On Thursday June 23 2016, the UK voted to leave the EU. That departure has become known as ‘Brexit’. This was followed in November 2016 by the election of Donald Trump as US President. During his presidential campaign Mr Trump made no secret of support for taxes on imports to the US, other trade defence measures and his opposition to large scale multi-lateral trade deals like the Transatlantic Trade and Investment Partnership (TTIP), going so far as to threaten to scrap a number of existing free trade agreements including those between the US, Canada and Mexico. He has also pledged to withdraw from the Trans-Pacific Partnership (TPP) on his first day in office.
These events have triggered considerable uncertainty about the future of trade between the EU, the UK and the US. What has traditionally been a bi-lateral trading picture – between the US on the one hand and the EU (including the UK) on the other – will become a three sided relationship; a ‘Trans- Atlantic Triangle’. Businesses in the US are already reacting to the uncertainty created by this three-sided relationship. Over three quarters of US businesses report that uncertainty over the future of trade regulation is having a direct impact on their current investment decisions, both positive and negative.
Each of the three relationships (US-UK, US-EU, UK-EU) is dependent on a unique set of circumstances and each relationship affects the others.
US – UK trade
Over one third of US businesses with a base in the UK say they are considering moving it to elsewhere in the EU because of Brexit - and over half of US businesses that export to the EU claim that they are more likely to bypass the UK in order to do business with other EU countries as a result of the Brexit vote. Additionally, the UK domestic market alone may not be sufficiently attractive to retain the current level of trading links between the US and the UK post-Brexit.
However, without its own privileged relationship with the EU, there is a higher chance that US investment will continue to see the UK as an attractive gateway to the EU’s Single Market if the UK can retain important elements of its current access. The possible collapse of TTIP could therefore present an opportunity for the US and the UK to conclude a strong bi-lateral agreement that could facilitate US investment into the UK which may continue to have free access to the EU market. And such a deal is a possibility. Speaker of the House of the U.S House of Representatives, Paul Ryan, is backing a US-UK free trade deal, describing the UK as an “indispensable ally”.
It is therefore not surprising that most US businesses favour both a soft Brexit (66.6%), where the UK retains privileged access to the Single Market, and a direct trade deal (81.8%) between the UK and the US.
However, the time lag created by the triggering of Article 50 and potential ‘cherry picking’ by the UK of EU legislation makes it highly likely that, over time, there will be some divergence of standards and requirements between the UK and the EU. In the event of a hard Brexit, the UK’s attractiveness to the US for investment as a gateway to the EU is likely to fall dramatically. This may impact the UK domestic market to the extent that divergence from EU standards and requirements means that the same US products cannot be sold in both the UK and the EU.
US – EU trade
Ninety six per cent of US businesses say they currently face non-tariff barriers when trading into the EU. TTIP is intended both to lower tariffs and reduce regulatory barriers that make trade between the US and the EU difficult or more costly. Three quarters of US businesses are aware of TTIP, and USfirms consider that TTIP will have a bigger impact on their business than either a bi-lateral deal between the US and the UK or the multi-lateral Trans-Pacific Partnership (TPP) deal that the US was considering with 11 other Pacific Rim countries.
However, despite this wide-spread support, the indications are that TTIP is not going to progress in the short term, if ever. With the imminent collapse of TTIP, it seems that in the short to medium term there will be little change in the US’s trading relationship with the EU. Therefore, the degree to which the US will trade directly with the EU post-Brexit, or will opt to make further investment in the UK as a gateway to the EU, becomes a live and open question.
Once it leaves the EU, the UK will still retain access to the EU’s Single Market in the same way as every other country in the world – including the US – also has access. What it will seek to negotiate is the particular terms of that access. The greater the degree to which it can retain privileged access to the Single Market the ‘softer’ the Brexit will be; the further it moves away from the access it currently enjoys, the ‘harder’ the Brexit.
Two thirds of US businesses would like a soft Brexit and half favour the Swiss or Norway ‘soft exits’. While these two models are often the most talked about, it is extremely unlikely that either will be adopted. But there are other soft Brexit options that remain feasible. The current direction of travel suggests elements of a customs union, the Ukraine model (DCFTA) or even a Continental Partnership.
Although it may be economically desirable for the UK to aspire to a soft Brexit, the fact that this is likely to require the continued adoption of EU laws means that such a position could be politically untenable in the context of the call to repatriate UK decision-making on important issues which found resonance with those that voted to leave.
Action to take now
Ninety five percent of US firms told us that they will need third party support and advice in order to successfully deal with Brexit. The type of support needed will vary both by sector and over time as the future shape of trading relations in the Trans-Atlantic Triangle begin to crystallise. However, there are steps that all businesses can take now in order to mitigate risk, including conducting supply chain audits and assessing the impact of any regulatory divergence, along with making strides to develop trade association and lobbying relationships.