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1 [1] (March 5, 2019)

handle is hein.crs/govyex0001 and id is 1 raw text is: Congressional Research Service Informing the legislative debate since 1914 March 5, 2019 Brexit and Outlook for U.S.-UK Trade Agreement Introduction The trade aspects of Brexit, the expected withdrawal of the United Kingdom (UK) from the European Union (EU) on March 29, 2019, are of growing interest to Congress. The UK is a major U.S. trade partner, and uncertainty over Brexit presents commercial challenges for the nearly 43,000 U.S. companies exporting to the UK and for U.S. firms operating in the UK, including some 4,000 majority-owned subsidiaries (2016 data). Details about the future UK-EU trade relationship remain largely unknown, and it is uncertain when and to what extent the UK will regain control of its national trade policy-a major objective for Brexit supporters. These factors directly shape prospects for a proposed bilateral U.S.-UK free trade agreement (FTA), supported by the Trump Administration and several Members of Congress. On October 16, 2018, the Trump Administration notified Congress under Trade Promotion Authority (TPA) of proposed trade agreement negotiations with the UK post- Brexit. The UK cannot formally negotiate or conclude a new agreement until it exits the EU, which has exclusive competence over trade policy and negotiates trade deals on behalf of all EU member states (Fig. 1). In the interim, and absent a U.S.-EU trade agreement, World Trade Organization (WTO) terms govern U.S.-UK trade (like U.S. trade with the rest of the EU), and would apply after Brexit. Figure I. Current UK Trade Status: Fast Facts EU member since 1973 Participates in the EU single market, which covers the four freedoms of movement of goods, capital, services, and people in the EU (e g., no tariffs or customs checks). The single market is more developed for goods than services. 3 Member of the EU customs union, which imposes common external tariffs on non-EU countries. 4 Part of over 40 EU trade agreements with 70-some countries, as well as ongoing EU trade talks 5 Set up a new Department of International Trade in 2016 to rebuild national trade expertise Trade and Economic Context The UK, at 15% of the EU gross domestic product (GDP) in 2017, is the EU's second largest economy after Germany (21%). As a bloc, the EU is the UK's largest trading partner, while by country, the United States ranks first. Total U.S.-UK two-way trade in merchandise and services ($236 billion) was about one-third of such UK trade with the EU ($788 billion) in 2017 (U.S. and WTO trade data). Many firms operating in the UK are taking steps to reduce trade disruptions post-Brexit, especially if the UK leaves the EU without a negotiated deal, loses its preferential access to the EU market, and returns to trade on WTO terms. While EU tariffs are low overall, WTO terms for UK-EU trade would be significantly different than the status quo of tariff-free trade. A no-deal Brexit could lead to lengthy customs checks, and some businesses are stockpiling goods to build inventories. UK-EU supply chains, such as for the auto industry, are tightly integrated and with component parts heavily traded. U.S. and other banks are concerned about losing the ability to use their UK bases to access EU markets without establishing legally separate subsidiaries. Some financial institutions, such as Goldman Sachs, J.P. Morgan, Morgan Stanley, and Citigroup, have shifted (or are planning to shift) some jobs and assets from London to other cities, such as Amsterdam, Dublin, Frankfurt, and Paris. In 2016, after the Brexit referendum, the British pound fell to a record low, and concerns emerged about widespread harm to the UK economy. Doomsday fears may have abated, but prolonged uncertainty over Brexit appears to be a drag on the UK economy. In 2018, the UK economy saw its lowest annual growth rate (1.4%) since 2012. Most analyses predict that the UK economy faces lower growth in all Brexit scenarios, with a no-deal Brexit constraining growth rates the most. Post-Brexit UK-EU Trade Relationship Brexit casts great uncertainty over the future UK-EU trade relationship. A draft agreement on the UK's withdrawal terms and political declaration on the future relationship was rejected by the UK House of Commons in January 2019, and the UK is trying to find a path forward. EU leaders endorsed the deal, which requires approval by the European Parliament. During the draft deal's transition period through 2020, the UK could negotiate, but not enter into, its own trade agreements. The UK and EU agreed to work toward a UK- EU FTA, with a fully independent UK trade policy arising after the transition period. As a backstop to address the Irish border issue, however, they agreed to allow the UK to stay in the customs union if they failed to reach an alternative arrangement to avoid a hard border (e.g., customs check, physical infrastructure) between Northern Ireland and Ireland-thereby preserving extensive cross-border economic ties and the peace process. (See CRS Report RL33105, The United Kingdom: Background, Brexit, and Relations with the United States, by Derek E. Mix.) Potential scenarios for future UK-EU trade relations have mixed economic and political attractiveness (Fig. 2). No Customs Union? If the UK exits the EU without a deal, it would no longer be a part of the EU customs union and regain control over its national trade policy at once. A no-deal Brexit, whatever its downsides may be, would free the UK to negotiate its own FTAs with the United States and other countries. Likewise, if a Brexit deal emerges where the UK leaves the customs union at some later point (as in the draft deal and political declaration if an alternative arrangement were to be reached ittps://crsreports. congress.gov