Updated February 12, 2020
Brexit and Outlook for U.S.-UK Free Trade Agreement
Introduction
trade, intellectual property rights (IPR), government
Brexit—the withdrawal of the United Kingdom (UK) from
procurement, and regulatory cooperation. The EU offer is
the European Union (EU)—occurred on January 31, 2020.
conditional on commitments to ensure a “level playing
During the transition period, currently expected to last until
field” in relation to state aid, labor and environmental
the end of the 2020, the UK remains a member of the EU
protections, and taxation agreements. The UK may seek to
single market and customs union, and therefore subject to
diverge from EU rules and regulations, which would afford
EU rules. The UK and EU aim to negotiate an agreement on
it more flexibility in its other trade negotiations.
their future trade and economic relationship. The outcome
The Johnson government aims to conclude a deal by the
of the negotiations directly shapes prospects for a potential
end of the transition period. EU officials have warned that
bilateral U.S.-UK free trade agreement (FTA), which is
the “extremely challenging” time frame will constrain the
supported by the Trump Administration and many
scope of the talks. Some past EU trade agreement
Members of Congress.
negotiations have been lengthy; EU negotiations with
Post-Brexit UK-EU Trade Relationship
Canada and Japan took, respectively, seven and four years.
In 2018, the UK was the world’s fifth-largest economy, and
Customs Union? The prospect of the UK remaining a
the second largest economy of the EU28, comprising 15.2%
of the bloc’s gross domestic pro
member of the EU customs union is unlikely in light of the
duct (GDP) after Germany
decisive victory of Johnson’s Conservative Party in the
(21.0%). The EU bloc is the UK’s largest trading partner;
December 2019 UK election and recent UK official
by country, the United States is its largest (see Figure 1).
statements. A customs union would allow the UK closer
UK-EU trade is tightly integrated through supply chains,
economic ties with the EU, but limit the UK’s control over
trade in services, and foreign affiliate activity.
its trade policy. The UK potentially could negotiate with
Figure 1. Share of UK Total Trade, 2018
other countries on issues outside of the customs union (e.g.,
services, government procurement, or IPR), but would have
limited negotiating scope since alignment with the EU
would be a condition of being in the customs union—which
Other,
includes a common external that customs union members
36%
EU27,
apply to trade with countries outside of the arrangement. A
49%
customs union also could limit UK trade policy on trade
remedies or developing country preference programs.
US,
15%
If the UK is no longer part of the EU customs union, it
would regain control over its national trade policy and be
free to negotiate its own trade agreements with other

Source: CRS, based on UK House of Commons Library data.
countries, a key rationale for many Brexit supporters.
Notes: Total trade for exports and imports of goods and services.
WTO Terms? If the transition period ends without an
UK-EU trade agreement or customs union arrangement, the
Several possibilities exist for the future UK-EU trade
UK would no longer have preferential access to the EU
relationship. Most of the analyses predict lower growth for
the UK economy in all scenarios, but a “no deal” scenario
market. WTO terms would govern UK-EU trade, which
would no longer be tariff-free. EU tariffs are low (5.2% on
in which the UK and EU are unable to conclude a trade
average), but WTO trade terms could significantly affect
agreement and return to World Trade Organization (WTO)
certain industries; for instance, the EU imposes tariffs of
terms of trade at the end of the transition period likely
10% on passenger cars and tariffs of up to 6.5% on
would constrain growth rates the most.
chemicals. Nontariff barriers such as new customs
Trade Agreement? The political declaration attached to
procedures would add delays and costs to doing business.
the UK-EU withdrawal agreement envisions “an ambitious,
UK regulatory frameworks are currently aligned with those
broad, deep, and flexible partnership across trade and
of the EU on data protection and data flows, but after the
economic cooperation with a comprehensive and balanced
transition period, the EU will have to make determinations
Free Trade Agreement at its core.” The UK government,
on UK compliance with the EU regulatory frameworks. For
led by Prime Minister Boris Johnson, seeks to negotiate a
financial services, absent an equivalence decision, after the
“best in class” trade deal with the EU. Existing EU FTAs
transition period, the UK will not be able to use financial
vary in their scope of trade liberalization and rules-setting.
passporting (which allows banks to use their UK bases to
Draft EU negotiating directives for a trade agreement with
access EU markets without establishing legally separate
the UK include tariff- and quota-free trade on goods and
subsidiaries). Even with a positive determination, the EU
cover a range of sectors, including services trade, digital
would retain the ability to revoke equivalence at any time.
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Brexit and Outlook for U.S.-UK Free Trade Agreement
Continued trade in financial services may require firms in
EU and U.S.-EU trade agreement negotiations. Some
the UK and EU to restructure operations; some financial
analysts also question the sequencing, to the extent that the
institutions already have shifted or are planning to shift
United States may face difficulty negotiating with the UK
some jobs and assets from London to EU cities.
without knowing what the final UK-EU relationship looks
Global Britain
like; others counter that the UK-EU trade and economic
relationship is becoming clearer. Some experts are
The UK is acting on multiple fronts to retain and strengthen
optimistic about a U.S.-UK FTA in light of the U.S.-UK
its trade linkages around the world after the transition
“special relationship” and historical similarities in trade
period ends. It is negotiating its own WTO schedule of
approaches. The UK has been a leading voice on trade
commitments on goods, services, and agriculture.
liberalization in the EU. Others are skeptical about the
Treatment of agricultural products is especially complex as
likelihood of a “quick win,” particularly for a
it requires reallocation of EU and UK tariff-rate quotas. In
comprehensive trade deal, as negotiations would need to
the interim, the UK continues to apply the EU schedule.
The UK’s
overcome a number of obstacles and concerns.
continued participation in the WTO Government
Procurement Agreement (GPA) was approved in principle;
Figure 2. U.S.-UK Trade and Direct Investment
the UK has not submitted its instrument of accession yet.
The UK also is working to replicate existing EU deals with
non-EU countries. The EU has more than 40 trade
agreements with around 70 countries. During the transition
period, EU trade agreements continue to apply to the UK.
As of December 4, 2019, the UK had signed continuity
deals covering 8.3% of total UK trade with around 50
countries or territories, including Switzerland,
Liechtenstein, Iceland, Norway, and South Korea.

