Updated July 8, 2020
Brexit and Outlook for a U.S.-UK Free Trade Agreement
Introduction
officials have warned that a tight time frame may constrain
On October 16, 2018, the Trump Administration notified
the scope of the talks but that the EU is “ready to find
Congress, under Trade Promotion Authority (TPA), of its
compromises.” One such compromise could allow the UK
intent to enter into trade agreement negotiations with the
to diverge from EU rules and regulations, giving it more
United Kingdom (UK). Brexit—the withdrawal of the UK
flexibility in other trade negotiations, in exchange for
from the European Union (EU)—occurred on January 31,
giving the EU the right to impose higher tariffs on UK
2020. During the transition period, set to last until the end
goods if the UK deviates from the “level playing field.”
of 2020, the UK remains a member of the EU single market
WTO Terms If the transition period ends without an UK-
and customs union, and subject to EU rules. The UK and
EU trade agreement, the UK would no longer have
EU have launched negotiations on their future trade and
preferential access to the EU market and the two would
economic relationship. Any final UK-EU agreement would
return to World Trade Organization (WTO) terms of trade
directly inform prospects for the potential bilateral U.S.-UK
at the end of the transition period, which would no longer
free trade agreement (FTA).
be tariff-free. EU tariffs are low (5.2% on average in 2018),
Post-Brexit UK-EU Trade Relationship
but WTO trade terms could significantly affect certain
Initial 2019 data shows that the UK was the world’s sixth-
industries; for instance, the EU imposes tariffs of 10% on
largest economy, and the second-largest economy of the
passenger cars and tariffs of up to 6.5% on chemicals.
EU28, comprising 15% of the bloc’s gross domestic
Nontariff barriers such as new customs procedures would
product (GDP); Germany comprised 21% of EU GDP. The
add delays and costs to doing business. Most analysts
EU as a bloc is the UK’s largest trading partner; by country,
predict that this “no deal” scenario would likely constrain
the United States is its largest (see Figure 1). UK-EU trade
UK economic growth to a greater extent than if the two
is tightly integrated through supply chains, trade in services,
sides are able to conclude a limited tariff-only trade
and foreign affiliate activity.
agreement.
Figure 1. Share of U.S. and UK Total Trade, 2019
Nontariff Barriers UK regulatory frameworks are
currently aligned with those of the EU on data protection
and data flows, but after the transition period, the EU is to
make determinations on UK compliance with the EU
regulatory frameworks. To minimize any interruption of
cross-border data flows and digital trade, the EU would
review the UK’s data regime to determine if it sufficiently
protects personal data or if other arrangements are
needed. The United States may need to negotiate a separate
cross-border data flows agreement with the UK.
Source: CRS, based on U.S. Bureau of Economic Analysis and UK
Office for National Statistics data.
For financial services, absent an equivalence decision after
UK-EU Trade Agreement The political declaration
the transition period, the UK will not be able to use
attached to the UK-EU withdrawal agreement envisions “an
financial passporting (which allows banks to use their UK
ambitious, broad, deep, and flexible partnership across trade
bases to access EU markets without establishing legally
and economic cooperation with a comprehensive and
separate subsidiaries). Even with positive determinations,
balanced Free Trade Agreement at its core.” Existing EU
the EU could revoke equivalence at any time, disrupting
FTAs vary in their scope of trade liberalization and rules-
UK trade. Continued trade in financial services may require
setting, and it is unclear what the final scope may be of any
firms in the UK and EU to restructure operations; some
UK-EU trade agreement.
financial institutions already have shifted or are planning to
shift some jobs and assets from London to EU cities.
Draft EU negotiating directives for a trade agreement with
Customs Regime
the UK include tariff- and quota-free trade on goods and
If, as planned, the UK is no longer part
cover a range of sectors, including services trade, digital
of the EU customs union, it would regain control of its
trade, intellectual property rights (IPR), government
national trade policy. U.S. exporters would need to manage
procurement, and regulatory cooperation. The EU offer is
separate customs regimes for the UK and EU starting
conditional on commitments to ensure a “level playing
January 1, 2021. However, the UK stated that it will not
field” in relation to state aid, labor and environmental
implement full customs controls on goods entering from the
protections and regulations, and taxation agreements.
EU for six months. Rather, the new UK customs regime is
to be initiated in three stages, starting January 1, 2021, with
Progress to date has been limited but the UK is pushing to
full controls in effect by July 1, 2021. The extra time
conclude a deal by autumn, with Prime Minister Johnson
provides UK importers additional time to complete customs
telling negotiators in June to “put the tiger in the tank.” EU
declarations and defer tariff payments with border checks
https://crsreports.congress.gov
Brexit and Outlook for a U.S.-UK Free Trade Agreement
limited to controlled goods and some “high risk” items
regulations appear to be “thinly veiled protectionism.” On
from the EU. However, for UK exports, the EU stated it
the other hand, UK farmers and some in civil society have
will require all customs paperwork. Trade between the EU
voiced concerns about the implications of U.S. demands for
and Northern Ireland are to be considered intra-EU.
