Trade Deals – are we heading for negotiation chaos?

The news barely gets a mention in the media, but progress is being made across the globe securing trade deals that will play a significant part in our trade and commerce post Brexit. Roll over agreements are being secured to achieve, so far as possible, status quo where we currently benefit from EU deals. New deals will also be sought – most notably with the US.

A new deal with South Korea has recently been announced and efforts continue with other important trading partners such as Canada and Turkey.

But, in terms of new deals, the spotlight has been on negotiations with the United States. This briefing note takes a look at some key points we ought to be aware of when it comes to trade in goods. A separate briefing will take a look at services.

Politicians frequently use language such as “this will be a special deal” or “we can do this deal quickly”. It was good to see Prime Minister Johnson caution that a deal with the US is certainly a year away. No deals will be “special” and all will have their complexities.

The US is, for certain, positive about doing a deal – its negotiation objectives were published in the earlier part of this year. We are behind the US on this score – Government has consulted but has yet to produce definitive guidance to inform the negotiations.

UK/US Trade is significant

Taking the US and the UK as, respectively, the first and fifth global economies, annual trade two way amounts to more than $230 billion. The potential of the relationship is, of course, currently restricted by the rules and regulations of the European Union – there is no trade deal in place between the US and the EU although both aspire to have one – and that just might complicate negotiations somewhat as we don’t yet know the new status we will have with the EU – joint customs area,  Free Trade Agreement or something else?

There is a big risk for negotiators in advancing a deal with the US ahead of one with the EU and that is bringing into the deal with the US something that is not compatible with – something that contaminates if you will, the integrity of the deal we really want to achieve with the EU 27.

So what do we need to understand in terms of complexities of a Trade Deal?

Its already clear that there are multiple areas where any willingness on the UK’s part to set a position on what goods can be imported into the UK might be viewed as not acceptable to the EU. Agriculture is likely to be the most interesting focus for this risk. The EU is, in its negotiations with the US, adopting a particularly protective stance.

Are there any tariff or quantitative limitation related challenges to doing a trade deal with the US?

This is a reference to taxes on importations or, in the alternative, limitations on precisely how much of a given product can be permitted as imports within a given time frame.

A Free Trade deal should achieve equal treatment for each other’s goods – unless, through specific agreement, certain categories of goods are to be treated differently. There is currently no expectation that imports from the US to the UK in any category will still command protection. The US, however, in its negotiating objectives makes an oblique reference to this possibility in the areas of textiles and apparel products.

What are the key non-tariff challenges to doing a trade deal?

The key areas of focus for negotiators typically fall into two categories these being:-

  • Sanitary and Phytosanitary products (food and animal and pharmaceutical products); and
  • Technical barriers to trade (the equivalent of our domestic product fails to meet certain safety or other practical requirements).

Sanitary and Phytosanitary products

Controversy surrounds this area of international trade almost as no other. Much has been said around the risks to health through permitting importation of US chlorinated chicken produce. At the same time there appears to be little made of the very different position taken by the EU over food and animal product regulation with a particularly rigid control system that, it is alleged,  actually breaks WTO rules concerning accepting standards set by another country as equivalent.

The EU insists on taking a prescriptive approach to regulation – if a product does not meet the criteria set by the EU then importation is strictly prohibited. The WTO expects its members to adopt an approach tolerant of other participants rules and regulations. Essentially other countries should not be pressurised into adopting your rules and regulations but rather, the focus should be on agreements that modify or potentially remove existing regulations that have a discriminatory effect and which cannot be justified by reference to scientific data or on health and safety or environmental grounds.

Helpfully, the US negotiating principles anticipate this approach and there is an expectation that both parties remain free to establish and maintain their own rules and standards in the key risk areas of food safety and animal and plant health. So the issue of chlorinated chicken and any other areas where there is a safety based concern should not unduly hinder the settling of a trade deal – points of detail of this kind are an issue for further down the line.

Technical Barriers to Trade

Technical barriers to trade have become, internationally, an issue of increasing importance as the volume of technical regulations and standards brought into effect globally increases. The WTO sets out the issues succinctly in the following way:-

“increased regulatory policy can be seen as the result of higher standards of living worldwide, which have boosted consumers’ demand for safe and high quality products, and of growing problems of water, air and soil pollution which have encouraged modern societies to explore environmentally friendly products”.

And what do these technical barriers mean to a business looking to break into an overseas market? The effect is most likely seen at the point of entry into the market and the cost of securing product acceptance.  Costs will include translating and understanding the relevant regulations, hiring experts to help with product conformity issues, changes in manufacturing processes (including redesign costs).

It can easily be seen that securing agreement internationally to one adopted standard being close enough to another presents a potential exporter with significantly less risk and will strengthen appetite to address the challenges of that new market.

The US negotiating position sets out an expectation that the UK will adhere to the decisions and recommendations of the WTO in the area of technical barriers to trade. This, we are likely to agree to.

Again, the approach taken by the EU is at odds with its approach being one of “prove your product meets our regulations”. This issue has contributed significantly to the inability to date on the part of the EU to secure a trade deal with the US.

What about our public services – are they at risk of US takeover?

The comments made by US President Trump concerning the NHS were not in line with the US negotiation principles. In any trade deal it is usually understood that policies around public services – and how they are delivered – remain a domestic matter. There seems to be no appetite within the UK to differ from that position and concerns raised by politicians around the NHS “being for sale”  could be said to be scaremongering!

EU member states place great importance upon product protection through geographical indicators of  origin – will this become an issue with the US?

Potentially yes. US negotiation principles refer to preventing the “improper use” of rules of geographical origin. There is a strong lobby group in the US concerned that rules of origin impede trade in agricultural products. The UK’s willingness to continue and acknowledge existing EU protections features in the Withdrawal Agreement. There will be no particular reason for Prime Minister Johnson’s team to focus on this as an area for renegotiation – presenting a further complexity for US negotiations. Interestingly, however, the UK has relatively little practical interest in this subject with few EU based protections existing. A number that we do have  – such as Scotch Whisky – have protections at World Trade Organisation level (remember the issues we had with Japan over this product?).

So which deal will come first – US or EU?

That is a difficult question! In terms of progress to date UK/US discussions (not yet negotiations) are ahead of anything that can be achieved with the EU – insisting as it has upon merely the warm words of a memorandum of understanding style future relationship document  and refusal to enter into detailed trade negotiations until after exit day has restricted the ability to progress to negotiations.

Crucially – and this will be understood by the negotiation teams and Ministers – completing one deal will have consequences for the other. Some tricky judgements lie ahead and early publication of the now overdue negotiation principles for the US deal is much needed.

For more information on the impact of Trade Deal negotiations upon your business contact Frank Suttie at Brexit Legals.

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