The increased protectionist turn taken by the United States, including steel and aluminium tariffs levied against the EU and other countries and a potential trade war with China, comes at an awkward time for the United Kingdom. While the United Kingdom is negotiating its exit from the European Union, it still remains within the EU and its customs union and so is dependent on the EU to negotiate on its behalf. Even though the UK and EU both oppose a trade war, this incident highlights the awkward position the UK will find itself in after Brexit if America continues to pursue protectionist policies.
It is worth noting that the economic impact of the steel and aluminium tariffs is small for the UK. Total UK steel exports to the United States account for only £360m (0.01% percent of GDP), and aluminium even less. Even if a trade war widens, the UK’s most competitive exports are in the services sector, where British exports are more constrained by non-tariff barriers than by tariffs that would be utilised in a traditional trade war.
However, the trade and customs relationship between the UK and EU is still unsettled, limiting Britain’s freedom of action. Despite a brief flirtation with seeking a separate exemption, UK International Trade Secretary Liam Fox has confirmed that he will work within the EU framework to roll-back or secure exemptions from the US’s steel and aluminium tariffs. Based on the current framework for a transitional deal, the UK will remain in the customs union until December 2020, and during this time could negotiate and sign, but not implement any new trade deals. The May Government has ruled out remaining in the customs union permanently, although a combination of factors – avoiding a ‘hard’ border with Ireland, demands by business for ‘frictionless’ UK-EU trade, and the logistical difficulties of processing customs checks at existing port facilities – means there is not necessarily a majority in parliament for leaving the customs union. Additionally, if the UK does regain an independent trade policy, it is legally ambiguous if existing trade agreements the UK was party to as an EU member will remain in force.
Whatever the outcome of these negotiations, this dispute highlights the UK’s weakened position in any future trade negotiation with the US (or other nations). The exemptions from these tariffs did not include EEA members such as Norway, nor did it exempt Turkey, which is in the Customs Union with the EU – suggesting that the EU would not attempt to negotiate on the UK’s behalf in future trade disputes even if it were in a customs union. It is also unclear what would happen if the UK was forced to negotiate over tariff exemptions closer to the March 29 deadline.
An increasingly protectionist US also raises significant new difficulties in managing bilateral US-UK trade relations post-Brexit. The US already has significant leverage to extract concessions from the UK in any FTA because of its large market size. The US has generally used this leverage in FTA negotiations to require its partners in FTAs to conform to American product standards on a variety of issues. The Trump Administration could use the threat of revoking exemptions to the steel tariff as part of negotiations to maximize this leverage; even the UK achieved a permanent exemption by then. Trump has used the threat of letting tariff exemptions expire on Canada and Mexico in the NAFTA negotiations, and has already leveraged these tariffs to secure a renegotiation of the Korea-US Free Trade Agreement (KORUS). However, the UK cannot commit to such a deal until the relationship with the EU is finalised, as on some issues, such as GMOs, US and EU standards are incompatible, leaving it in an uncomfortable position.
The political environment heightens these stakes for both sides, with the UK at a disadvantage. President Trump has consistently claimed that his priority is to negotiate ‘better’ trade deals than its predecessors, while the UK needs to demonstrate on a global stage that it is able to secure any trade deal and has only begun hiring and training trade negotiators. This is particularly awkward as currently both the US and UK report that they have a bilateral trade surplus with the other, due to discrepancies in calculations of exchange rates, and other measurement issues. Further complicating any negotiations is the fact that President Trump’s first term will end shortly after the transition period expires, meaning any negotiation will be conducted in the midst of a presidential campaign and may be concluded or implemented by another, possibly less protectionist, American president.
Finally, a potential wider US trade war with China will also impact the UK. Many of the key points of dispute raised by the Trump administration – including overproduction of steel and forced technology transfer – are concerns most western countries are sympathetic to, including the UK. However, the United States’ threats to undermine or withdraw from the rules-based trade order overwhelm any benefit these actions may provide. As a smaller country, the UK is likely to have to resort to the WTO’s dispute resolution mechanism to assert its interests in a post-Brexit world. America’s threats to pull out, and veto over the appointment of new appellate body members means that this important piece of recourse for the UK may not be available once it is on its own.
The threat of a more protectionist United States creates more uncertainty in UK trade policy in what was already a point of maximum uncertainty. The UK alone is more vulnerable to the US using tariffs as leverage as it develops its own in terms of trade policy. While this might cause the UK to pursue a ‘softer’ Brexit with the EU, the fact that by surrendering its membership means it will no longer benefit from a coordinated response, means the UK will have few good options to respond to this new environment.