Strengthening the US Economy through a US-UK Trade Agreement

Thank you for the opportunity to offer comments for the January 29, 2019, hearing held by the Office of United States Trade Representative on negotiating objectives for a potential US-UK trade agreement. The Mercatus Center at George Mason University is dedicated to bridging the gap between academic ideas and real-world problems and to advancing knowledge about market-based policies that advance the freedom and well-being of the American people.

At a historic meeting at Chequers, England, in July 2018, President Donald Trump and Prime Minister Theresa May agreed to pursue an ambitious US-UK trade agreement if and when the United Kingdom leaves the European Union. For the people of the United States, such an agreement would deepen our commercial ties to a longtime ally and the world’s fifth-largest economy. The United Kingdom is America’s no. 7 partner in two-way goods trade, the no. 3 source of tourists, and the no. 1 partner in services trade and foreign direct investment. With an economy of $2.65 trillion,^[1] the United Kingdom would be by far the largest free trade agreement (FTA) partner for the United States in terms of GDP—larger than the combined economies of our NAFTA partners, Canada and Mexico.^[2]

            The largest potential gains from a bilateral agreement would be from

1. harmonization of financial services standards,
2. liberalization of agricultural trade, and
3. freeing the movement of people.

INVESTMENT AND SERVICES

The US-UK relationship is at its deepest in the area of foreign direct investment (FDI). The stock of two-way FDI between the two nations exceeds $1.2 trillion, according to the US Bureau of Economic Analysis.^[3] The two nations are each other’s largest investment partner. Of the $598 billion in UK-owned FDI in the United States in 2016, $257 billion was in manufacturing, with finance, information, and professional services being the other major areas of investment. Majority-owned UK affiliates in the United States employed 1.14 million American workers in 2015, more than majority-owned affiliates from any other country.^[4]

The United Kingdom is one of the few nations in the world in which there is more two-way trade in services with the United States than in goods. That means that bilateral US-UK commerce is highly developed, and it argues for giving special attention to the potential two-way gains from liberalizing services trade through a US-UK FTA. One of the most robust areas of services trade between the two nations is financial services, including banking and insurance. Both nations are among global leaders, with New York and London arguably the world’s two premier financial centers. Of the $65.7 billion in cross-border services the United States exported to the United Kingdom in 2016, 21 percent were financial services, whereas financial services account for 12 percent of total US service exports to the rest of the world.^[5] Almost 30 percent of US FDI in the United Kingdom is in the financial sector, compared to 11 percent of outward US FDI in the rest of the world.^[6] A US-UK FTA should seek to harmonize standards between the two nations in financial services, insurance, and accounting.^[7]

On transportation services, an ambitious agreement would allow providers to offer competitive services in the other nation without restrictions. For air transport, the United States should allow UK-based airlines to serve the domestic US market. This would require an exception from the current US law that forbids cabotage rights for foreign-owned air carriers (that is, the freedom to carry fare-paying passengers between destinations within the United States).^[8] The agreement should also grant an exemption from the Jones Act for UK maritime transportation companies. The almost 100-year-old US law, known formally as Section 27 of the Merchant Marine Act of 1920, reserves intercoastal shipping services in the United States to vessels that are US owned, US flagged, US built, and largely US crewed. A US-UK trade agreement could bring much-needed competition to this protected sector by allowing shipping companies based in a trusted ally to offer services in the US market.^[9]

MERCHANDISE AND AGRICULTURE

On merchandise trade, both the United States and the European Union impose relatively low average tariff rates on goods imported to their customs territories. According to the World Trade Organization (WTO), the average trade-weighted tariff applied to nonagricultural products exported from the United States to the European Union is 1.4 percent, and the average tariff applied to exports from the European Union to the United States is 1.6 percent.^[10] The low averages, however, disguise tariff spikes on certain politically sensitive goods, including apparel, footwear, and motor vehicles. Once the United Kingdom exits the European Union’s common external tariff, a US-UK FTA should aim to eliminate all tariffs on all categories of goods in both nations upon enactment of the agreement.

