By Stephen Fidler 

The British government has said it wants to leave the European Union's customs union so it can pursue trade deals elsewhere in the world. Of those, the biggest prize would be an agreement with the U.S., the U.K.'s biggest national trading partner.

Politicians on both sides of the Atlantic, including President Donald Trump, have spoken enthusiastically about a U.S.-U.K. free-trade deal.

But a recent report suggests that such a deal wouldn't be quick or easy. Any agreement of substance would be enormously politically sensitive in the U.K., posing London with a strategic choice of whether to align the British economy closer to the U.S. or keep it closely tied to the EU.

The U.S. market is important to the U.K. Some 60% of U.K. exports go to the EU and the countries with which the EU has free-trade deals. Of the rest, the U.S. buys almost half. The U.S. is so significant that the benefits to the U.K. from signing non-EU trade deals around the world hang importantly on securing an agreement with the U.S.

The report by researchers at Harvard University and King's College London led by Ed Balls, a former British Labour government minister, and Peter Sands, a former chief executive of Standard Chartered Bank, points out that any deal will be a long time coming.

It takes on average 45 months for the U.S. to negotiate bilateral trade agreements. But negotiations can't start in earnest until the U.K. has settled its post-Brexit relationship with the EU. That might not happen for a couple of years or more.

No U.S.-U.K. accord can be implemented until the U.K. unlatches itself from the EU's customs union, which sets the country's tariff schedule. That development might be years away if the U.K. government attaches itself to the customs union well beyond 2020 as British officials say is now under consideration.

The report by Messrs. Balls and Sands points out a "power imbalance" in the relationship. The U.S. economy is more than five times the size of the U.K.'s and U.S. trade negotiators are far more experienced, given the U.K.'s own trade negotiations have been outsourced to the EU for four decades.

The U.K. also needs a deal more than the U.S., not least to reinforce the narrative that Brexit gives the country new economic opportunities and wasn't about the U.K. turning inward.

Average tariffs are already low -- but the U.K. has more to give in negotiations and not so much to gain: U.K. tariffs, currently set by the EU, are higher than U.S. tariffs on average. The U.S. will likely target cuts in tariffs where they remain relatively high, including on cars and agriculture, both of which could have big impact on the U.K. industries.

In nontariff negotiations, the likely British "asks" are tough. Opening up the U.S. financial-services market, for example, was impossible for the weightier EU in now moribund trade negotiations with the Obama administration.

Moreover, dealing with the U.S. is complicated: The federal government negotiates but, even if it is inclined to make concessions, it often can't corral its states, Congress and independent regulatory agencies.

Meantime, the U.S. will want to open up the British economy to U.S. farm products by relaxing regulations on labeling, food safety, genetically modified organisms. That raises the nightmare of British farmers: that they will be held to a higher standard of food safety and environmental protection while cheap produce floods in from American farmers. Among other things, too, Washington is also likely to want to give U.S. health-care providers access to the British market.

Trade agreements no longer fly under the political radar as they did in the past -- as demonstrated by widespread political opposition to the prospective U.S.-EU agreement.

On questions of food standards and the perceived undermining of the state-run National Health Service, any agreement with the U.S. is likely to encounter noisy organized opposition.

One reason is for the political sensitivity around trade agreements is that for them to have an impact, they have to go beyond tariffs and tackle nontariff barriers to trade, including aligning product and services regulations and standards. That raises the politically charged question about which country will set those regulations and standards.

In a trade accord between the U.S. and the U.K., there would be only one answer: the U.S.

That will raise a tricky question for politicians in London. Will they be willing align rules and standards with the U.S. to get a meaningful trade deal or will they prefer to remain aligned with the EU so as to minimize disruption of current trading patterns?

For many in the U.K., membership of the EU demanded excessive sacrifices of sovereignty. For probably a different group, ceding influence to the U.S. over important areas of the British economy would be unthinkable. A U.S.-U.K. trade deal therefore shouldn't be taken for granted.

 

(END) Dow Jones Newswires

May 19, 2018 10:14 ET (14:14 GMT)

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