Think About the U.K. in Nafta. Really.
The visit to Washington on Friday of U.K. Prime Minister Theresa May makes her the first foreign leader to meet the new U.S. president. There are already reports that President Donald Trump may get a return audience in Britain, full of royal pomp, sometime this summer. The two leaders are sure in a hurry -- and for good reason.
In a couple of months, May plans to trigger Article 50 of the European Union treaty, starting two years of exit negotiations from the EU. The prospect of a trade agreement with the world's largest economy and the U.K.'s historic ally would bolster confidence in post-Brexit Britain, and be an important feather in May's cap as she faces scrutiny from her own Parliament.
For Trump, a sprinkling of royal gold dust would be a legitimizing act in a hostile world. He has, reports say, privately taken to calling the prime minister "My Maggie," in reference to the close ties between Margaret Thatcher and Ronald Reagan in the 1980s. A vocal Brexit supporter and EU critic, Trump also has an interest in Britain's EU withdrawal going well.
Most Americans find the "special relationship" with Britain a quaint notion. Expect Trump to take it seriously and May to invoke it repeatedly. It would be a marriage of pure convenience, not the ideological meeting of minds that their predecessors shared. But given their mutual needs, it might just work.
Ironically, the idea that the U.K. should turn toward the U.S. for a new, post-EU trade agreement was once advocated by a small group of vocal British and American conservatives who were mercilessly mocked for it.
In 1998, the Canadian media tycoon Conrad Black, then owner of the Daily Telegraph, a conservative British newspaper, gave a keynote speech at the Centre for Policy Studies, a free-market think tank in London, entitled "Britain's Final Choice: Europe or America?"
"None of the continental European countries has a particular affinity with the United States and Canada or anything slightly comparable to Britain's dramatic modern intimacy with North America," he said.
Black's argument was that the U.K. should leave the EU and join the North American Free Trade Agreement:
Such an expanding Nafta would have every commercial advantage over the EU. It is based on the Anglo-American free-market model of relatively restrained taxation and social spending, which is the principal reason the United States and Canada together have created net, an average of two million more new jobs per year than the European Union for the last 15 years. Nafta, as its name implies, is a free trade area only. The United States will not make any significant concessions of sovereignty and does not expect other countries to do so either.
The speech might have gone largely unnoticed had Black not published a version in his newspaper. Michael Heseltine, a former deputy prime minister, demanded a right of reply and denounced Black's "political naivete."
Across the Atlantic, a few people had the same idea, only to be similarly dismissed. In April that year, Newt Gingrich, then Speaker of the House of Representatives, suggested that the U.K. could become an associate member of Nafta. He was ignored. Two years later, Phil Gramm, then chairman of the Senate Committee on International Trade, echoed the idea in a speech at the same Centre for Policy Studies where Black first raised it. He too was treated like a party-crasher.
"Britain leaving the EU to join Nafta is a mad, bad and dangerous idea," snorted Chris Huhne, a Liberal Democratic member of the European Parliament. Foreign Secretary Robin Cook called Gramm's statements "barmy." Gramm shot back that "barmy" was not a word in the American lexicon, "which reminds me we have been separated too long."
Meanwhile, the Senate Finance Committee had asked the U.S. International Trade Commission to study whether a deal between the U.K. and Nafta was possible. The resulting review, based on 1995 data, found that eliminating tariffs on products traded between the two would increase U.S. imports from the U.K. by 7 percent to 12 percent, and U.K. imports from the U.S. by 11 percent to 16 percent. But ultimately, given the low existing tariff barriers, effects on gross domestic product would be small, with "very small" effects on manufacturing output. However, the study didn't consider the effects of removing non-tariff barriers and so said its results probably understated the impact of eliminating remaining barriers.
It was all academic at the time. As an EU member, the U.K. was bound by the EU's customs union, and so wasn't free to lower tariffs and trade barriers with non-EU countries.
From the U.K. perspective, the idea no longer seems so crazy. U.K. trade with the EU has been declining. The U.S. has become the U.K.'s second-largest trading partner, after Germany. Affiliates of U.S. companies employ over 1.2 million workers in the U.K., while U.S. affiliates of British companies employ over 1 million workers.
A British-U.S. trade deal, with or without Nafta, would not be a cinch. There are, the U.S. study found, only narrow areas where significant barriers to trade exist and you can expect both sides to dig in to preserve them. May's Conservative Party has just a tiny majority in the House of Commons and will face tough opposition to any deal that is seen as unfavorable. She will have limited negotiating power against an economy nearly six times the size of the U.K.'s (and very few trade negotiators to throw at the problem). Getting the whole of the North American market in a deal that would otherwise look skimpy might help her sell it at home.
Trump's campaign description of Nafta as "the worst trade deal ever" would seem to box him in. But his recent emphasis on renegotiating the pact with Mexico and Canada suggests he's aware of the enormous amount of bilateral trade at stake -- U.S. trade with its neighbors more than tripled since the deal was signed -- and maybe even the complex web of supply chains that would be disrupted by scrapping it.
Tearing the deal apart and stitching it back together with the U.K. included would be a risky gambit, but it would allow him to claim that he reformed Nafta (maybe even renaming it), while also rebutting critics who say he is a reckless protectionist. Canada and Mexico would have to sign off, but it's hard to imagine a Trans-Atlantic expansion of the club being a deal-breaker, given that the alternative might be no deal at all.
Black (who has been supportive of Trump) lamented two decades ago that U.K. leaders lacked the pluck to clinch what he saw as Britain's rightful destiny. But May has the courage of Brexit voters' convictions. It is now more of a test for the U.S. dealmaker-in-chief.
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