3Potential Economic Benefits of UK-US Trade Agreement
Current State of UK-US Trade and Investment
24.The US is the UK’s largest single-country trade partner. The CBI told us that the US-UK trade relationship is valued at over £160 billion,61 with the US accounting for 19.7% and 11.1% the UK’s total exports and total imports, respectively.62 In 2017, the US exported $123 billion of goods and services to the UK, making it the UK’s 2nd largest source of imports, and imported US $111 billion in goods and services from the UK.63
25.The UK is also the single largest investor in the US. British companies annually invest over $570 billion in the US, “contributing nearly 20% of all foreign-direct investment into the US”.64 The US is also the single biggest source of inward investment to the UK, accounting for 25% of all FDI projects in Europe and more than 12% of US FDI worldwide.65 Gary Campkin told us that “something like 60% of US foreign direct investment in financial services comes to the UK.”66 Together, the US and UK have around $1 trillion invested in each other’s economies67 and “every day, 1 million people in Britain go to work for a US company and 1 million Americans go to work for a British company”.68
26.We heard from a number of sectors in the course of the inquiry who provided a sector-specific assessment of current UK-US trade:
- Chemicals—Bilateral trade with the US in chemicals and pharmaceuticals in 2016 was £14.3 billion. The US was the UK’s top export destination for chemicals (14%) followed by Germany (13%), Belgium (8%), the Netherlands (7%) and France (7%).69
- Financial services—The UK exported £16 billion worth of financial services (including insurance) to the US in 2015, generating a financial services trade surplus with the US of £13 billion.70
- Food and Drink—In 2016, the US was the UK’s principal non-EU destination for food, feed and drink: 10% of UK exports went to the US (£2.1 billion, of which £1.5 billion was alcohol); 3% of imports came from the US (£1.25 billion). The UK had a surplus with the US of £895 million including alcohol, but a deficit of £634m excluding alcohol.71 UK food and drink exports to the US are dominated by value added consumer products, including whisky (£873.9 million), gin (£172.6 million), salmon (£169.2 million), beer (£146.9 million) and vodka (£89.7 million).72
- Insurance and Pensions—In 2015, the UK exported $4 billion of insurance and pensions services to the US, while importing £146 million from the US.73
- Tech—The UK exported £4.06 billion in telecoms, computers and information services and imported £2 billion.74
Current UK-US Trade Agreements
27.Trade between the EU and US is primarily conducted under WTO rules, which includes the imposition of tariffs. Tariffs between the UK and US are, on average, quite low—around 3%75—although “[s]ome tariffs are still particularly high in sectors that are relevant for trade”, such as chemicals and agriculture.76 While the US and EU (and thereby the UK) do not have an FTA, both are parties to WTO agreements which further their trade relationship (e.g. Government Procurement Agreement). The EU and US are also parties to several bilateral trade-related agreements. In 1997 the US and EU signed a mutual recognition agreement (MRA) covering six sectors: telecoms equipment, electromagnetic compatibility, electrical safety, recreational craft, medical devices and pharmaceuticals.77 However, to date, only three of the six sectoral annexes of the 1997 MRA have been implemented. The MRA also has a transatlantic structure for overseeing implementation.78
28.Other notable agreements include the EU-US Open Skies Agreement (aviation), the Privacy Shield Agreement (discussed below) and the EU-US insurance coverage agreement.79 The Open Skies Agreement allows EU airlines to fly to the US from any EU airport, regardless of their place of establishment, and operate international routes between the EU and the US, and routes beyond the EU and the US, without restrictions on the number of flights or type of aircraft. It also governs ownership requirements for EU and US airlines.80 The EU-US insurance coverage agreement addresses three areas of insurance oversight: reinsurance; group supervision; and the exchange of insurance information between supervisors.81 According to the Commission, the agreement eliminates opportunity costs to EU business of $400 million a year.82
Potential Economic Benefits of UK-US FTA
Economic Modelling and Trade Agreements
29.In this section we consider the potential effects of a UK-US FTA on the economy. First, we note some limitations of economic modelling in assessing future benefits of FTAs, and then we discuss the evidence we received on the potential overall effects of a UK-US FTA.