greater access to the UK market, and potential changes to
Global Britain
UK food safety regulations. Some observers have suggested
creating a dual system in which U.S. agriculture exports not
After the transition period, the UK would regain control
meeting UK standards would be allowed to enter the UK
over its national trade policy and be free to enter into its
market but would be subject to additional tariffs.
own trade agreements with other countries. The UK is
acting on multiple fronts to retain and strengthen its trade
Some Members of Congress and analysts question the
linkages around the world after the transition period ends. It
sequencing of the talks, to the extent that the United States
is negotiating its own WTO schedule of commitments on
may face difficulty negotiating with the UK without
goods, services, and agriculture. Treatment of agricultural
knowing what the final UK-EU relationship looks like;
products is especially complex as it requires reallocation of
others counter that the UK-EU trade and economic
EU and UK tariff-rate quotas. In the interim, the UK
relationship is becoming clearer. Some experts are
continues to apply the EU schedule. The UK’s continued
optimistic about a U.S.-UK FTA in light of the U.S.-UK
participation in the WTO Agreement on Government
“special relationship” and historical similarities in trade
Procurement (GPA) was approved in principle; the UK has
approaches. The UK was frequently a leading voice on
not submitted its instrument of accession yet.
trade liberalization in the EU.
The UK also is working to replicate existing EU deals with
Figure 2. U.S.-UK Trade and Direct Investment
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 June 2020, the UK had signed continuity deals
covering over 8% of total UK trade with close to 50
countries or territories, including Switzerland,
Liechtenstein, Chile, Israel, and South Korea.
In addition, the UK is negotiating mutual recognition
agreements (MRAs) to assure continued acceptance by UK
and partner country regulators of each other’s product
Source: CRS, data from U.S. Bureau of Economic Analysis.
testing and inspections in specific sectors. To date, the
Notes: Foreign direct investment (FDI) on stock basis.
United States and UK have signed a number of MRAs
Many U.S. and UK businesses and other groups see an FTA
covering specific sectors such as telecom and marine.
as an opportunity to enhance market access and align UK
Also, as part of its “Global Britain” strategy, the UK is
regulations more closely with those of the United States
taking steps to pursue new trade deals. During the transition
than of the EU. Other stakeholders oppose perceived efforts
period, the UK can negotiate, but not implement, trade
to weaken UK regulations. Other controversial issues could
agreements with other countries and is in discussions with
include financial services, investment, e-commerce, and
multiple countries with existing EU agreements. Rather
pharmaceuticals. To the extent that the UK remains aligned
than rolling over the EU-Japan FTA, Japan seeks to quickly
with the EU, difficulties in past U.S.-EU trade negotiations
negotiate new terms with the UK in time for Japan to pass
could resurface in the U.S.-UK context.
an FTA in autumn. The UK also launched FTA negotiations
Additional complexities for the U.S.-UK trade talks include
with Australia and New Zealand, and seeks to join the
frictions over tariffs and other policy issues. For instance,
regional Comprehensive and Progressive Agreement for
the Trump Administration has threatened the UK with
Trans-Pacific Partnership (CPTPP).
tariffs over its plan to apply a new digital services taxes
U.S.-UK Trade Agreement Outlook
(DST). Other issues, such as the U.S. Section 232 national
The UK is a major U.S. trade and economic partner, and
security-based steel and aluminum tariffs, and potential
foreign direct investment (FDI) and affiliate activity are key
auto tariffs, could see pushback from the UK side.
aspects of bilateral ties (see Figure 2). U.S.-UK trade
Many Members of Congress support a U.S.-UK FTA.
negotiations aim to address tariff and nontariff barriers to
However, some Members have cautioned that they would
trade in goods, services, and agriculture, investment, and
oppose a deal if Brexit undermines the Northern Ireland
government procurement, as well as trade-related rules. The
peace process, whereas others support a trade agreement
first two rounds of virtual negotiations were conducted in
without such conditions. Congress may continue to hold
May and June 2020, and further rounds are planned.
consultations with the Administration over the scope of the
U.S. Trade Representative (USTR) Robert Lighthizer has
negotiations, and engage in oversight as the negotiations
committed to pursuing a comprehensive agreement that
progress. For more information, see CRS Report R45944,
would be subject to congressional approval and not a
Brexit: Status and Outlook, coordinated by Derek E. Mix.
limited, “skinny” deal. He warned, however, that
negotiations will take time and likely not be complete in
Shayerah Ilias Akhtar, Specialist in International Trade
advance of the upcoming presidential election. Agriculture
and Finance
could be the most contentious issue in negotiations. In the
Rachel F. Fefer, Analyst in International Trade and
USTR’s view, some UK food safety and animal welfare
Finance
https://crsreports.congress.gov
Brexit and Outlook for a U.S.-UK Free Trade Agreement
IF11123
Andres B. Schwarzenberg, Analyst in International Trade
and Finance
Disclaimer
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