US Trade Deal Cannot Help Mitigate No-Deal Brexit Impact

A possible trade deal with the US will do little to mitigate the impact of Britain leaving the EU without a deal in place, economists have told CNBC.
Both the UK and US governments have expressed a desire to forge a partial deal on trade as soon as possible after Britain’s anticipated departure from the EU on October 31.
On a recent visit to London, US national security advisor John Bolton said the US would enthusiastically support a no-deal Brexit should Prime Minister Boris Johnson pursue it, adding that Washington would be ready to work fast on a free trade agreement.
However, such an accord faces significant political hurdles on both sides of the Atlantic, while also falling short of the economic reprieve Britain will need to offset the loss of its existing trade arrangements with the EU, economists have argued.

Limited Impact

In 2018, the EU accounted for 46% of all UK exports, 54% of all imports, and seven of the UK’s 10 largest export markets and sources of imports were from the other 27 EU nations, according to a House of Commons briefing paper published last week.
The US accounted for 19% of UK exports and 11% of imports, while Germany as a standalone partner represented 9% of exports and 12% of imports.
Kallum Pickering, senior economist at Berenberg, told CNBC that given the larger impact on GDP from the quantity of trade with the EU in comparison with the US, it is “hard to see how leaving the EU could be offset with a trade deal with the US.”
“You could add a further layer in the fact that the UK’s trade agreement with the EU is free in all senses of the word, on investment, on immigration, on goods and in most services, including finance, whereas the UK would presumably be striking with the US a trade deal that covers goods and only partial agreements in services, with very little on immigration,” Pickering said.
“So the major things that the UK benefits from—attracting lots of FDI [foreign direct investment] from Europe, a high inflow of EU workers boosting the labor force—would not be offset by a trade deal with the US,” he added.
The EU has around 40 trade deals covering over 70 countries, meaning the UK currently has access to those markets, such as Canada, without having to pay import tariffs on most goods. In the event of a no-deal Brexit, the UK would lose this tariff-free access and would have to trade under World Trade Organization rules.
In order to avoid this, the UK government is trying to replicate many of the EU’s existing trade deals with other territories. If Brexit does happen on October 31, the UK will be free to sign trade deals with countries which do not have existing agreements with the EU, such as the US.
Britain has rolled over 13 trade deals so far, most recently with South Korea. Others have included partners with whom trade is historically negligible, such as Central America, Norway and Iceland and the Pacific Islands.
It will, however, also need to renegotiate a trade deal with the EU in order to ensure continued tariff-free access to the world’s largest free-trading bloc.
While acknowledging that a trade deal with the US would be advantageous in general terms, Pickering argued that the benefit of an immediate US trade deal upon leaving the EU, in the case of a hard exit, “provides only a limited offset, and that’s being generous.”
Other analysts were similarly skeptical about the practical aspects of a potential deal. Steen Jakobsen, chief economist at Saxo Bank, dismissed the suggestions as “political noise” when speaking to CNBC, citing the seven-year negotiation to establish the landmark EU-Canada deal as an example of the complexity of the process.
Altaf Kassam, EMEA head of investment strategy and research at State Street Global Advisors, pointed to the White House’s recent handling of trade negotiations as an ominous sign for any prospective trade deal.
“Boris Johnson and [US President] Donald Trump have some kind of rapport, and that’s a good thing, but if you see the way the US-China trade negotiations have gone, it’s never going to be a slam dunk for the UK. This is going to drag on,” he told CNBC earlier this week.