It has been an important week for the UK. It can now count a hat trick of firsts since leaving the EU in the execution of its independent trade policy. First accession country to the CPTPP. First major country to have a trade deal with India (negotiated in three years), and now first country to have an Economic Prosperity Deal (EPD) with the Trump 47 administration.
It is important to look at what the UK and US have agreed and divide this into what has so far been agreed and what remains to be decided. The UK-US EPD is a framework agreement which includes some downpayments (things that are absolutely agreed and don’t depend on further discussions) and some things that are still being negotiated.
The downpayments are as follows:
- Increased beef access at 0% for 13,000 metric tons (up from 1,000mt on both sides, and removing a 20% tariff on that 1,000mt on the UK side)
- Increased duty free ethanol access for the US
- Cars. A quota of 100,000 cars from UK to the US at a 10% tariff (not 27.5%) – reflecting UK sales to the US last year of 102,000 cars
- Commitment to completely remove steel and aluminium tariffs as long as UK production does not include Anti-Competitive Market Distorting China components. This also extends to a bar on Chinese ownership of facilities
- Commitment to a common defence production area. (A long time UK ask leveraging the close relationship in defence and intelligence sharing)
- Commitment to not applying pharmaceutical tariffs on the UK if it can show no China components in the supply chain
- Alignment on approach to Chinese distortions (something the US will seek from all its EPD partners)
The commitments to future negotiations relate to sanitary and phytosanitary measures (SPS), technical barriers to trade (TBT) and standards (a long standing complaint of the US and a direct attack on the EU’s Standard Setting System). Pharmaceuticals will also avoid any tariff going forward if the section 232 investigation demonstrates there are no Chinese components in the supply chain.
While the Digital Services Tax of the UK survives for now, there is an intriguing discussion of digital trade corridors between the UK and US to make customs processes smoother. Both the UK Cabinet Office and US Customs and Border Protection and the Commerce department have been separately discussing pilot programmes on digital trade and these could be brought together in the form of a digital trade corridor.
On non-tariff barrier negotiations, specific reference is made to negotiations on TBT, SPS and other areas which are part of the UK’s National Trade Estimate entries (the US inventory of foreign country trade barriers). It is important to remember that America’s primary concerns are with the EU’s TBT and SPS rules, and to the extent the UK promulgates them, the US will want to see meaningful changes.
This is not about aligning to the US or EU regulatory systems but rather aligning to the US approach to regulation itself, which is based on regulatory competition with mutual recognition and outcome-based equivalence. That is why the EPD framework contains copious references to mutual recognition agreements in a variety of sectors. But these negotiations will be affected by whatever the UK agrees with the EU in its reset (starting May 19).
The US has shown it is willing to be very ambitious and pull the UK into its approach to regulation, mutual recognition and international standard-setting, as opposed to the EU’s approach, which is the export of its own specific rules and standards. These non-tariff barriers are massively important to the Trump administration because the damage to US trade comes mainly from these, not just border measures. Our own distortions economic model shows that border measures account for only 10-15% of economic harm, the rest being lack of protection of property rights and – critically – market distortions inside the border (which is picked up by the US approach to non-tariff barriers).
The next wave of countries lined up for a US trade deal are Japan, Korea, Australia and India. On Japan, the US will want agricultural market access (beef, rice and others), and will be focused on Japan’s non-tariff barriers.
It looks as if Japan is ready to address some of these barriers: relatively high agricultural tariffs, overregulation of the beef industry, an insurance monopoly and a range of import and distribution distortions that decrease the competitiveness of US exporters. US farmers will especially benefit from eliminating some of these barriers, as China’s retaliatory tariffs have blocked them from accessing that nation.
Japanese companies will benefit from reduced barriers because Trump wants to make deals. Negotiations by Japan could include expansion of industries in US markets to the apparent benefit of the Japanese. For example, then-President Joe Biden blocked Nippon Steel’s purchase of US Steel in January. Since then, Nippon Steel has expanded the financial value of its investment in the American steel industry to $21 billion, with a promise that it will keep thousands of jobs.
Despite the protectionist accusations, Trump is more open to the proposal, perhaps because he recognises that America needs allies to increase pressure on China.
For the UK, this is a signal achievement. But the deal can only really be judged when the whole of it is concluded, not just this framework. The Trump administration is maintaining the 10% tariff, but has indicated that for a deal of significance this too might be negotiable. There is a world where smart UK negotiators can simultaneously improve their own economic performance by removing regulatory distortions which damage their own economy as well as negatively impacting America, and ensure that they are in a privileged position with respect to trade with the US.
This is not the beginning of the end of these negotiations, but the end of the beginning. Now the stage is set for a wide-ranging negotiation. The starting gun has been fired – the race is yet to conclude.
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