The U.S. and U.K. are looking to enter into a trade agreement. Will this impact U.S. supply chains and are there implications for USMCA? Bush Institute-SMU Economic Growth Initiative Director Matthew Rooney answers our questions.
What are the implications of USMCA entry into force for the proposed US-UK trade deal?
The terms of the US-Mexico-Canada Agreement (USMCA) suggest that the current Administration’s trade policy is to seek more open markets for many services, especially internet-related services, that have emerged since the template for trade negotiations was largely set in the early ‘90s. Similarly, the Trump Administration sought far more stringent labor conditions in USMCA than had been the approach under previous administrations, in an effort to level the playing field for American workers.
At the same time, a set of rules were negotiated for manufactured goods, especially autos, that are designed to encourage industry to “re-shore” parts of the supply chain, bringing more production back to the U.S. These changes in rules imply an obtrusive government inspection regime with conditions that will be costly for industries to comply with.
Securing free trade in services will not be hard for the U.K. to agree to; like ours, the British economy is heavily invested in financial and online services, and U.K. companies are well established and competitive. However, the U.K. is a very free-trade-minded country with a relatively small economy that needs access to foreign markets to thrive. As a result, it is likely harder for them to agree to the kind of intrusive inspections that USMCA includes.
Finally, free trade agreements and the more limited commitments required under the World Trade Organization generally tend to tolerate more government interference in agricultural markets. The U.S, as a low-cost producer of agricultural commodities and food products, has traditionally tried to secure more open trade in these markets. However, the European Union has been one of the most determined defenders of a more managed approach.
The core question of the US-UK negotiation will likely be: will the U.K. break with the European approach and agree to more open agricultural trade? Or will it, in order to preserve its privileged access to the EU market and shield its own, relatively high-cost, agricultural sector from competition, refuse? We will see, of course, but my bet would be that they will be unable to give much ground, making a final deal tough to achieve.
How will a US-UK trade deal impact supply chains in the U.S.?
The model of global supply chains that has developed over the past three decades generally links high-cost with lower-cost production areas. Thus, enabling the industry to manage costs by shifting production to reduce overall cost to remain globally competitive. As a result, U.S. supply chains tend to stretch through Mexico to Central America, Colombia, Peru, and Chile, the low-cost countries in the Western Hemisphere with which we have free trade agreements. In addition, U.S. industry uses supply chains that link to China, Vietnam, and other low-cost countries in the Asia-Pacific.
Under the current circumstances, less than 20 percent of US-UK trade is in intermediate goods, which suggests that the two countries’ supply chains are not closely linked. This is not surprising, given that the U.S. and the U.K. are both high-cost production areas, with highly skilled workers, heavily capital-intensive production processes, high levels of environmental protection, and strong labor rights. As a result, it seems unlikely that a US-UK trade agreement would by itself lead to shifts in our supply chains. More likely, elements of those supply chains could be shifted, re-shored or “near-shored” as costs in many of those countries rise and as political pressure to “make it here at home” continues.