Views from Across the Atlantic: the Outlook for a US-UK FTA

We are delighted to have the opportunity to host this guest post by our US colleagues Shumaker Loop & Kendrick and in particular to have the benefit of the highly-informed expert insights of Derek Harley, VP of Federal Affairs, on the impact on the UK of the incoming Biden administration, with particular focus on the prospects of a US-UK free trade agreement.

We are grateful to Derek for sharing his time and insights, and for our continued close working relationship with the Shumaker team.

The Outlook for a US-UK FTA

Introduction

The United States – United Kingdom Free Trade Agreement (FTA) has been a high priority for both President Donald Trump and Prime Minister Boris Johnson, who has made expanding the UK’s trading relationships post-Brexit a high priority. The FTA also enjoys bipartisan support in the U.S. Congress. Talks were formally launched in May 2020 and have proceeded apace through five rounds, most recently late October 2020. However, expiring Trade Promotion Authority (TPA) in the U.S., several still-unresolved issues in the negotiations, and the incoming Biden Administration’s divergent priorities, make the prospects of enactment extremely unlikely in the short term. At the same time, not all hope is lost. Given the progress that has been made in the talks, the bipartisan support that will continue to exist in Congress, and the economic benefits it affords both nations, it’s possible the effort could be revived later in the Biden Administration.

TPA – A Ticking Clock

Any discussion about the chances of success of a particular trade agreement in the United States must start and end with TPA, the law that provides authority to the President to enter into reciprocal trade agreements on tariff and nontariff barriers and that governs the process for congressional approval of legislation implementing the agreement. Formerly known as “fast track,” in practice, trade agreements cannot be approved without it.

By way of background, in order to give a president negotiating leverage and provide assurances that any trade deal that is struck will not be subsequently amended, Congress will enact temporary TPA laws that provide streamlined legislative procedures and a guaranteed up-or-down vote in Congress. In exchange, TPA imposes specific negotiating objectives on the president, as well as notice and consultation requirements, which must be adhered to for an FTA to enjoy TPA protection.  The protections apply to any deal signed during the time TPA is authorized.[1]

The Bipartisan Congressional Trade Priorities and Accountability Act of 2015, passed by a Republican-controlled Congress and signed by President Obama, contains the most recent grant of TPA.[2] While the authorization is in effect through July 2021, the President is required to notify Congress 90 days prior to signing an agreement.[3] Thus, the actual deadline is much sooner – April 2021. Given the complex issues that still remain to be negotiated, that would be an extremely tight, if not impossible, deadline to meet, even if President Trump had been re-elected. Indeed, in testimony before the House Ways and Means Committee in June, Ambassador Lighthizer sounded rather pessimistic, stating, “It is unlikely that we would get an agreement . . . to present to Congress for congressional action.”

The Incoming Biden Administration – Focused on Domestic Priorities

President-elect Biden’s election in November will usher in an entirely new policy agenda, focused almost exclusively at first on U.S. domestic priorities, injecting uncertainty into the deal, and further complicating an already tight timeline to move the agreement forward.  President-elect Biden and his team have made it abundantly clear that, at least initially, domestic issues will take precedence. Speaking about trade in particular, he said, “I’m not going to enter any new trade agreement with anybody until we have made major investments here at home and in our workers.” Campaign sources further indicated, “new laws on COVID, the economy, immigration, infrastructure, and climate change would come first.” Regarding the FTA specifically, Biden advisors said he will “definitely not” prioritize a U.S.-UK deal in the first 100 days, which clearly makes completion of a deal before TPA expires a non-starter.

This should not be perceived as a criticism that Biden is anti-trade or against free trade deals, however.  Admittedly, and at the risk of overgeneralization, it is commonly perceived in the U.S. that Republicans are the trade-friendly party (at least that was the case prior to Trump’s victory in 2016), while Democrats are more skeptical of trade and international trade agreements. But at the presidential level at least, several trade deals have been enacted with Democrats in the White House.[4] And President-elect Biden arguably has a good record on the issue relative to the rest of his party, supporting NAFTA and permanent normal trade relations (PNTR) for China as a senator, and then later the Trans Pacific Partnership (TPP) and the 2015 TPA deal as Obama’s vice president. In fact, you could argue that the best political recipe for advancing trade agreements is a Democrat in the White House and Republicans in charge of Congress. If the Senate stays in Republican hands (we will know for sure after the two Georgia senate runoff elections on January 5th), and with Republicans in the House having an extremely strong majority, that recipe could very well be there for the next two years.

Other Substantive Issues Remain with the U.S.-UK FTA

Despite the “special relationship” that exists between our two nations and the significant progress that has been made in the talks, several sticking points remain to reaching an agreement, including for example, differing approaches to food standards, such as hormone-fed beef and chlorinated chicken. In addition, one of the U.S.’s negotiating objectives is greater “regulatory compatibility” to facilitate exports, particularly in the agricultural space, as well as improved transparency, but that too may prove difficult. While the UK’s regulatory regime is closer to the U.S.’s than is the EU’s, the UK faces cross pressures with its European trading partner. In other words, as the U.S. negotiates standards that seek to harmonize our regulatory regimes with those of the UK, the UK will be pushed to maintain compatibility with the EU. Those will be very difficult to reconcile, particularly if the agreements are being negotiated simultaneously.

