US and UK negotiators should pay special attention to the services sector in an eventual trade deal in order to avoid political pitfalls, say Karen Briggs and Rohitesh Dhawan.
Spending a couple of days in New York helps put Brexit in context for us Brits. Cable news is wall-to-wall Trump, save the odd Superbowl story, and Brexit barely gets a mention. But sit down with US chief executives as we did last week and you find US multinationals are not only engaged with Brexit, but also ‘get it’ – from operational implications right through to the issue’s significance for the global economy.
We heard the CEOs express support for the UK market and as the source of over a quarter of all foreign direct investment into the UK. But they were also honest in saying they had no choice but to start contingency planning: looking at alternative corporate structures, making plans to move talent, rethinking supply chains etc. And what we heard was that it was not only European capitals wooing them with “slick proposals” to relocate. The likes of New York, Singapore and Bangalore were at it too.
In that context, Prime Minister Theresa May is sensible to try and pull American business closer. For Washington, closer commercial ties would help by offsetting those areas where it is pulling back from trade agreements. A deal looks like good business for both sides.
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But even if it makes strategic sense, it will not be so easy selling a meaningful free trade deal to populations that have grown more sceptical about free trade. Personally we feel the current backlash against free trade and globalisation won't dramatically shift the long-term trajectory towards more open, connected markets. Nevertheless, the “optics look difficult” as they say, especially since Donald Trump himself has become the movement’s cheerleader-in-chief.
Meanwhile across the pond, British voters may be open to the need for a post-Brexit trade push, but the UK Government can expect little public understanding about US-grown GMO veg popping up on supermarket shelves or US pharmaceutical firms ‘flooding’ the NHS with their products. The “optics” are wrong on both sides.
So rather than try to sell a deal focusing on freer trade in emblematic industries like manufacturing, agriculture and the public sector, why not focus on a simpler target – like services?
Liam Fox, the international trade minister, has already signalled he is keen to make progress on this aspect of global trade – one that has remained stunted for so many decades. Despite the fact that it accounts for the biggest slice of output in many developed economies (and almost 80% of GDP in both the US and UK) trade agreements in services have traditionally foundered as the sides resisted the harmonisation of national regulations.
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It can be done though. Singapore and Australia have just said they are expanding their 2003 free trade pact to include services. Between the US and Britain, the natural barriers look a lot lower than many bilateral deals would face too. They are similar markets in terms of maturity and consumer behaviour; they have comparable legal and regulatory systems and standards; they share a common language and are old political friends. And their workforces enjoy similar levels of pay, limiting the danger of undercutting each other on price.
For the UK, the attractions are obvious. The US is Britain’s No.1 market for services exports, a £14 billion surplus in 2015 and the weaker pound could swell that figure this year (think how attractive British law firms, media agencies and accountants suddenly look to a US multinational right now). Against that, the UK needs to take seriously the danger expressed to us last week by US CEOs, that they are looking at their post-Brexit options, most obviously where US financial institutions deploy resources globally. They will remain present in the UK, but we can expect some rebalancing.
The UK is gearing up to do a deal. Officials from the Department for International Trade should be in Washington this week for informal discussions according to Dr Fox. He added that he plans to lead a ministerial delegation as soon as the Trump administration has formalised its trade line-up.
Doing a deal straight after leaving the EU (by doing the groundwork now) would offer Mrs May’s government an immediate Brexit dividend. Donald Trump has said he is keen to do a “quick deal” and in the president the UK may have found someone willing to work on an ambitious agreement, at speed. After the hard yards of Brexit negotiations, for the prime minister a services-led trade deal could feel like her touchdown moment.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.
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