The US and UK have begun to negotiate a free trade area (FTA) in anticipation of the December 31 end of the UK’s trade transition period within its departure from the European Union. In the absence of a final free trade agreement, the countries’ bilateral trade will be governed by their respective WTO obligations. But the UK’s independence from EU trade constraints offers both countries an extraordinary opportunity to cement a more beneficial relationship through a comprehensive free trade agreement. It also offers the possibility of joint development of innovative trade regimes to address areas of trade as yet uncovered by multilateral rules.
Even with the best of intentions and dedicated efforts, it will not be possible to complete the bilateral negotiations before the end of the year. It would be desirable (and feasible), therefore, to “prime the pump” for the full agreement by implementing some modest first steps that could serve as “earnest money” on the overall deal. A modest early harvest of results would build mutual confidence and help to keep the FTA at the top of each country’s priorities. This would be especially important on the US side as we go through our presidential and congressional elections and the subsequent transition in January.
What could constitute a realistic, mutually beneficial priming of the pump? In developing such a package, one should take advantage of the flexibility for both sides resulting from the UK’s independence from EU trade authority on January 1. It will be necessary to craft something of obvious concrete and political value to each side.
In October 2019 the US was authorized by the WTO dispute settlement procedures to impose additional tariffs on $7.5 billion in imports from the European Union due to the EU’s failure to comply fully with the WTO ruling on the US complaint about Airbus subsidies. The US subsequently imposed tariffs of 25 percent on various non-aircraft EU products, including single malt Scotch whiskies and liqueurs from the UK. The impact on exports to the US was immediate, resulting in a 25 percent drop over the subsequent six months.
In June 2020 the USTR published a Federal Register Notice requesting public comment on possible modifications of the existing tariff retaliations. The USTR is seeking recommendations to alter the existing list of retaliation products or to increase the level of tariff retaliation, including possible tariff levels of 100 percent. The rotating tariff retaliation lists are constructed to impose maximum political pressure on individual EU Member States, especially the four Airbus members.
Given the flexibility that the USTR has in modifying the Airbus retaliation list, it would be a significant good will gesture to remove UK products from the retaliation list as part of a pre-FTA bilateral confidence-building package. Moreover, the UK has recouped and reconfigured previous launch aid to Airbus that arguably puts it in compliance with the WTO subsidy rules. And increasing or maintaining the tariffs on UK products has the perverse effect of reducing the EU’s incentive to reform its policies. Since the UK left the EU last January, the remaining Members and the Commission do not feel any political pressure from affected UK interests. In fact, the greater the share of retaliation assigned to the UK, the lighter the pressure on the other Airbus nations.
For the Americans, a particularly irritating UK provision is its recently enacted Digital Services Tax (DST) of 2 percent on the revenues of large social media, search engine and online marketplace companies (read: American) that derive a significant value (more than 25 million pound sterling) from UK consumers. The Trump administration has reacted strongly to this measure, adding the UK to its list of targets under its Section 301 investigation of digital taxes on American high-tech firms. An unfavorable finding (very likely) could lead to additional retaliatory tariffs. In fact, President Trump already has threatened such retaliation against British automobile exports.
As part of the FTA negotiations, the UK undoubtedly will insist on the elimination of the US retaliatory tariffs on UK products, and the US will insist on the removal of the Digital Services Tax. Why not demonstrate now the two countries’ commitments to a new era of trade cooperation by eliminating these needless irritants.