FPI / May 18, 2020
Commentary by Lee Cohen
Brexit is happening. The UK is currently in an official transition period leading up to its complete divorce from the European Union. During this phase, which lasts until the end of 2020, Britain is “no longer a member of the EU but continues to be subject to EU rules and remains a member of the single market and customs union.”
Brexit becomes even more important from a U.S. perspective as the U.S. and UK kicked off negotiations this month — via videoconferencing — of a landmark free trade agreement that could be a pre-election touchdown for President Trump.
The global pandemic has affected nearly every aspect of daily life from micro to macro from buying toilet paper to negotiating international trade treaties. No exception is Brexit, already an all-encompassing national issue preoccupying the U.S.’ closest ally and critical trading partner.
While it maintains a member-like relationship with the EU, for the first time since it joined, the UK is now able to pursue new trading relationships, including with the U.S, independent of EU rules.
Against this backdrop, on May 5, the U.S and UK kicked off their own trade agreement talks, which have great motivations for leaders of both countries. Economically, a quick, well-negotiated agreement would be a significant victory, pre-election for President Trump. On the British side, Trade Secretary Liz Truss said, “…increasing transatlantic trade can help our economies bounce back from the economic challenge posed by coronavirus.”
U.S. Sen. Rob Portman wrote that as close as the two nations are, the economic consequences of the deal for both countries could be “immense,” enabling the trade relationship to reach its potential, unencumbered by any remaining barriers… Moreover, he added, “a new comprehensive agreement would aim to eliminate tariffs, expand market access for agricultural goods by eliminating restrictions on quota and non-tariff barriers, harmonize the services trade, and set bold rules for trade over the internet.”
An interesting element is that the transition period may be extended by up to two years, but it must sign off on the length of any extension before July 1 — a date that is rapidly approaching. At the end of the transition period, the status of the UK-EU trade relationship will be determined to be a new trade negotiation between the two parties that is underway but has taken a negative turn. In the event no deal emerges between, UK and EU, the UK will still exit, but the trade relationship will default to World Trade Organization terms.
A breadth of details must be sorted out during this period, which has been indelibly affected by COVID-19, between the EU and the UK including trade rules, border details (of which Northern Ireland is particularly complicated), and immigration issues.
This week saw a decisive disintegration in the UK-EU trade talks, which ended in stalemate, with the EU’s negotiator, Michel Barnier describing them as “very disappointing, ” and blaming what he called Britain’s “incomprehension”.
For his part, UK negotiator, David Frost summarized the discord: “It is hard to understand why the EU insists on an ideological approach which makes it more difficult to reach a mutually beneficial agreement,” said Frost. “We very much need a change in EU approach for the next Round beginning on June 1.”
It is plausible that the EU’s reluctance could be a tactic aimed to delay and extend the transition period. Extending the transition period could further de-stabilize a UK economy, seriously wounded — like all global economies — by the pandemic.
Boris Johnson’s spokesman made clear last month that the UK would resist extension: “We will not ask to extend the transition period, and if the EU asks we will say ‘no.’ Extending the transition would simply prolong the negotiations, prolong business uncertainty, and delay the moment of control of our borders. It would also keep us bound by EU legislation at a point when we need legislative and economic flexibility to manage the UK response to the coronavirus pandemic,”
While the U.S.-UK talks have gone ahead this month, some have speculated that the demands and distractions of the pandemic necessitate a scaling back of expectations of the original bilateral hopes for the FTA. An additional complicating factor is a U.S. Congress reluctant to hand a pre-election victory to Trump, notwithstanding the benefits for the nation. In light of these challenges, the Trump Administration might opt instead for a “mini-deal” avoiding Congress entirely, to be inked before the election
With so many variables including the pandemic response and competing political national and pan-national interests at stake, only time will reveal the status of final trade relationships.