EU-US rivalry could bring ill winds for 'Global Britain'

31 January 2020 12:47

At midnight tonight — Brussels time, naturally — the UK will formally leave the EU and the easy part will be done.

What will follow is unclear, and largely in the hands of Boris Johnson's government. With an unassailable parliamentary majority, the UK prime minister has the domestic mandate that so eluded his predecessor, Theresa May. He can use it to push through just about any trade deal the EU agrees to, as well as agreements with other countries around the world.

Johnson's idea of "Global Britain" is to maintain close trading relations with Europe while exploiting other opportunities elsewhere, free from the shackles of EU membership. The UK's cultural cachet, free-trading heritage and strong diplomatic ties to many big economies will allow it to sprint ahead of the EU pack, the argument goes.

The reality looks bleaker, partly because growing tensions between the US and the EU will make it very difficult for the UK to have a close trading relationship with both. From data protection to food standards, and from climate change to banking rules, Britain will have to favor one of these partners over the other — or risk displeasing both.

At the same time, the global economy is far more interconnected — in depth as well as breadth — than it was in 1973, when Britain last stood alone. Just-in-time supply chains mean many industries will be hobbled by even minimal customs checks with the EU; the mass of data-privacy and financial regulations will make life equally difficult for the service sector.

So far, Johnson has not gone over entirely to the US camp, as some British Europhiles had feared. On Tuesday, his government approved a limited role for Huawei in deploying 5G infrastructure, defying pressure from the US to ban the Chinese company.

Game of chicken

But US pressure will be harder to brush off when it comes to negotiating a trade deal. Many of President Donald Trump's demands, such as acceptance of US food standards or a loosening of geographical indications, would mean crossing EU red lines. To seal a trade deal with the US, Britain may have to diverge from EU regulations — intensifying the checks that will take place on goods entering the Single Market.

The current signs are not promising, with Trump and other US officials threatening to impose tariffs on the UK if it acts against US interests. While similar threats from the Trump administration to the EU have proved to be empty, they have nevertheless stood in the way of any meaningful trade talks. The same could hold for the UK, which is under time pressure to sign a big post-Brexit trade deal.

Last week in Davos, for example, UK finance minister Sajid Javid vowed to press ahead with a 2 percent revenue tax on large digital companies. In response, his US counterpart Steve Mnuchin said this would be "discriminatory" and could lead to retaliation in the form of car tariffs.

The threat shows that the UK will be constrained by US as well as EU interests as it establishes an independent trade policy. As a relatively small economy — less than one-seventh of the US's in terms of gross domestic product — it must take such threats seriously.

Perhaps more important, the Trump administration's combative approach suggests that a vaunted UK-US trade deal may not be available — or at the very least, will come at a high price.

A key area of tension between the US and EU is in food standards, particularly around the sale of chlorine-washed chicken and hormone-treated beef — both widespread in the US and banned in the EU — but also around stricter EU animal-welfare standards and regulation of pesticides.

Washington has long complained that the EU's standards are unscientific and burdensome for US farmers, and it is likely to push hard on this issue when negotiating any trade deal with the UK. Published US negotiating objectives aim to "remove expeditiously unwarranted barriers that block the export of US food and agricultural products" to the UK.

Leaked UK government papers on the negotiations make clear the US's particular opposition to maintaining EU practice in food production. In one UK memo from November 2018 on wine labeling, a US official is quoted describing the UK's upholding of EU standards as "the disease spreading."

Another UK memo sees US officials identifying a "philosophical difference" with their EU counterparts.

But if the UK concedes this point to the US, it could cause serious harm to its trading relationship with the EU, which insists on sanitary and food-safety standards being aligned. If the UK allows chlorine-washed chicken into its market, it could face restrictions in selling meat to the EU, officials have warned.

Geographical indications

Another likely flashpoint is in the protection of "geographical indications" or GIs: names reserved for food and drink produced in a certain region, such as Champagne and Parmesan cheese. The EU insists on maintaining these protections, even when this stance threatens the success of a trade negotiation — as was the case with the Mercosur deal, eventually agreed last year.

The US, by contrast, prefers a trademark system and could put pressure on the UK to move away from GIs. But doing so would be likely to incur penalties with the EU.

Both powers have tried to stamp their mark on trading partners, as seen in their recent dealings with China. The EU and China last year reached a standalone agreement on a limited list of 200 GIs — 100 from each side — which they would protect from misleading labeling.

This vexed the US administration, which insisted that any future Chinese GI agreements should be "subject to cancellation," and should not undermine market access for US goods "using trademarks and generic terms." China agreed to this under a "phase one" trade deal signed last month.

