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Trade experts dismiss UK joining Nafta as “far-fetched”

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Claims that the UK could join the North American Free Trade Agreement (Nafta) have been dismissed as “far-fetched” by trade policy experts.

With the UK facing an uncertain trading future post-Brexit, the Daily Telegraph has reported that government ministers are considering joining the trade alliance with the US, Canada and Mexico. The newspaper has claimed this is an option if the UK is unable to secure a post-Brexit trade deal with the EU.

The proposal comes on the back of the publication of UK Brexit whitepapers on future trade and customs options earlier this week. The papers set out the UK’s strategic objectives, and for the first time outlined what the country might do if it exits the EU without a free trade deal – among which are plans for speedy deals with non-EU states.

However, the suggestion has caused some bewilderment among experts on both sides of the pond.

While acknowledging that each of the three members of Nafta would have a strong interest in fortifying trade relations with the UK post-Brexit, Michael Camunez, who served as assistant secretary of commerce for market access and compliance as well as US commissioner on security and co-operation in Europe under the Obama administration, tells GTR the story is unrealistic.

“The idea, at least to me, that the UK could join Nafta seems quite far-fetched. What makes Nafta so unique and special is in no small measure the geographic proximity of the partner countries, which has facilitated an unprecedented level of economic integration and co-production that is hard to imagine extending across the Atlantic. Moreover, putting aside very legitimate questions as to whether Nafta survives in the Trump era – sadly an open question today – it seems a reach too far to talk about adding any new members, much less the UK,” he says.

On the other side of the Atlantic in the UK, there are also serious doubts to the value a UK-Nafta deal would bring businesses, least not concerns of exposure of some industries to competitive exports.

There is some appeal to a Nafta deal. It could be quicker and easier deal to negotiate than creating a free trade deal from scratch, and would draw on far fewer of Whitehall’s scarce resources. It would also be an eye-catching ‘early harvest’ delivered for the government’s ‘global Britain’ strategy.

Peter Mackay, former Canadian attorney general, minister of justice, minister of national defence and minister of foreign affairs, says there would also be great economic benefit for the UK pursuing a trade deal with the Nafta members individually and as a bloc.

Mackay, now a partner in Baker & McKenzie’s Toronto office, tells GTR: “There is a significant economic opportunity to be offered to the UK by Canada in the current turmoil in the aftermath of Brexit. I believe there is an exponential benefit to both countries in pursuing a UK-Canada trade deal. This could also later include a broader Nafta in the future, but will probably have to await the conclusion of current Nafta renegotiations.

However, there are a number of issues to consider, according to Daniel Capparelli, trade policy practice lead at Global Counsel advisory.

He tells GTR: “I doubt there would be much enthusiasm among the UK business community about a UK Nafta membership, especially if this is presented as a substitute for a deep and comprehensive deal with the EU. Nafta membership is very unlikely to create substantial market opening in areas where the UK’s competitive and comparative advantage is greatest – such as services and financial services – given its relatively low level of coverage in these areas.”

By contrast, he says, joining Nafta would be all but certain to expose a range of UK manufacturing and agriculture sectors to highly competitive US and Mexican exports.

“Importantly, to benefit from preferential market access into Nafta, UK exporters would, in many cases, have to significantly restructure their production, supply and distribution chains to comply with the North American trading zone’s product standards and rules of origin. In many cases, such as automotive, UK-based firms would have to produce two versions of the same product to export to both EU and Nafta markets.”

A further issue that will likely make Nafta unattractive to UK businesses is the rules of origin requirements that currently require products to have 60% of North American content to qualify for Nafta privileges – an amount the US wants to significantly increase to ensure that product inputs are not being used from other markets.

“If you were to join a revised Nafta – which would likely include stricter rules of origin and require a higher content of parts and inputs originating from Nafta partner countries, as this is what President Trump is pushing for – this would significantly reduce the amount of foreign inputs the UK could use in its manufacturing for goods to be shipped under Nafta preferential arrangements. This would limit UK manufacturers’ flexibility in terms of where they source products from,” Baker & McKenzie trade partner, Jenny Revis tells GTR.

