is also a dependent economy; subject to damage from external dynamics.

Similarly, due to advanced political ideology, Canada cannot sustain itself economically; however, they are dependent by choice. Currently Mexico is not self-sustaining; they too are dependent on both access to the U.S. market and the import of industrial goods. However, unlike Canada our southern trade partner is working toward self-sustenance.

♦ Dependence or Independence is the ultimate context for all trade negotiations.

Dependent countries do not inherently carry negotiation leverage, and must create leverage through access to their economy (China again). The more independent the internal economy is within any nation, the less dependency they have. Less dependency means more leverage… more leverage means better terms (with nationalist negotiators).

A U.S-U.K trade agreement would not be based on “essential” trade products or “vital” trade services. The trade is not essential, but it is complimentary.

A U.S. and U.K. trade agreement is based on mutual enhancements or mutual benefits. This is an important distinction to keep in mind because it plays into the larger geopolitical dynamic.

The U.K. is currently in a post-Brexit negotiation phase after they spit away from the European Union. Strategically, it is smart for the U.K. to enter into trade discussions with the U.S. for needed products and services they might currently be gaining from the EU.

The timing of trade discussion with the U.S. gives Prime Minister Boris Johnson leverage toward the EU.  President Trump and Boris Johnson have previously discussed this.

Additionally, the U.S. and E.U will eventually have to work out a new trade agreement because President trump is realigning all existing U.S. trade terms.

The U.S. already carries all of the leverage in any discussion with the EU; both in terms of market size, need for EU to retain access to the U.S. market, and the generous one-way tariff benefit currently maintained by the EU (which Trump is about to confront). Enhancing the U.S. leverage by providing a super-highway for transatlantic trade between the U.S. and U.K. puts the EU at an even further strategic disadvantage with the U.S.

If President Trump told the EU to drop their market restrictions (protectionist tariffs and non tariff barriers); and the EU refused to negotiate…. well, Trump could just shut the EU trade door completely (think German autos) and collapse their economy. The EU needs us more than we need the EU.

Remember the important dynamic: The EU hitched their wagon to China… China cannot purchase from the EU without the dollars from their U.S. trade imbalance…. If Trump shrinks U.S. purchasing from China; Beijing has less money to spend on EU industrial goods…. When we punch China on the nose, the EU gets the nosebleed.

Again, all of this is leverage for the U.S. and vulnerability for the EU.

Thus, the Trump benefit in a complimentary trade discussion with Boris Johnson is really the pending benefit of leverage over the EU.

Not accidentally, a Johnson benefit in a complimentary trade discussion with Trump is really the current benefit of leverage in their post-Brexit negotiations with the EU.

Because most of the trade sectors will be lower tier; and because the bigger goal for President Trump would be the building of leverage to confront the EU; I would expect the biggest trade gain for the U.S. will be helping the U.K. with military purchases.

There will be a lot of small-ball stuff.  However, the bigger headline within a fast deal will likely be Boris Johnson purchasing advanced military hardware from us, and in return the U.K. will have preferential access to sell into the United States market based on reciprocal value.

That preferential access will form the basis for a trade hub inside the U.K. which will be the gateway to a transatlantic super-highway.  The UK will then negotiate with EU companies based on access to their trade hub.  Boris Johnson control the hub.

Once an alternative trade route is established Trump will start negotiating with the EU for new terms based on reciprocity.  If the EU balks, Trump reminds them he can just close direct EU trade access while reminding them EU companies can use the hub.

The EU will have no choice except to acquiesce to Trump’s terms, drop their protectionist unilateral tariffs and drop their non-tariff barriers.  We finally dissolve the Marshal Plan and enter a new trade era based on actual reciprocity.

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