Brexit and Outlook for a U.S.-UK Free Trade Agreement

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Updated January 14, 2021
Brexit and Outlook for a U.S.-UK Free Trade Agreement
The United Kingdom (UK) is a major U.S. trade and
that, even with a deal, the UK’s economic growth will be
economic partner, and foreign direct investment (FDI) and
lower in the long-term than it would have been if the UK
affiliated activity are key aspects of bilateral ties. The
had remained in the EU—though not as low as it would
United States is the UK’s largest trading partner by country,
have been without a deal. Some critics say that the deal
while the European Union (EU), as a bloc, is its largest
lacks a clear framework for services, which comprise
overall partner (see Figure 1). Brexit, the UK’s withdrawal
around 80% of UK gross domestic product (GDP) and half
from the EU, and the conclusion of a new UK-EU trade
of UK exports. The limited treatment of some issues does
agreement are significant for a potential U.S.-UK free trade
not smooth all trade frictions introduced by Brexit, but may
agreement (FTA), initiated by the Trump Administration. If
allow the UK more flexibility in negotiations with other
a Biden Administration continues FTA negotiations,
countries. The implications of the deal—over 1,200 pages
Congress may actively monitor and shape them, and could
and with exceptions, limitations, and transition periods—
consider implementing legislation for any final agreement.
will take time to become fully apparent.
Figure 1. Share of U.S. and UK Total Trade, 2019
The trade commitments go beyond a typical FTA in some
respects, given the unique starting point for the UK-EU
trade talks. They cover market access and rules for trade in
goods, services, agriculture, government procurement,
investment, and energy and transportation; trade-related
rules on data flows, intellectual property rights (IPR), and
other areas; regulatory cooperation; sustainable
development standards; and other issues—enforceable
through binding dispute settlement and governed by an
institutional framework. A separate protocol governs trade
between the EU and Northern Ireland, treated as intra-EU.

