The United Kingdom’s surprising vote to exit the EU turned another tricky day into a possible social crisis. But where there is crisis, there is also opportunity, and the vote presents an opening for another step forward of global trade and investment liberalization.
When the U.K. leaves the EU, it will also lose zero-tariff participation in what is now the world’s largest economy, the EU. Beyond tariffs on goods, the U.K. has virtually barrier-free access to service sector opportunities across the EU. These economic opportunities far exceed any relationships the U.K. has elsewhere in the world. The upcoming exit means the U.K. will need to better integrate with the rest of the world as it seeks a new arrangement with the EU.
The European economy, in turn, will lose a dynamic member that has been spurring otherwise dismal EU growth. One thing that will help the EU with or without the U.K. is stronger integration with the United States. But the mechanism for bringing that about, the Trans-Atlantic Trade and Investment Partnership (TTIP) now under negotiation, is stalled.
This opens up the possibility for a difficult but possible and dramatic move by the United States: quickly negotiate a free trade agreement with the U.K., use the U.K.’s exit to emphasize to the EU the desirability for it to integrate with the United States, and drive that deal home as well.
Finalizing any such agreement with the U.K. would have to wait until the U.K. formally withdraws from the EU, but negotiations should start soon. Quick action toward such a U.K. agreement and quickly finalizing the EU agreement could help ease the uncertainties generated by the U.K. vote and restore confidence in the global economy.
Some might object that negotiating with the U.K. would provide an incentive to others to leave the EU. That may be the case, but that view also ignores the opportunity to improve the U.S. and global economies, and to use such a negotiation to complete TTIP and improve the EU economy.
A U.K.-United States deal should be relatively easy. As of 2014, the U.K. economy measured only 17 percent of the U.S. economy, about on par with the combined gross state products of California, Oregon, and Washington.
Like the U.S. economy, the U.K. economy is highly developed and underpinned by openness to globalization, rule of law, strong intellectual property rights, and world-leading universities. It is difficult to see how one or the other country would somehow drive down standards in the other.
Opponents of trade deals often complain that such deals empower corporations at the expense of workers, but that argument would also be difficult to accept given the current economic realities of the United States and the U.K.
U.K. companies are the leading direct investors in the United States, holding a direct investment position of $449 billion, or more than 15 percent of the total invested in the United States by all foreign companies in 2014. Likewise, that same year, U.S. companies were the leading direct investors in the U.K., holding a direct investment position of 253 billion pounds, or 24 percent of the total held by all foreign companies in the U.K. The corporations of the two countries are already deeply intertwined with each other.
There are a number of options for a U.S.-U.K. deal. A bilateral free trade agreement is one option. The current TTIP text could provide a starting point, meaning much of the text will already be completed, opening the possibility of a quick conclusion to the negotiations.
Because of their similarities and historical affinities, the United States and the U.K. could even go further and negotiate the first U.S. customs union – a measure that would create zero tariffs and a common external tariff.
Alternatively, the U.K. could be welcomed into the entire North American Free Trade Agreement. Negotiations on a Canada-EU agreement have been completed, although the treaty is awaiting approval, and Mexico already has a trade agreement in force with the EU, meaning both countries already have an agreement with pre-exit U.K. In fact, Mexico has already prepared a draft proposal for an agreement with the U.K.
This rich set of options may not face a great deal of popular opposition: Although many “leave” voters may have been concerned about the loss of manufacturing jobs from trade, most of the reporting on reasons for voting to leave has focused on immigration, due to EU rules on free movement of people, and on EU rules and regulations themselves, as emanating from an unelected authority that is not answerable to voters. And if voters truly had been concerned about greater free trade and investment, economic dislocations from the U.K. exit might encourage them to be more accepting of a deal, especially with the United States.
What about the EU? The U.K. exit from the EU should actually be of as great concern to the EU, or even more, as it is to the people in the U.K. who wanted to remain.
In 2014, the U.K. constituted 16 percent of the EU economy. Without the U.K., the EU would be the second-largest economy in the world, behind the United States, not the largest.
Of even more concern, the U.K. has been an important contributor to EU growth. With the U.K., EU GDP grew a little more than 1.0 percent per year from 2009 to 2014. But taking out the U.K., growth was only 0.8 percent.
On a per capita basis, the EU grew slightly more than 0.8 percent per year during that same period. Taking out the U.K., growth was only a dismal 0.7 percent. At the end of 2015, fully half the 28 members had an unemployment rate of greater than 8 percent, compared to 4.9 percent in the U.K. and 5 percent in the United States. These days, much of Europe is the sick man of Europe.
Clearly the EU needs help restoring growth and dynamism, and the TTIP can contribute. Some elements of the EU are on board – EU Trade Commissioner Cecilia Malmström said this week she is aiming to finish negotiations this year.
But negotiations are stalled in part because some European countries believe that, somehow, linking with the United States will lower standards or otherwise empower corporations. These arguments, like many others in trade, are also difficult to support.
If one counts rule of law as a high standard to which countries should aspire, it was the United States that uncovered the Volkswagen diesel engine pollution scandal, not the EU’s many police and investigative agencies. Likewise, it was the United States that opened the doors on corruption in FIFA, the governing body of global soccer (football).
If one is concerned about the environment, while 50 percent of the U.S. population was exposed to levels of Pm2.5 air pollution exceeding World Health Organization guidelines in 2013, in Europe that figure was 84 percent (and only 68 percent in the U.K.). Even in areas where the United States lags Europe, there is progress. In 2013, the United States generated 40 percent of its electricity from coal, and the EU generated 27 percent. But in 2006, only seven years earlier, the United States had generated 50 percent from coal.
Certainly, there are lobbies in the United States against such an agreement. But the EU is not the low standard, low wage country that is usually the target of such opposition. Given the previous grounds for opposing trade agreements, opposition to the principle of a U.S.-EU trade agreement makes little sense.
Negotiating one agreement – a U.S.-U.K. deal – to move another deal forward – the U.S.-EU deal – can be considered competitive liberalization. The United States has used competitive liberalization before. When the negotiations over the Uruguay Round multilateral trade deal bogged down, the United States, Canada, and Mexico negotiated the North American Free Trade Agreement.
Can the United States complete two large trade deals in the space of six months? No one says it will be easy. It certainly can negotiate two large trade deals at once, as it did with NAFTA and with the Uruguay Round, and as it did with the Trans-Pacific Partnership (TPP) and TTIP.
And in U.S. Trade Representative Mike Froman, the United States has a tenacious and bold negotiator – tenacious for finishing the highly complex, 12-member TPP trade and investment agreement, and bold for leading the effort to end the 14-year multilateral Doha Development Agenda negotiating round, against the wishes of many countries.
Proceeding along two tracks may raise concerns among EU, leadership, but the United States has demonstrated a more-than-70-year commitment to Europe’s growth and toward it playing a prominent role in world affairs. This commitment will not change.
Furthermore, the United States might not be alone. Not only does Mexico have a draft proposal, but Japanese Foreign Minister Fumio Kishida said this week that his country will consider a separate agreement with the U.K.
Any effort to complete a U.S.-U.K. deal and the TTIP will be high risk. But the rewards could also be high. The opportunity is unique, and success could help salvage the U.K., EU, and world economies from damage that could be induced by the exit of the U.K. from the EU.
Howard J. Shatz is a senior economist at the non-profit, non-partisan RAND Corporation and a professor at the Pardee RAND Graduate School. He is the author of the newly released RAND report, U.S. International Economic Strategy in a Turbulent World, part of RAND’s Strategic Rethink series.
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