When U.K. Prime Minister Theresa May visits the White House on Friday, she will have every reason to expect the firmest of commitments from President Trump for the speediest of negotiations of a U.S.-U.K. bilateral trade deal. There is also every reason to expect that both May and Trump will trumpet this commitment as the start of a new golden era in U.S.-U.K. trade relations.
It would, however, be a serious mistake for May to delude herself to think that such a commitment will provide any real solution to the U.K.’s serious balance of payment challenges over the next few years. This would seem to be especially the case now that the she is well on her way to having burned the U.K.’s bridges to Europe, and given the many constraints to finalizing a rapid U.S. trade deal.
May’s Washington visit comes on the eve of her triggering Article 50 of the Lisbon Treaty that will start the two-year period within which the U.K. must negotiate its European Union divorce. It also comes in the immediate wake of May’s most recent European speech making it clear that the U.K. is determined to regain full control over immigration policy and that it will not be seeking a partial separation from the European Union in the forthcoming divorce negotiations.
May’s visit also comes at a time that the U.K. is suffering from its largest external current account deficit in the post-war period and the pound remains under considerable pressure in the foreign exchange markets. Since the June 2016 Brexit vote, when Britain voted to leave the EU, the pound has lost almost 20 percent of its value against the dollar.
{mosads}At the same time, foreign companies are now warning May that they might have to relocate at least part of their U.K. operations to Europe if they do not have assurances that they will continue to enjoy free access to the European single market in a post-Brexit world.
As May makes her way to Washington, she has to know that her hardline stance ahead of the forthcoming Brexit negotiations heightens the chances that the U.K. will lose its preferential access to the European single market, which currently absorbs around 45 percent of the U.K.’s exports.
After all, the U.K.’s European partners would not want a favorable post-Brexit arrangement with Britain to give encouragement to the remaining EU members to emulate the U.K. and leave the European Union.
This makes it all the more necessary that the U.K. quickly strikes favorable bilateral trade agreements with other major trade partners. It also explains in large measure why May is losing no time in striking a close relationship with the new Trump administration.
While a favorable bilateral U.S. trade agreement holds out the potential for enormous long-term benefits to the British economy, it would be foolish for May to expect that such an agreement could quickly come into effect.
For a start, under its European Union Treaty commitments, the U.K. could only formally start negotiating a U.S. bilateral trade arrangement once the U.K. has actually left the European Union, which at the earliest would occur by March 2019.
There could also be significant delays in obtaining the needed congressional approval for a new trade deal after any such agreement had been negotiated. On average, it has taken three-and-a-half years from launching for the U.S. to have fully implemented the 20 last bilateral trade deals that it has negotiated.
Even if a bilateral U.S.-U.K. bilateral trade agreement could be quickly negotiated, it would be doubtful that this would do very much to halt the prospective relocation of foreign companies from the U.K. to Europe. A primary reason that these companies located in the U.K. was to gain ready access to the European single market.
A U.S.-U.K. bilateral trade arrangement would now do nothing to prevent the U.K. from losing such access to the single market. This would seem to be especially the case for those foreign companies in the U.K.’s all-important financial sector, which are likely to lose their financial passport to the European market once the U.K. exits the European Union.
All of this likely means that over the next few years, the pound will continue to lose value in the foreign exchange market as the U.K. has difficulty in financing its gaping external current account deficit. While this might do wonders for the U.K.’s external competitive position, it could cause problems for a Trump administration that is bent on leveling the playing field for U.S. exporters.
One must expect that May will make the most of the likely announcement of the ready disposition of the Trump administration to a favorable U.S.-U.K. bilateral trade. However, one has to hope that she does not allow the positive atmospherics in Washington to blind her to the major balance of payment challenges the U.K. will face over the next few years as it tries to extricate itself out of the Europe Union.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.
The views expressed by contributors are their own and not the views of The Hill.