March 5, 2019
Brexit and Outlook for U.S.-UK Trade Agreement
Introduction
status quo of tariff-free trade. A no-deal Brexit could lead
The trade aspects of “Brexit,” the expected withdrawal of
to lengthy customs checks, and some businesses are
the United Kingdom (UK) from the European Union (EU)
stockpiling goods to build inventories. UK-EU supply
on March 29, 2019, are of growing interest to Congress.
chains, such as for the auto industry, are tightly integrated
The UK is a major U.S. trade partner, and uncertainty over
and with component parts heavily traded. U.S. and other
Brexit presents commercial challenges for the nearly 43,000
banks are concerned about losing the ability to use their UK
U.S. companies exporting to the UK and for U.S. firms
bases to access EU markets without establishing legally
operating in the UK, including some 4,000 majority-owned
separate subsidiaries. Some financial institutions, such as
subsidiaries (2016 data). Details about the future UK-EU
Goldman Sachs, J.P. Morgan, Morgan Stanley, and
trade relationship remain largely unknown, and it is
Citigroup, have shifted (or are planning to shift) some jobs
uncertain when and to what extent the UK will regain
and assets from London to other cities, such as Amsterdam,
control of its national trade policy—a major objective for
Dublin, Frankfurt, and Paris.
Brexit supporters. These factors directly shape prospects for
In 2016, after the Brexit referendum, the British pound fell
a proposed bilateral U.S.-UK free trade agreement (FTA),
to a record low, and concerns emerged about widespread
supported by the Trump Administration and several
harm to the UK economy. Doomsday fears may have
Members of Congress.
abated, but prolonged uncertainty over Brexit appears to be
On October 16, 2018, the Trump Administration notified
a drag on the UK economy. In 2018, the UK economy saw
Congress under Trade Promotion Authority (TPA) of
its lowest annual growth rate (1.4%) since 2012. Most
proposed trade agreement negotiations with the UK post-
analyses predict that the UK economy faces lower growth
Brexit. The UK cannot formally negotiate or conclude a
in all Brexit scenarios, with a “no-deal Brexit” constraining
new agreement until it exits the EU, which has exclusive
growth rates the most.
competence over trade policy and negotiates trade deals on
Post-Brexit UK-EU Trade Relationship
behalf of all EU member states (Fig. 1). In the interim, and
Brexit casts great uncertainty over the future UK-EU trade
absent a U.S.-EU trade agreement, World Trade
relationship. A draft agreement on the UK’s withdrawal
Organization (WTO) terms govern U.S.-UK trade (like U.S.
terms and political declaration on the future relationship
trade with the rest of the EU), and would apply after Brexit.
was rejected by the UK House of Commons in January
Figure 1. Current UK Trade Status: Fast Facts
2019, and the UK is trying to find a path forward. EU
leaders endorsed the deal, which requires approval by the
European Parliament.
During the draft deal’s transition period through 2020, the
UK could negotiate, but not enter into, its own trade
agreements. The UK and EU agreed to work toward a UK-
EU FTA, with a fully independent UK trade policy arising
after the transition period. As a backstop to address the Irish
border issue, however, they agreed to allow the UK to stay
in the customs union if they failed to reach an alternative
arrangement to avoid a hard border (e.g., customs check,
physical infrastructure) between Northern Ireland and

Ireland—thereby preserving extensive cross-border
Trade and Economic Context
economic ties and the peace process. (See CRS Report
The UK, at 15% of the EU gross domestic product (GDP)
RL33105, The United Kingdom: Background, Brexit, and
in 2017, is the EU’s second largest economy after Germany
Relations with the United States, by Derek E. Mix.)
(21%). As a bloc, the EU is the UK’s largest trading
Potential scenarios for future UK-EU trade relations have
partner, while by country, the United States ranks first.
mixed economic and political attractiveness (Fig. 2).
Total U.S.-UK two-way trade in merchandise and services
No Customs Union?
($236 billion) was about one-third of such UK trade with
If the UK exits the EU without a deal, it would no longer be
the EU ($788 billion) in 2017 (U.S. and WTO trade data).
a part of the EU customs union and regain control over its
Many firms operating in the UK are taking steps to reduce
national trade policy at once. A no-deal Brexit, whatever its
trade disruptions post-Brexit, especially if the UK leaves
downsides may be, would free the UK to negotiate its own
the EU without a negotiated deal, loses its preferential
FTAs with the United States and other countries. Likewise,
access to the EU market, and returns to trade on WTO
if a Brexit deal emerges where the UK leaves the customs
terms. While EU tariffs are low overall, WTO terms for
union at some later point (as in the draft deal and political
UK-EU trade would be significantly different than the
declaration if an alternative arrangement were to be reached
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Brexit and Outlook for U.S.-UK Trade Agreement
on the Irish border issue), the UK also would be free to
with the EU. A customs union also could limit UK trade
negotiate its own trade deals.
policy such as in applying trade remedies or developing
In either scenario, the UK likely would seek to negotiate an
country preference programs.
FTA with the EU, but not be able to achieve single market
Other UK Trade Considerations
access. The EU-Canada Comprehensive Economic and
The UK, seeking continuity in its trade ties after Brexit, is:
Trade Agreement (CETA), for instance, eliminates most
 Negotiating its own WTO “schedule” of commitments on goods,
tariffs but has major exceptions, such as for services, which
services, and agriculture. The EU schedule applies to all EU
are integral to UK trade. Negotiations could be lengthy;
members. Agricultural negotiations are particularly complex as
CETA negotiations took seven years. Other examples of
they involve reallocation of EU and UK quotas. The UK’s post-
potential trade arrangements between the EU and non-EU
Brexit continued participation in the WTO Government
countries are Norway and Switzerland, which are not in the
Procurement Agreement (GPA) was approved recently.
customs union but have tariff-free access to the EU (with

