Capitol Hill could imperil any new US-UK trade deal

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Foreign Policy | 9 August 2019

Capitol Hill could imperil any new US-UK trade deal

by Keith Johnson

British Trade Secretary Liz Truss wrapped up a four-day visit to the United States Friday, basking in promises from Trump administration officials about a quick free trade agreement between the two countries. But in reality, she’ll head back to Britain with few prospects for any accord that could mitigate the damage of a no-deal Brexit this fall even as the British economy has already begun shrinking.

And even if U.S. President Donald Trump and new British Prime Minister Boris Johnson—who are often seen as neonationalist comrades—do manage to arrive at a new bilateral trade agreement, it could face stiff resistance from both Democrats and Republicans in the U.S. Congress.

In Washington, Truss called the prospect of a free trade deal with the United States one of the opportunities of Brexit and stressed the importance of the U.S.-U.K. trading relationship. She also called the United States “our biggest single trading partner”—which is true only if one ignores trade between the U.K. and the European Union, which is almost three times larger but which starting Nov. 1 will no longer take place on preferential terms.

Trump administration officials, as they have for years, talked up the prospects of a speedy trade agreement with Britain once it is outside the EU and able to negotiate bilateral deals. Secretary of State Mike Pompeo said the United States would be waiting “pen in hand” to sign a deal at the earliest opportunity.

And Truss was buoyed before her arrival by a group of 45 Republican senators, led by Tom Cotton of Arkansas, who pledged to support post-Brexit Britain and to make a new trade pact a priority, hoping to offer the new British government a lifeline as it prepares to crash out of the EU amid warnings of food and medicine shortages and with the pound in freefall.

The idea of a trade agreement with the United States could never make up for the loss of frictionless access to its main market in Europe, but from a political point of view, it’s one of the few drops of lemonade that London can squeeze out of Brexit these days.

“It was always clear that if the U.K. leaves with an outcome that is not very favorable, which seems increasingly to be the case, that politically it would be important for the U.K. government at that difficult junction to have something positive to point to and not just negative things,” said André Sapir, a trade expert at Bruegel, a Brussels-based think tank. “And what could be positive? A deal with the U.S. is the first thing that comes to mind, even though it cannot compensate for a downgraded economic relationship with the EU.”

But even as the need to deliver some sort of silver lining becomes more urgent—the British economy contracted by 0.2 percent in the second quarter of 2019 as manufacturers struggled with falling exports and Brexit preparations, the first such negative growth in seven years—prospects of any deal seem as far off as ever.

Beyond the usual suspects that complicate any trade deal with the United States, especially allowing unfettered access to U.S. agricultural goods, there are other thorny headaches. Both Trump and the U.S. ambassador to Britain suggested this summer that opening up Britain’s state-run health care system, the National Health Service (NHS), to U.S. providers must be part of any deal, spooking even Truss.

A U.K. government spokesperson said: “The government has been clear that the NHS is not, and never will be, for sale to the private sector, whether overseas or domestic. We are committed to the guiding principles of the NHS—that it is universal and free at the point of need.”

But there is also Britain’s planned digital tax, a way to modernize antiquated international tax codes to account for the modern, digital economy; Trump officials insist that tax must be scrapped or there will be no trade agreement.

There is also the latest wrinkle that the Trump administration insists on inserting into trade deals it negotiates, such as the tweaked NAFTA that is still awaiting ratification in the U.S. Congress: poison pills that prohibit other countries from doing trade deals with China. In recent years, Britain has deliberately courted much closer economic ties with Beijing and has even broken ranks with Washington over the role that the Chinese telecommunications giant Huawei should play in developing advanced phone networks. Seeking to cut off Britain from any future trade agreement with China at a time when British leaders are looking to Beijing for much-needed investment and joining the $1 trillion Belt and Road Initiative could further dampen prospects for agreement between London and Washington.

“I don’t think it is straightforward to make a deal with the United States at this stage, purely on trade grounds,” said Sapir, who previously served as an economic advisor to the European Commission. “A lot depends on how far the United States wants to go—does it want to do Britain a favor or ply its advantage?”

But what might become the biggest obstacle of all has to do with Ireland, not with Britain per se. Many Democrats in the U.S. House of Representatives are adamant that there can be no free trade deal with the United Kingdom if Brexit imperils the 1998 Good Friday Agreement that ended decades of terrorism and violence in the Irish Republic and Northern Ireland. That’s a cause for concern because the negotiated withdrawal agreement between the U.K. and the EU maintains that open border, but that is absolutely unacceptable for pro-Brexit conservatives. Without some sort of negotiated solution with the European Union, a hasty exit by Britain would require reinstalling some sort of border checks along the frontier between Ireland, still part of Europe, and Northern Ireland, which is part of the U.K.

California Rep. Nancy Pelosi, the speaker of the House and the ultimate arbiter of the fate of any trade deal in Congress (at least as long as Democrats hold the House), made clear this spring in a London speech that any trade deal would be a “nonstarter” in Congress if it undermined the peace pact.

But at the time, Britain still had hopes of a negotiated solution with the European Union to resolve the contentious border issue. Since then, positions on both sides have hardened, and Johnson has made clear that the U.K. will leave Europe on Oct. 31 without a deal if it must—even though there is no clear solution in sight for how to manage trade across the border between the EU and a third country, as Britain will become.

Since Pelosi’s warning, other leading Democrats—and even some Republicans—have been just as vocal. Rep. Richard Neal, a Massachusetts Democrat, has stressed that any future U.K.-U.S. trade deal must respect the peace accord. He is in a position to make that opposition known: He is the chairman of the House Ways and Means Committee, which shepherds trade legislation through the lower house, and is also the Democratic leader of the congressional Friends of Ireland caucus.

In a speech in late July laying out his priorities, the British prime minister said he hoped Irish border issues would be resolved in future negotiations with Europe and rejected the idea that part of the U.K. must remain in the European market to keep the Irish border open.

“The evidence is that other arrangements are perfectly possible and are also perfectly compatible with the Belfast or Good Friday Agreement, to which we are of course steadfastly committed,” Johnson said.

But the Irish border question remains unresolved, as do the terms of Britain’s eventual exit. If Truss was hoping that her feel-good trip to the United States would scare Europe into a last-minute compromise on Britain’s withdrawal, she may be disappointed.

“The British talks in Washington are not going to change the balance between the U.K. and the EU,” Sapir said. “It’s normal to want to have a positive story to tell, but it’s fraught with all sorts of difficulties. I’m not sure they can get a deal, and if they can, at what price.”

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source: Foreign Policy