30.In the process of scoping potential FTAs, countries regularly prepare economic modelling of the potential effects of an agreement. Many studies of trade agreements use an approach called computable general equilibrium (CGE) modelling, which relies on estimates produced by the modellers of the impacts of removing tariff and non-tariff barriers (NTBs) to trade. Some have argued that the CGE-modelled effects of trade agreements depend largely on the assumptions made by the modellers, particularly with respect to the impact of NTBs on trade, and the data used.83 With respect to the assumptions which underpin CGE models, we were told that “[o]ne of the weaknesses of any of the assumptions … is that they are static models [which] do not take into consideration what changes of policy the Government might make as a result of the free trade agreement coming into force”.84 His Excellency Mr Downer said that assuming that “behaviour is static … [means] then the economic model is not going to turn out to be particularly valuable.”85
Projected Benefits of UK-US FTA
31.We have heard several different projections as to the potential economic effects of a UK-US FTA. First, the Government offered some assessment of the potential effects of an agreement. In July 2017, Dr Fox reportedly said that the Department’s internal analysis showed that “bilateral US-UK trade could rise from £167bn a year to about £207bn by 2030 ‘if we’re able to remove the barriers to trade that we have’”.86 Greg Hands further told us that the Department has “done some fairly standard use of Government models in this space”.87 Subsequently, in March 2018, the Exiting the EU Committee published the Government’s internal analysis which found that the “modelled US deal … [could] provid[e] a benefit to UK GDP of 0.2% in the long-term, within a range of 0.1 to 0.3%.”88 However, on the subject of benefits to the Australian economy of an agreement with the US against their own Government forecasts, His Excellency Mr Downer told us, “it has exceeded our expectations [ … ] It has worked incredibly well.”89 The Government’s analysis of the effect of Brexit on the economy, which took into account the possible effect of an agreement with the US, found that the effects could be dramatically different across regions and nations of the UK.90 When we asked the Minister about this assessment, he told us that it was “impossible to really effect a proper estimate, because we have no idea what is in the agreement”.91 The Minister told us that FTAs “add a significant amount to GDP on both sides”,92 and that a UK-US FTA could “[p]rovide a boost to the UK economy, potentially worth tens of billions of pounds”, based on “using computable general equilibrium trade models”.93 Mr Hands had earlier also told us that not all UK trade with existing EU partners is determined by the EU FTAs in place, noting that FTAs “on average” “will add more than 32% to trade volumes”.94
32.Other witnesses provided some percentage estimates of the potential GDP effects of a UK-US FTA. Samuel Lowe told us that “the guilty secret” of trade is that FTAs “do not deliver much aggregate growth”. According to Mr Lowe, “[a]nything over 1% is massive in terms of long-run growth, and most trade agreements are little more than rounding errors in terms of your long-run impact”95 By contrast, Shanker Singham said that the “biggest gain you could have” from a UK-US FTA was 2–3% of GDP, which he said was the result of the impact of “[b]order barriers … at the outset”.96 Even where potentials gains are hard to model, the Australian High Commissioner told us that FTAs can “psychologically affect[] the attitude of businesses to that country” by creating “a sort of notion—albeit an exaggerated notion—of a single economy”. He told us that, following the Australia-US FTA, “Australian investors have proved to be more willing to go and invest in the [US]” and vice-versa.97
33.We were told that, ultimately, the economic gains from a UK-US FTA depended on the reduction of regulatory barriers (discussed further below). For Mr Lowe, if the UK remained “broadly aligned with the EU regulatory system and [did] a tariff deal with the US”, the impact “would not necessarily be that great on a grand scale.”98 Dr Holmes, University of Sussex, agreed that a shallow, tariff-only agreement “would have relatively little effect”, and the impact of a UK-US agreement “would really depend on how those regulations were adjusted”.99 Accepting that economic forecasting is “very difficult to do”, Mr Singham also told us that “[a] comprehensive agreement that deals with regulatory barriers and behind-the-border barriers would do an awful lot”.100
Projections of effects of TTIP
34.Others referred us to evidence about the projected impacts of TTIP as a guide to the possible effects of a UK-US FTA. We were referred to an economic impact assessment of TTIP by the Centre for Economic Policy Research (CEPR), which was based on assumptions of “25% removal of non-tariff barriers between the two partners, and 32.5% in some areas, such as chemicals, cars and ICT.”101 That study found that TTIP could raise UK GDP by 0.14%-0.35%,102 and that an ambitious TTIP deal would increase the size of the EU economy around €120 billion (or 0.48% of GDP) and the US by €95 billion (or 0.39% of GDP).103 According to the study, the sectors most likely to benefit from TTIP included “processed foods (+9%), chemicals (+9%), other manufactured goods (+6%) … and especially motor vehicles (40%)”. Other studies of TTIP which used different modelling and / or assumptions produced varying projections, from a negative effect on EU GDP of -0.5% and positive increase to US GDP of 0.36%,104 to increases of 3.94% and 4.89% to EU and US GDP, respectively.105
35.A UK-US FTA has the potential to have a positive effect on economic growth. However, given how central new free trade agreements are to the UK’s Brexit strategy, and that an agreement with the US is top of the list, the Government should undertake detailed work modelling the potential effects of a UK-US agreement on the economy. The Government’s explanation that the content of an agreement is unknown is not fully satisfactory; there is no reason why it should not model a range of scenarios. The Government has indicated undertaking only a limited exercise in modelling and should increase this work to look at the range of potential variations to best assess potential impacts.