some exclusions, e.g., agriculture and fisheries for Norway,
Working to replicate existing EU deals with non-EU countries.
These EU deals would not apply to the UK post-Brexit. The
some services for Switzerland). At the same time, Norway
UK has so far concluded a fraction of the deals it aims to
and Switzerland have no say on EU decisions on rules and
replicate. For instance, its bilateral engagement is ongoing with
regulations and must accept free movement of workers and
Canada, Japan, and South Korea, which all have trade
pay in to the EU budget. Norway’s access to the EU market
agreements with the EU.
is through its membership in the European Economic Area
(EEA). Switzerland (not in the EEA) has more complicated
 Negotiating sector-specific regulatory agreements. A focus is on
access through over 100 sectoral agreements with the EU.
mutual recognition agreements (MRAs) to assure continued
acceptance by UK and partner country regulators of certain
Customs Union?
product testing and inspections by the other. For instance, the
Alternatively, the UK could remain in the customs union or
United States and UK concluded an MRA on pharmaceuticals,
be a part of some other restrictive customs arrangement,
as well as agreements on derivatives and insurance.
and not regain an independent trade policy. This could
 Taking steps to pursue a range of new trade deals once outside of
occur if a UK-EU deal keeps the UK in the customs union
the EU. In addition to the United States, potential countries
permanently or in an extended transition period.
that the UK has identified as of interest for negotiating new
Turkey is a prime example of a non-EU country in a
trade deals include Australia, China, India, and New Zealand.
customs union relationship with the EU. Like Norway and
U.S.-UK Trade Agreement Outlook
Switzerland, Turkey has no voice on EU decisions, but
unlike them, does not contribute to the EU budget. Turkey-
Should the UK regain an independent trade policy,
EU trade is tariff-free on covered products (most goods and
prospects for a U.S.-UK trade agreement are mixed. Some
processed agricultural products). Turkey has adopted the
experts view an FTA as more feasible than a U.S.-EU trade
EU common external tariff, and must apply tariff reductions
deal, given historical similarities in trade policy approaches
that the EU negotiates with other countries. To receive
and the U.S.-UK “special relationship.” Others caution that
reciprocal market access to these EU trading partners,
domestic sensitivities could impede a “quick win” on a
Turkey needs to negotiate its own agreements with them.
trade deal. Some stakeholders, particularly in the UK, have
raised concerns about effects, for instance, on food safety
Figure 2. Non-EU Country Arrangements with the EU
regulations. Key issues also could include financial
services, investment, and e-commerce. How U.S.-EU
tensions over steel, aluminum, and potential auto tariffs
could affect the U.S.-UK negotiations is uncertain.
Each side’s approach to the negotiations could be affected
by potential U.S.-EU and UK-EU trade negotiations. The
United States may be hard-pressed to negotiate with the UK
without clarity on the future UK-EU relationship. To the
extent that the UK decides to continue aligning its rules and
regulations with the EU, its largest trading partner, sticking
points in past U.S.-EU trade negotiations (e.g., agriculture)
could resurface in the U.S.-UK context.
Congress is expected to continue ongoing consultations
with the Administration over the scope of proposed
negotiations, and engage in oversight during negotiations.
Congress would need to approve implementing legislation
for a potential final trade agreement to enter into force. See

CRS Report R44817, U.S.-UK Free Trade Agreement:
Source: CRS, based on various sources.
Prospects and Issues for Congress, by Shayerah Ilias
If the UK were to participate in the customs union, it
Akhtar.
potentially could negotiate on areas outside of the scope of
the customs union, e.g., services, digital trade, public
Shayerah Ilias Akhtar, Specialist in International Trade
procurement, intellectual property, and regulatory
and Finance
cooperation. Still, negotiating flexibility may be limited if a
IF11123
goal of being in the customs union is continued alignment
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Brexit and Outlook for U.S.-UK Trade Agreement


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https://crsreports.congress.gov | IF11123 · VERSION 1 · NEW

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