Source: CRS, data from U.S. Bureau of Economic Analysis.
In addition, the UK is negotiating mutual recognition
Notes: Foreign direct investment (FDI) on stock basis.
agreements (MRAs) to assure continued acceptance by UK
and partner country regulators of each other’s product
Many U.S. and UK businesses and other groups see an FTA
testing and inspections in specific sectors. The UK has
as an opportunity to enhance market access and align UK
signed MRAs with Australia, New Zealand, and the United
regulations more closely with those of the United States
States; MRA discussions with Japan are ongoing.
than of the EU. Other stakeholders oppose perceived efforts
to weaken UK regulations. Some in UK civil society have
Finally, as part of the UK government’s “Global Britain”
voiced concerns about the implications of U.S. demands for
strategy, the UK is taking steps to pursue new trade deals,
greater access to the UK market, and potential changes to
such as with the United States, Australia, China, India, and
UK food safety regulations and prices for pharmaceutical
New Zealand. During the transition period, the UK can
drugs. Bilateral issues also could include financial services,
negotiate, but not implement, trade agreements with other
investment, and e-commerce. To the extent that the UK
countries. Rather than rolling over the EU-Japan FTA,
remains aligned with the EU, difficulties in past U.S.-EU
Japan seeks to negotiate new terms with the UK.
trade negotiations could resurface in the U.S.-UK context.
U.S.-UK Trade Agreement Outlook
Other complexities for the U.S.-UK trade talks include
The UK is a major U.S. trade and economic partner, and
frictions over tariffs and other policy issues. For instance,
foreign direct investment (FDI) and affiliate activity are key
the Trump Administration has threatened the UK with
aspects of bilateral ties (see Figure 2). In January 2017,
tariffs over its plan to apply a new digital services taxes
President Trump and then-Prime Minister Theresa May
(DST), and strongly opposes the UK’s recent decision to
discussed the potential for a future U.S.-UK trade
open its 5G network development to participation by
agreement, and a bilateral working group was subsequently
Huawei, a Chinese telecommunications firm. Other issues,
formed to explore ways to strengthen trade and investment
such as the U.S. Section 232 national security-based steel
ties. On October 16, 2018, the Administration formally
and aluminum tariffs, and potential auto tariffs, could see
notified Congress, under Trade Promotion Authority (TPA),
pushback from the UK side.
of its intent to enter into trade agreement negotiations with
the UK to address tariff and nontariff barriers to trade in
Many Members of Congress support a U.S.-UK FTA.
goods, services, and agriculture, investment, and
However, some Members have cautioned that they would
government procurement, as well as trade-related rules.
oppose a deal if Brexit undermines the Northern Ireland
peace process, whereas others support a trade agreement
U.S. Trade Representative Robert Lighthizer has said that
without such conditions. Whether a potential final
trade negotiations with the UK are a “priority” and will start
agreement would meet congressional expectations or TPA
as soon as the UK is in a position to negotiate, but he
requirements, or be concluded as an executive agreement is
cautioned that the negotiations may take time. Whether the
unclear. Congress may continue to hold consultations with
Administration ultimately takes a comprehensive approach
the Administration over the scope of the negotiations, and
to the negotiations, as with the U.S.-Mexico-Canada Trade
engage in oversight as the negotiations progress. For more
Agreement (USMCA), or a more limited approach, as with
information, see CRS Report R45944, Brexit: Status and
the U.S.-Japan trade deal, remains to be seen.
Outlook, coordinated by Derek E. Mix.
Some analysts question the priority that will be afforded to
U.S.-UK trade agreement negotiations, in light of the UK-
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Brexit and Outlook for U.S.-UK Free Trade Agreement

IF11123
Shayerah Ilias Akhtar, Specialist in International Trade
and Finance


Disclaimer
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