One of the most economically promising and politically significant sectors for liberalization is motor vehicles. The European Union currently imposes a 10 percent import duty on passenger vehicles and imposes duties on trucks ranging up to 22 percent.^[11] The US government, in turn, imposes a 2.5 percent import duty on passenger vehicles and a 25 percent duty on light trucks and commercial trucks. In 2017, the United States exported $3.4 billion in passenger vehicles, engines, and parts to the United Kingdom while importing $9.9 billion.^[12]

Other commercially significant tariffs that should be at the front of the line for elimination are the European Union’s 12 percent duty on shirts, dresses, and trousers; its 6.5 percent duty on plastics, paints, and organic chemicals; and its 7 to 10 percent duties on certain aluminum and titanium products. Among the most egregious US tariff barriers ripe for elimination are the 7 percent duty on light oils; the 5 to 6.5 percent duties on certain chemicals; the 10 to 37.5 percent duties on a range of clothing and footwear items; the 15 percent duty on certain titanium products; and the 16 percent duty on parts and accessories for liquid crystal devices (LCDs).^[13]

In contrast to relatively low average tariffs on manufactured products, tariffs remain a significant barrier to agricultural trade. According to the WTO, the US-applied tariffs on agricultural imports average 5.2 percent, while EU tariffs on agricultural imports average 11.1 percent.^[14] The US government maintains significant import barriers against foreign-produced cheese, butter, raw cane sugar, refined cane sugar, canned tuna, and beef, according to the US International Trade Commission’s biannual report on significant US import restraints.^[15] Of special interest to UK producers are US duties of 10.8 percent on cheese and 4.8 to 5.6 percent on chocolate and other cocoa products. Of special interest to US producers are the current EU duties of 12 to 16 percent on fresh grapes, cranberries, and confectionary items.^[16] As with nonagricultural goods, the agreement should aim to eliminate all duties on agricultural products upon enactment.

One potential area of contention for agricultural trade will be nontariff barriers such as sanitary and phytosantiary (SPS) standards. The United States has complained that the European Union has maintained certain food safety regulations not for legitimate reasons of public health, but for the protection of domestic producers. The United States has complained that those barriers “are not based on scientific principles and evidence, thereby restricting trade without improving public health.”^[17] A US-UK FTA should strive to remove all unnecessary impediments to trade from the enforcement of SPS standards. Each nation should be allowed the regulatory space to ensure the protection of legitimate public health and safety standards, but those standards should not be allowed to be twisted into disguised protections for domestic producers.

FREE MOVEMENT OF PEOPLE

A US-UK free trade agreement should facilitate the movement of people between the two nations. The free movement of workers would allow a more productive matching of labor supply with demand within the two nations by enabling workers to move where their skills are most in demand. Since living standards in the two nations are comparable, it is unlikely that there would be large movements of workers in either direction. Free movement would also facilitate trade in services by allowing specialists to travel to meet the needs of customers in the other market. It would also enhance FDI by allowing greater flexibility for intracompany transfers. The agreement, either in its text or by separate legislation, should create a special visa category to allow citizens of the United Kingdom to work in the United States without a quota on the numbers, and to allow citizens of the United States to work in the United Kingdom without a quota. The special visa could be patterned on the E-3 visa that Congress created in 2005 that allows Australian professionals to work in the United States on two-year visas that are renewable indefinitely.^[18] The US-UK free trade agreement should also commit the two nations to seek harmonization of occupational licensing laws.

CONCLUSION

The governments of the United States and the United Kingdom should commit themselves to negotiating an ambitious and liberalizing bilateral commercial agreement that would enter into force immediately or soon after the United Kingdom exits the European Union’s common customs territory. A bilateral trade agreement between the United States and the United Kingdom should be written in such a way that other nations can join the existing agreement with few, if any, modifications. This “open architecture” approach would allow other trading partners, such as Australia, Canada, Mexico, and New Zealand to join, increasing the extent of the duty-free and barrier-free commercial zone.

Whether the United States and the United Kingdom decide to pursue a bilateral agreement or another route, the goal should be the same: zero barriers to the movement of goods, services, capital, and people between the two nations that have arguably done more than any other nations in the postwar era to lead the world to a more free and open global economy.