There Is Opportunity In Every Brexit
Like anything, the status of the U.S. dollar as the world’s reserve currency should not be taken for granted. Since 1944, the dollar has yielded tremendous benefits to the United States: having the dollar as the global reserve currency reduces the cost of imported goods and lowers interest rates for U.S. citizens, a benefit calculated to be worth at least $100 billion per year. However, in an increasingly G-Zero world, supposed U.S. allies are considering alternatives to the dollar. Case in point: Saudi Arabia is exploring funding in Chinese yuan in a move that could herald greater financial ties between the two countries. As the dollar’s status inevitably declines, trade becomes an increasingly important foreign policy tool.
Despite the tremendous economic and political benefits the Trans-Pacific Partnership (TPP) offered the U.S., the secretive nature of its negotiation meant that U.S. President Trump’s decision to cancel the trade deal was met with popular support. Even so, trade deals can provide the means to boost investment, cooperation and U.S. influence overseas. Doing trade deals right will require governments to learn the lessons from trade deals past—less secrecy, greater protection for labor and reduced scope for investor-state dispute settlement.
In theory, the Transatlantic Trade and Investment Partnership (TTIP) provides an opportunity to learn lessons from the failure of the TPP. However, in practice this negotiation is also beset with same issues that sowed distrust, sapped popular support, and ultimately killed the TPP. In addition, TTIP will require approval from twenty-seven European Union member states, a lengthy process that requires convincing leaders and populations that are not enamored with an “America First” policy.
The United Kingdom provides the best opportunity for a fresh start on trade: Brexit has made the the U.K. desperate for a trade deal and the country remains single largest source of foreign direct investment in the United States. Moreover, a deal with the U.K. enjoys Congressional support, could supplant the potentially soon to be scrapped U.S.-Korea free trade agreement, would be a simpler negotiation than NAFTA, and provides Trump the opportunity to fulfil his campaign promise to negotiate better trade deals for U.S. workers. Although the U.K. cannot sign any trade agreement while a member of the EU, as the Brexit process evolves, building blocks for a U.S.-U.K. free trade agreement can be put in place.
Any such trade deal must be mutually beneficial, not least because it will be viewed by the EU as a bellwether for any future TTIP agreement. This means that although the U.K. is desperate for a deal and the U.S. has far more leverage, squeezing the U.K. may strain the “special relationship” and produce gains that cannot be extended to other trade deals. In any U.S.-U.K. trade deal, a complicating factor is that the two countries have similar GDP composition. This makes joint gains through mutually beneficial trades more challenging as both parties may place high value on the same issues (e.g. financial services).
The U.S. should therefore enter negotiations with a view to securing favorable terms on areas of high value and be willing to make concessions in other areas. Consider agriculture: in the U.K., an increasingly active electorate, environmental groups, and a precariously positioned Conservative government won’t take kindly to lowering food standards to accommodate U.S. agricultural imports. Given that agriculture represents just 1.1% of U.S. GDP and less than 2% of British exports to the U.S., this is a concession that the Uncle Sam should be comfortable making. Raising U.S. standards helps U.S. farmers partake in future trade agreements such as the TTIP, among other benefits.
Providing this concession could help the the U.S. advance other interests, most notably on highly valuable financial services. Over the past decade, London has successfully challenged New York’s status as the financial capital of the world. Now, as London experiences capital flight, the U.K. government will be keen to secure deals that remove barriers to trade and harmonize regulations. Although the U.S. may want the U.K. to loosen financial regulations, insisting on this point would be short-sighted. This is because the U.K. will want to abide by a regulatory framework that allows it to retain access to the EU in order to mitigate Brexit damage on London. By offering this concession, the U.S. can better position itself for a later TTIP deal that includes financial services.
Besides, any agreement that includes financial services will likely confer greater benefits to U.S. enterprise for several reasons. Firstly, London’s success has long been such that the U.K. plays host but foreign names dominate. For every Barclays and HSBC that London has, New York has Goldman Sachs, Morgan Stanley, JP Morgan, Citi, Bank of America, Wells Fargo and many more. Secondly, as London loses financial sector talent to other cities (including New York), the U.S. will stand to benefit more from an agreement that features flexible labor market rules and mutual recognition of qualifications.
On healthcare, Brits recognize that the National Health Service (NHS) is a scelorotic, gargantuan bureaucracy, but politicians and public alike will vehemently oppose any attempts to privatize the NHS which is viewed as a crown jewel. By offering concessions on NHS privatization, the U.S. can instead focus on the United Kingdom’s rapidly growing but less mature private healthcare market. In particular, the centralized nature of the NHS means the U.K. healthcare market is ripe for efficiency gains and innovation that U.S. firms can provide. Finally, on public procurement, many British firms will be eyeing up the large and very lucrative U.S. market. Including procurement in a U.S.-U.K. trade agreement would please the British without costing the U.S. anything: a trade deal could allow Brits to bid on all projects, but Uncle Sam can always choose U.S. firms for projects pertaining to national security.
Striking a deal with the U.K. will take years. With the 2020 election just three years away, the 2018 midterms even closer and Democrats flipping districts that were red in 2016, the Trump administration will need a foreign policy win and trade win to share with voters, particularly given Trump’s 2016 campaign rhetoric on these topics. A comprehensive deal with the U.K. offers a good opportunity to achieve both. It’s time to start negotiating.
Al Abedi is pursuing an MBA at the University of Chicago Booth School of Business and is a graduate of the University of Warwick in the U.K.
The views reflected in this piece do not reflect the views of other Arbitror contributors or of Arbitror itself.
Photo: "The Gherkin & Canary Wharf" by Harshil Shah for Wikimedia with a CC BY-SA 2.0 license