Trump and Johnson open trade talks but experts doubt of a massive deal

Trump and Johnson open trade talks but experts doubt of a massive deal

Britain’s Prime Minister Boris Johnson (R) welcomes US President Donald Trump (L) to the NATO summit at the Grove hotel in Watford, northeast of London on December 4, 2019.

Peter Nicholls | AFP | Getty Images

The U.K. is about to start trade negotiations with the United States, but some experts doubt they’ll achieve a far-reaching deal anytime soon.

The two countries announced in January their intention to conclude an agreement in 2020. Speaking at the World Economic Forum, Commerce Secretary Wilbur Ross said that both economies are similar and “it should be much easier” to reach a deal, as a result. However, analysts are only expecting a “shallow” agreement, given the upcoming U.S. presidential election and recent disputes over 5G and digital taxation.

“I don’t have high expectations and don’t expect anything major to happen soon. There are both political and technical obstacles standing in the way of a comprehensive trade deal between the two,” Fredrik Erixon, an international trade expert at the Brussels-based think tank ECIPE, told CNBC Tuesday.

The British government announced in late January that Huawei will be allowed to participate in the country’s 5G network, though with some restrictions. This decision was not been welcomed by the White House, where officials believe that the Chinese firm poses a security threat. At the same time, the U.K. has also said it will go ahead with plans to tax tech giants, which are mostly large American firms. The U.S. believes such a tax discriminates against their homegrown companies.

Moritz Kraemer, chief economic advisor at advisory firm Acreditus, said that in principle negotiations should be smooth, but there are a “series of rubs.” He cited the dispute over 5G, digital taxation and President Donald Trump’s “America First” approach as some of the obstacles.

“While both sides claim that a comprehensive deal is possible this year, that remains doubtful. The U.S. side will be absorbed by the nearing presidential election and the U.K. side should have its hands full negotiating with the EU,” Kraemer said via email.

In addition, given the time pressure to conclude a deal before the end of the year, analysts do not expect anything broad or wide-ranging.

“It is our expectation that, although it will not be signed, much less ratified, before the U.S.’s November 3 election, there will be significant progress toward the U.S.-U.K. Free Trade Agreement (FTA) by then. That said, the noise about the FTA will be louder than the actual substance of the deal,” Anna Rosenberg, head of Europe and the U.K. at the advisory firm Signum Global, said in a note to clients.

Brexit in the way

The U.K. left the European Union on January 31, but it is still bound to follow EU rules until the end of a transition period, due to last until late December. In the meantime, U.K. officials can negotiate trade deals with other countries, but these can only take effect from the moment that transition period ends.

A shallow agreement will make both sides able to score some political points.

Fredrik Erixon

Director at ECIPE

During this time, the British government will also be busy figuring out new commercial links with the EU. This could further complicate negotiations with the United States.

“EU-U.K. trade discussion will limit the negotiating freedom with the U.S. For example, should the U.K. end up adhering to EU food standards, which we expect in some areas, a deal with the U.S. involving agriculture will be more limited,” Rosenberg from Signum Global said.

In 2018, the U.K.’s total trade with the EU reached £641.9 billion ($831.02 billion). In contrast, its total trade with non-EU countries stood at £657.2 billion for that year. The U.K. government has embarked on a trade deal bonanza, looking to reach agreements with various countries to compensate for its departure from the EU. At the moment, the U.K. is negotiating with Canada, Mexico and Ukraine, to name just a few.

However, reaching a deal with the United States would have a bigger impact given the current level of commerce between the two. In 2018, the U.S. topped the U.K.’s list of single-country trading partners, with a total trade flow of £190.5 billion ($246.91 billion). Germany came second, followed by the Netherlands and France.

Erixon said that the “magnitude of the gains” from a U.S.-U.K. trade deal “aren’t in the same universe as the magnitude of the costs for leaving the EU on bad trade terms.”

“A shallow agreement will make both sides able to score some political points and get some small economic gains, and that is probably all that they could wish for,” he added.

Niclas Poitiers, a research fellow and trade expert at the Brussels-based think tank Bruegel told CNBC that it is “simply impossible” to compensate for the economic impact of Brexit with a U.S. trade deal.

“The EU Single Market is by far the most comprehensive commercial relationship in the world, and of a similar size as the U.S. market. Furthermore, geography and integrated value chains play an important role, as do areas of specialization,” he said via email, highlighting that the U.K. and U.S. are both competitive in the service sector.

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