Brexit Vote Casts Uncertainty on UK Trade Alignments

Concluding a U.S.-UK free trade agreement should be simpler than finishing the TTIP, as the majority of TTIP’s most contentious aspects have originated outside the UK, National Customs Brokers & Forwarders Association of America legislative representative Jon Kent said. While there is still impetus to seal a trade deal with the EU, the completion timeline will likely extend, he said.

The UK’s exit, or Brexit, as it's been dubbed, could either prod TTIP negotiators closer to consensus or act as a prolonging complication for talks, Peterson Institute for International Economics senior fellow Jeffrey Schott said in an interview. Either way, the necessary subsequent stock-taking between the EU and the U.S. will likely mean that negotiators won’t clinch the agreement this year as hoped, he said. Despite long-term Brexit-related uncertainty and a shorter-term expected drop in U.S. exports to the UK, a bilateral trade deal between the U.S. and the UK is not on the Obama administration’s agenda, leaving it up to the next administration to embark on such a path if desired, Schott said. But the U.S. might not even have to consider concluding a separate UK trade deal, he pointed out, because if TTIP is done in 2017, the UK would still be part of the EU, bringing another batch of complications.

Concluding a diluted and less controversial TTIP -- which U.S. and EU trade officials say they’re avoiding at all costs -- would still likely face significant challenges by Congress, making such a measure unlikely to emerge as well, Schott said. A simple tariff-cut package could be palatable to Congress if a broader agreement fails, he said. A portion of Peterson’s funding comes from foreign governments, including the European Parliament.

U.S. Trade Representative Michael Froman and EU Trade Commissioner Cecilia Malmstrom will take stock of TTIP negotiations next week, an official close to negotiations said. Following the Brexit vote, Froman signaled resolve to maintain momentum in TTIP negotiations, acknowledging that the referendum is prompting his agency to examine potential impacts on the deal. "The importance of trade and investment is indisputable in our relationships with both the European Union and the United Kingdom,” Froman said in a statement (here). “The economic and strategic rationale for T-TIP remains strong. We are evaluating the impact of the United Kingdom's decision on T-TIP and look forward to continuing our engagement with the European Union and our relations with the United Kingdom."

An overnight 8 percent drop in the value of the UK pound to US$1.37 makes Schott think that an immediate drop in UK demand for U.S. goods will occur, but Center for Strategic and International Studies Scholl Chair in International Business Scott Miller thinks the phenomenon is a “one-day deal,” as investors took a “flight to safety” in the U.S. dollar. He doesn’t expect any impact on U.S. exports to the UK. “My sense is this is going to be like Y2K, which everybody panicked about right up until nothing happened, and then everyone adapted and life went on,” he said. “I would expect a rebound” of the pound within a week or two.

While Miller said UK authorities are intensively working to maintain economic stability, and to “not do anything drastic” for the shorter term, he added that the UK could realign itself with the European Free Trade Association (EFTA), comprising Iceland, Norway, Switzerland and Liechtenstein, because the bloc has a preferential trade arrangement with the EU. The UK left EFTA for the EU in 1973. “Britain would look to something like that to preserve its exporters’ margin of preference into the European Union,” Miller said. “That can unfold in the several weeks ahead.” If that happens, the U.S. could be enticed to negotiate a free trade agreement with EFTA, especially since the UK is still a top-five global economy and “an important partner in a lot of ways,” Miller said.

The Brexit won’t affect the UK’s standing as a World Trade Organization member, as every state in the European Economic Communities, EU’s predecessor, retained its signatory status with the General Agreement on Tariffs and Trade when the European bloc was formed, Miller said. But the UK will regain its own “legal personality” at the WTO, Miller said. “Will negotiations change?” he asked. “Well, probably.” Though the UK will be allowed to maintain WTO membership, it doesn’t have its own schedule of tariff concessions, which is required and indicates countries’ positions on various trade commitments.

A final UK withdrawal deal would have to be ratified by EU leaders in a qualified majority vote, as well as a majority of the European Parliament and the national parliaments of EU’s 27 other member states, according to the Baker & McKenzie blog post. Post-Brexit, EU directives enshrined in UK law will remain in force unless repealed, the blog post said. Experts expect the UK to attempt to conclude “a series” of free trade agreements with the remaining EU member states after its exit, through “extremely complex and lengthy” negotiations, yet some fear the UK doesn’t have the manpower or expertise for such talks, the blog post said. “Whether the [remaining EU members] will be willing to allow the UK to ‘cherry pick’ the best aspects of EU is far from certain,” the blog post said.