36.The Government should be clear and well-informed about the potential economic effects (positive or negative) of a UK-US FTA. Before pursuing a US trade agreement, the Department should conduct a comprehensive economic impact assessment. The assessment should go beyond an econometric study of the potential impacts, and consider in detail the effects of an agreement, broken down by sector as well as by each of the regions and devolved administrations of the UK. The Government should also be clear about the assumptions regarding reductions in non-tariff barriers which underpin the impact assessment. It should also take account of any effect of a trade agreement between the UK and the US on trade between the UK and its other trading partners.
37.We accept that there will be some occasions when the Government should not publish certain information to protect the UK’s negotiating position, but the Government should set out its position in its negotiating mandate, including identifying who is most and least likely to benefit from the proposed agreement.
62 Office for National Statistics, The UK trade and investment relationship with the United States of America: 2015, 5 September 2016
63 Bureau of Economic Analysis, United Kingdom - International Trade and Investment Country Facts, December 2017
65 Confederation of British Industry, Sterling Assets: British Investment Creating U.S. Jobs, August 2016; Organization for International Investment, Foreign Direct Investment in the United States - 2016 Report
66 Q 126
67 Joint Release by the UK International Trade Secretary, Dr. Liam Fox and U.S. Trade Representative Robert Lighthizer, June 2017
68 Q 355 [Greg Hands]
70 TheCityUK, “The UK leads European finance”, 13 September 2016
76 Q 163 [Dr Peter Holmes]
78 Legatum Institute, Developing a True Transatlantic Partnership—a High Standard Trade Agreement to Propel the Global Economy, June 2017, para 18.47
79 Bilateral Agreement between the EU and US on Prudential Measures Regarding Insurance and Reinsurance
80 Summary of Decision 2007/339/EC on the Air Transport Agreement between the EU and its Member States and the United States of America
82 Ibid; European Commission, Factsheet: EU - US Agreement on insurance and reinsurance, 22 September 2017
83 Ferdi De Ville and Gabriel Siles-Brügge, TTIP: The Truth about the Transatlantic Trade and Investment Partnership (Polity, 2016), pp 17–37
84 Q 322 [His Excellency Alexander Downer]
85 Q 330
86 “Liam Fox launches fresh drive on US-UK trade deal”, Financial Times, 24 July 2017
87 Q 359
88 Exiting the European Union Committee, EU Exit Analysis Cross Whitehall Briefing: January 2018, 8 March 2018, p 14
89 Q 337
90 As above
91 Q 360. See also Q 2 [Shanker Singham] (“The issue of the economic gain from a UK-US deal is difficult to answer without knowing what the agreement will be.”)
92 Q 371
93 Qq 355, 372
94 Oral evidence taken before the International Trade Committee on 24 January 2018, HC (2015–17) 520 iv, Qq 268–9 [Greg Hands]
95 Q 8
96 Q 10
97 Q325 [His Excellency Alexander Downer]
98 Q 8
99 Q 163
100 Q 10
101 Q 6 [Samuel Lowe]
102 Centre for Economic Policy Research, Estimating the Economic Impact on the UK of a Transatlantic Trade and Investment Partnership (TTIP) Agreement between the European Union and the United States: Final Project Report, March 2013
103 European Commission, Transatlantic Trade and Investment Partnership: The Economic Analysis Explained, September 2013, p 2
104 Federica Mustilli, “TTIP: Political and Economic Rationale and Implications” Intereconomics, vol 50 (2015), p 324; Jeronim Capaldo, “The Trans-Atlantic Trade and Investment Partnership: European Disintegration, Unemployment and Instability”, Global Development and Environment Institute Working Paper No. 14–03, October 2015, p 2.
105 Federica Mustilli, “TTIP: Political and Economic Rationale and Implications” Intereconomics, vol 50 (2015), p 324
Published: 1 May 2018