Revis argues that the UK would likely better benefit from forming its own “traditional free trade agreement” with the US.

“If you take a traditional trade agreement like the one the EU negotiated with Mexico or Canada, that would potentially allow for higher foreign content than a revised Nafta,” she says.

Negotiating Nafta

While UK membership of Nafta on the surface appears straight forward, a meaningful collaboration would require significant efforts. Since the two sides already enjoy low tariff levels, any real benefit would come from reducing or eliminating non-tariff and technical barriers via regulatory convergence.

“As an existing trading block, the onus would be on the UK to align itself with Nafta’s regulatory and policy frameworks for services and goods, including product standards, competition policy and IP protection,” says Capparelli at Global Counsel. “The high -level of divergence between current EU-UK and Nafta practice in these areas would make it a highly complex legislative exercise, which would also run against London’s approach to ensuring regulatory stability throughout the UK’s EU exit process.”

On the US side, problems with Nafta that Camunez (now CEO at consultancy firm Monarch Strategies) alludes to are also severe. As part of his run to presidency, Trump pledged to scrap the deal which he claims is unfair on the US. The three member countries are currently renegotiating the agreement, with the US proposing a set of very specific and far-reaching demands.

So demanding and aggressive have US negotiators been, some have tipped their Canadian and Mexican counterparts to walk away. Mexico’s foreign minister Luis Videgaray has warned that scrapping Nafta would lead to a reset in US-Mexican relations, while the US Chamber of Commerce says that scrapping Nafta will create a US$1tn trade deficit.

“Historically, the British approach to trade policy has been similar to the US approach. Talk about the UK joining Nafta, however, is somewhat premature. Brexit talks are ongoing as are the negotiations to revise Nafta,” Dean Pinkert, partner at Hughes Hubbard & Reed law firm and former commissioner of the US international trade commission, tells GTR.

What the white papers say

The whitepapers on trade and customs issued earlier this week set out three strategic objectives: ensuring UK-EU trade is as frictionless as possible, avoiding a hard border between Ireland and Northern Ireland, and establishing the UK’s own independent international trade policy.

The customs bill, for one, outlines the UK’s plans to make provisions for establishing a stand-alone customs regime from day one that would apply the same duties to every country with which it has no special deal. The level of this duty would be set out in secondary legislation before the UK leaves the EU.

Another whitepaper on trade outlines four principles that will guide future UK trade policy: maintaining the benefits of the World Trade Organisation’s Government Procurement Agreement, a focus on developing economies, bringing across trade agreements between EU and non-EU countries into UK law, and creating a new, UK trade remedies investigating authority.

“Responding to calls from businesses for continuity, today’s white paper confirms that the UK’s new legislation will, as far as possible, replicate the effect of existing EU customs laws,” said the government in a statement following publication.

Commenting on the whitepapers, Revis says: “I found the papers didn’t really add much to what was issued in August. That was quite disappointing. The one thing that comes through, which we didn’t have up until now, is that the UK government is clearly setting out the possibility that we may end up leaving the EU with no deal. We had heard from various officials independently that they were definitely planning and advising companies to start planning for no deal or a ‘cliff edge’ type of scenario and that’s coming across very clearly.”

The announcement to stick as close to EU laws and existing EU trade agreements with non-EU states may come as a blow for leave supporters, but it is a more “realistic” approach, says Revis.

“By sticking as close to EU rules as possible, the government is at least recognising there isn’t an opportunity between now and Brexit to significantly alter what we already have,” she says.

“One of the key messages that has come out of all the stakeholder engagements, and what we are hearing from clients, is that they want continuity. Eighteen months is not enough time for a major change in legislation. It would be unreasonable for the UK to start amending legislation significantly without giving businesses enough time to plan for it. The other reason is probably to appease the EU. But we need to wait to see what the EU says.”

A fifth round of negotiations, focusing on technical issues, will take place between the UK and EU in Brussels this week. It is the final set of talks before EU leaders meet on October 19 to decide if enough progress has been made to talk about post-Brexit trade relations.

Additional reporting by Finbarr Bermingham

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