Source: CRS, based on U.S. Bureau of Economic Analysis and UK
The trade deal gives the UK and EU tariff-free, quota-free
Office for National Statistics data.
access to each other’s markets and secures more
nondiscriminatory trade liberalization than if they used
UK-EU Trade Relationship
WTO-only terms. This avoids the imposition of tariffs that
On January 1, 2021, after a post-Brexit transition period
would have been, for instance, 50% or more on beef,
ended, the UK left the EU single market and customs union,
poultry, and dairy; up to 25% on processed fish, and up to
shedding its rights and obligations as an EU member state.
10% on autos. Still, the UK-EU trade deal does not fully
The UK regained control over its national trade policy, and
replicate trading within the far more frictionless EU single
is free to conclude its own international trade agreements.
market. Brexit introduced new exporting and importing
UK-EU trade and economic ties are now governed on a
licensing requirements, border checks, and regulatory
provisional basis by a new Trade and Cooperation
compliance requirements, raising costs and the potential for
Agreement. The agreement in principle, which the UK and
bottlenecks at borders. The agreement does not eliminate
EU reached on December 24, 2020, follows nine months of
customs requirements, but aims to simplify them, such as
contentious negotiations. In the end, both sides say that they
through mutual recognition of “trusted trader” arrangements
struck a fair and balanced agreement that respects each
to self-certify compliance with the other side’s regulations
side’s priorities. The UK has ratified the deal, and the EU is
and standards.
expected to follow in the coming months.
Although UK regulatory frameworks have been aligned
Many firms, facing years of uncertainty after the Brexit
with the EU, Brexit makes the UK a “third country” from
referendum, expressed relief that the deal appears to avoid
the EU perspective, meaning that the EU must make
the trade and economic disruption that a “hard Brexit” on
determinations on whether measures of the UK comply
World Trade Organization (WTO) terms was expected to
with corresponding EU regulatory frameworks; even with
cause. Given the high level of integration of UK-EU trade
positive determinations, the EU could revoke them at any
and investment and the role of the UK as a platform for
time, disrupting UK trade. The deal does not include mutual
firms to access the rest of the EU market, Brexit caused
recognition of conformity assessments, meaning that UK
uncertainty for U.S. firms exporting and operating in the
manufacturers now must have their products tested for
UK. A number of U.S. manufacturing, financial services,
compliance with EU frameworks and vice versa. The deal,
and other firms in the UK have been restructuring
however, does contain limited, sector-specific arrangements
operations due to Brexit changes. While the agreement is
for regulatory cooperation, such as for pharmaceutical
expected to yield a “certainty dividend” to the UK
manufacturing practices, motor vehicles, organic products,
economy, which also has been hard hit by the Coronavirus
trade in wine, and chemicals. In terms of services, the deal,
Disease 2019 (COVID-19) pandemic, most analyses predict
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Brexit and Outlook for a U.S.-UK Free Trade Agreement
for instance, lacks automatic mutual recognition of
intent to enter into comprehensive FTA negotiations with
professional qualifications.
the UK. The United States and UK conducted five rounds
The deal leaves a number of issues open-ended. For
of negotiations in 2020, all virtually. Despite high interest
financial services, which account for 7% of UK GDP and
on both sides and reported progress, the negotiations remain
one million jobs, the deal does not address UK financial
pending over outstanding issues.
services firms’ access to the EU, which previously was
It is uncertain if a Biden Administration will continue with
through a “passporting” right that allowed banks to use
the trade negotiations or engage, for instance, on specific
their UK bases to access EU markets without establishing
bilateral trade issues first. If negotiations are continued, it is
legally separate subsidiaries; the parties aim to establish a
not clear what priority they will take in relation to other
framework for cooperation by March 2021. Agricultural
potential U.S. trade negotiations, such as with the EU. To
trade also may face barriers or uncertainty, given the
be considered under the current TPA, an agreement must be
limited treatment of sanitary and phytosanitary standards
concluded by July 1, 2021. As the UK continues to
(SPS). Other issues not fully addressed include cross-border
conclude other trade agreements, U.S. businesses will lose
data flows, with the EU delaying a final decision on
advantages in UK markets in the absence a U.S.-UK FTA.
whether the UK provides adequate personal data protection;
If FTA negotiations are renewed, some experts are
many U.S. firms rely on such data flows to communicate
optimistic about their success in light of the U.S.-UK
with UK and EU customers, partners, and subsidiaries.
“special relationship” and historical similarities in trade
To try to ensure a “leveling playing field,” the agreement
approaches. The UK was a leading voice on trade
includes a “rebalancing mechanism” to allow each side to
liberalization in the EU. However, any U.S.-UK FTA talks
unilaterally reduce market access if it assesses that the other
could see flashpoints reemerge (see text box).
side’s actions result in subsidies that create market
distortions. This may allow the UK to diverge from EU
Potential Issues in U.S.-UK FTA Negotiations
rules, while allowing the EU to protect the integrity of the
Any continued U.S.-UK FTA talks may see debates over:
single market. The two sides also committed minimum
Agriculture. Some U.S. stakeholders view UK food safety and
standards on labor, the environment, and social issues, and
animal welfare regulations as protectionism. Meanwhile, UK
to not lower these standards to attract trade and investment.
farmers and some in civil society voice concerns about the
Global Britain
implications of U.S. demands for greater access to the UK
Since Brexit, the UK has aimed to retain and strengthen its
market, and potential changes to UK food safety regulations.
trade linkages globally. It negotiated and submitted to the
Pharmaceuticals. The United States seeks standards to
WTO for certification its own WTO schedules of
ensure that government regulatory reimbursement regimes are
commitments on goods, services, and agriculture, which
transparent and nondiscriminatory and provide ful market
were previously under the EU. The UK also now is a full
access for U.S. products. Some in UK civil society expressed
party in its own right to the WTO Agreement on
concern that a U.S.-UK FTA could lead to the UK privatizing
Government Procurement (GPA). U.S. and other exporters
services or raising drug prices; UK officials repeatedly have
will need to manage separate customs regimes and
maintained that these issues are not up for negotiation.
relationships for the UK and EU.
Other issues. Financial services, investment, e-commerce, and
As of January 1, 2021, EU trade agreements no longer
regulatory issues may be among other points of contention.
apply to the UK. Since the transition period, the UK has
Ongoing U.S.-UK trade frictions. The UK digital services
engaged in negotiations to replicate existing EU trade deals
tax, the U.S. Section 232 national security-based steel and
with non-EU countries (e.g., Switzerland, Iceland, Norway,
aluminum tariffs, and various retaliatory measures could add
South Korea, and Turkey), and pursued new deals with
complications. Many U.S. and UK firms see an FTA as a way to
countries with which the EU has not concluded trade deals
enhance market access and align UK regulations more closely
(e.g., Australia, India, and the United States). It also seeks
with those of the United States. Other stakeholders oppose
to join the regional Comprehensive and Progressive
what they perceive as efforts to weaken UK regulations. Based
Agreement for the Trans-Pacific Partnership (CPTPP or
on the UK-EU trade deal, the UK may weigh to what extent
TPP-11). To date, the UK has signed agreements covering
greater alignment with the United States may offset costs from
one-quarter of total UK trade with around 60 economies.
diverging from the EU.
The UK also negotiated mutual recognition agreements
(MRAs), as distinct agreements in some cases and as part of
Many Members of Congress support a U.S.-UK FTA. At
trade agreements in others, to assure continued acceptance
the same time, some Members of Congress have cautioned
by UK and partner country regulators of each other’s
that they would oppose a deal if Brexit undermines the
product testing and inspections in specific sectors (e.g.,
Northern Ireland peace process, whereas others support a
telecom and marine equipment in U.S.-UK MRAs).
trade agreement without such conditions.
U.S.-UK Trade Agreement Outlook

The UK’s departure from the EU opened up the possibility
Shayerah I. Akhtar, Specialist in International Trade and
of negotiating a U.S.-UK FTA. While the UK-EU trade
Finance
deal injects more certainty, how the UK-EU trade deal is
Rachel F. Fefer, Analyst in International Trade and
implemented and outstanding issues are treated may affect
Finance
negotiating positions and flexibility in U.S.-UK FTA talks.
Andres B. Schwarzenberg, Analyst in International Trade
On October 16, 2018, the Trump Administration notified
and Finance
Congress, under Trade Promotion Authority (TPA), of its
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Brexit and Outlook for a U.S.-UK Free Trade Agreement

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