The digital services tax presents (DSTs) another significant obstacle from the U.S. side. With American companies disproportionately affected, there is significant bipartisan opposition in Congress to the levies and equally bipartisan support for the Trump Administration’s strong response. Indeed, in June, USTR announced a Section 301 investigation into DSTs, which depending on the result, could authorize the President to take remedial action.[5]  It’s unclear when that report will be completed, and if it does arrive before January, what actions the Trump Administration will take. If so, that could further complicate matters. A comprehensive OECD agreement is likely the best way to resolve the issue and take it off the table for the purposes of the UK trade talks. However, those talks have yet to bear fruit.

Of course, ongoing Brexit negotiations shadow all of this from an American perspective, with some quarters arguing that it would make more sense for the UK to work out its trade arrangements with the EU first, with the U.S. to follow. Indeed, it has reportedly proven difficult to reach agreement in some areas of the talks without additional clarity on where the UK-EU relationship stands or will stand. In addition, the politics surrounding Ireland and the 1998 Good Friday Agreement lurk in the background. President-elect Biden and high-ranking Democrats in Congress have indicated the U.S. will not allow for a trade deal if peace in Northern Ireland is at risk. Then-candidate Biden indicated in a tweet that any trade deal would be contingent on “respect for the Agreement and preventing the return of a hard border. Period.” That, too, argues for allowing the Brexit negotiations to be completed in order to clear a path forward on that complex issue.

What the Politics of Trade May Mean for a Future Agreement

As indicated previously, the first several months of the new administration – if not most of 2021 – will be laser focused on domestic priorities here in the U.S.: fighting the virus, bolstering our economy, health care, climate change, and potentially, infrastructure. And only time will tell what the Biden Administration’s trade agenda will look like once the pandemic has passed and the economy is on stronger footing.  By then, the world, and priorities, certainly will have changed. And in some ways, the focus on and heightened attention paid to the US-UK FTA was unique to President Trump, and almost certainly driven politically on both sides by Brexit.

Another question is what the Biden Administration’s regional priorities will be, particularly with a rising China, its participation in the Regional Comprehensive Economic Partnership (RCEP), the world’s largest FTA, and growing bipartisan concern about the threat China’s economic policies pose to U.S. national security. Some have also argued that President Biden may wish to focus more on multilateral negotiations, and less on individual FTAs, though regional deals can prove difficult and unwieldy.

Perhaps regional priorities will shift somewhat, and other priorities will certainly arise, but trade leaders can walk and chew gum at the same time, and the significance of the US-UK deal and the bipartisan support in Congress will remain. It’s quite possible President Biden’s newly-installed trade team could pick up this baton later, revive talks, and come to Congress for renewed TPA. That is where it could get tricky, and will require a commitment and political capital from the Biden Administration – not just for completing the U.S.-UK negotiation, which in itself will be difficult, but also for negotiating a new TPA. Reaching agreement on the last TPA was hard fought, requiring unique congressional procedures to secure the sufficient number of votes. It passed mostly on party lines in the House, with most Republicans voting in favor and most Democrats opposed.

On the bright side, Americans’ views on trade are stronger today than they have been historically, despite a heated 2016 presidential campaign in which candidate Trump lamented America’s “trade deficit” and argued that America was being “ripped off.” According to Gallup, Americans’ broad view of trade is the “most positive it has been in a quarter-century,” with 74 percent of Americans believing trade represents an “opportunity for economic growth through increased U.S. exports.” And polling indicates that the American people want Congress and the president to put partisanship aside, work together, and get things done for the country.

Summary

In summary, given the incredibly tight TPA timeline and the issues that remain to be negotiated, the short-term prospects for a U.S.-UK deal look dim. While political support continues to exist in Congress, TPA is a critical condition, and with the Administration focused on domestic economic priorities, is unlikely to be a serious part of trade discussions for at least a year, potentially longer. However, the U.S.-UK relationship remains strong and important for both nations, and for companies working “across the pond,” there could be other, more limited areas in which the countries can reach agreement in the meantime, such as a smaller investment treaty or specific tariff relief. But don’t be surprised if the FTA comes back again later, as the American economy is growing, the pandemic is behind us, and the Biden Administration, post-Brexit, is looking for a political win with economic and strategic benefits for the U.S. and an important ally.

[1] See Congressional Research Service, “Trade Promotion Authority (TPA): Frequently Asked Questions, Updated June 21, 2019, P. 3: “If the United States enters into (signs) a trade agreement within a period for which TPA is provided, the President may submit the implementing bill to Congress a day on which both the House and Senate are in session, regardless of whether the TPA expired before that date.”

[2] P.L. 114-26.

[3] It was originally effective until July 1, 2018, but could be extended until July 1, 2021, by presidential request.  The president requested an extension on March 20, 2018, and because Congress did not enact an extension disapproval within the required amount of time, it was extended.

[4] See e.g. President Clinton and NAFTA, and President Obama, who enacted agreements with Korea, Colombia, and Panama, and negotiated the Trans Pacific Partnership.

[5] Section 301 is the same authority President Trump used to institute tariffs on Chinese imports.