The UK has said it will continue to use the EU's GI system until the end of the Brexit transition period, and will create its own system thereafter. If China's experience is any guide, that process is likely to turn into a battlefield between the EU and the US.

Data protection

It's not only physical goods that will stir tensions between the EU and the US: The regulation of digital economies and data flows could be equally problematic.

The UK plans to remain aligned with the EU's General Data Protection Regulation, which gives national regulators the power to fine companies up to 4 percent of their global revenue. While this hasn't yet become a major point of tension between the US and the EU, it could, if and when data-protection authorities start issuing big fines against the likes of Google and Facebook.

As with food standards and GIs, any such development could lead the US to put pressure on the UK to diverge from the strict EU rules, backed up by the threat of tariffs or the withholding of a trade deal.

The UK has already formally committed, in the Withdrawal Agreement, to continue indefinitely to protect EU citizens' personal data that it already holds. The government has said it intends to maintain the status quo after Brexit: that is, to fully implement the GDPR through the UK's Data Protection Act 2018.

Any divergence from this strict EU rule could harm the UK's economic relationship with the bloc, which could, for example, withdraw the UK's "adequacy" status. That means UK companies would face restrictions on accessing EU citizens' data.

Future agreements with the US could drag the UK away from the GDPR. Indeed, one deal, on US access to UK-based data for law enforcement purposes, is already causing problems.

Under a deal signed in October, but yet to enter into force, US law-enforcement agencies can order US tech companies to hand over electronic data held in the UK, when these data relate to serious crimes such as terrorism and child sexual abuse.

Where this data relates to EU citizens, there could be a clash with the GDPR. The European Data Protection Supervisor said last year that such data could be provided only in very limited cases, related to serious crime.

While this issue could yet be amicably resolved, it shows how any future attempts by the UK to strike data deals with the US could strain its existing relationship with the EU.

Climate change

Environmental policy, too, could put Britain in a difficult position, with the EU aiming to completely decarbonize its economy by 2050 while the US drags its feet.

The ambitious goals of the new European Commission, which took office in December, will almost certainly result in policies that reach beyond the bloc's borders, to ensure European companies don't lose out to competitors free from such strict standards elsewhere. As in other problematic areas, the EU may expect the UK to align itself with these policies.

One EU policy on the horizon is a "carbon border adjustment mechanism" — effectively, a tariff on dirty imports. An importer of Indian steel, say, would be charged a levy to offset the additional costs faced by EU producers in adhering to stricter environmental standards.

This week, senior US officials lashed out at these proposals, saying Washington would respond with punitive measures should the tariff apply to American companies. The UK could expect similar treatment from Washington, if it were to put in place a border mechanism equivalent to the EU's.

But if the UK doesn't implement such a policy, it risks exposing its own industry to being undercut by cheaper, dirtier imports. It could protect itself by allowing UK standards to slip — but then its own exports might become subject to the EU tariffs.

So far, the UK has led the pack in terms of climate policy: It was the first EU country to write a goal of carbon neutrality by 2050 into domestic law.

But environmental policies could be the first thing to suffer if the economy slows down after Brexit. For example, the UK government's earlier plans for a no-deal outcome proposed a carbon price of around 16 pounds per ton — about 19 euros. EU industries currently pay around 25 euros per ton under the Emissions Trading System, and this could rise further under the current commission.

Financial services

The pattern of strict EU rules clashing with a more liberal US regime could be reversed in the case of financial services — though this will not make it any less vexatious for the UK.

EU banks are still not subject to global capital rules agreed in December 2017. The commission plans to present a draft law this year to implement those rules, potentially putting EU banks on the hook for 125 billion euros ($138 billion). But national governments could yet insist on carveouts before passing the law, perhaps exempting exposures in mortgages or blue-chip lending.

The UK will then face the choice of whether to join the EU in offering similar exemptions, potentially angering the US; or to stand by the global agreement, winning US favor but running the risk of slowing down UK banks vis-à-vis their EU competitors.

In previous similar cases, the UK has favored higher regulation. Its former finance minister George Osborne in 2011 forced institutions to ringfence their investment banking off from utility-like services, while France and Germany first watered down, then abandoned, similar attempts to impose structural separations on the continent's banks.

As with other points of friction, it remains to be seen what path Johnson's government will tread.

But in the modern world, bare-bones trade deals won't be enough for the UK to prosper. As the West's two great powers drift apart, Britain risks being cast adrift, unable to dock in either port.

* Poppy Carnell, Joanna Sopinska, Matthew Holehouse, Matthew Newman, Giulia Bedini and Jack Schickler contributed reporting

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