What will a US-UK trade deal mean for investors?
What will Trump's proposed 'massive new trade deal' mean for investors?
The UK left the EU at the end of January and now faces an 11-month withdrawal process during which it tries to build trade deals with other countries. The most hotly debated one of these is, of course, is that with the US.
In December, the now-acquitted US president Tweeted that a US-UK trade deal had the potential to be “far bigger and more lucrative than any deal that could be made with the EU”.
US treasury secretary Steven Mnuchin recently said he’s optimistic that a bilateral deal with Britain could be reached as soon as this year.
Mike McKie from Bayleaf Angel Investments, which provides investment and financing for growth and launch plans, says, “The enemy of ambitious investment is uncertainty, so any concrete deal with the US which brings additional certainty to the UK trading network is good news from an investment point of view, especially when it comes to start-up businesses.”
However, he adds, “viewing a single – albeit large – deal as good news when the UK is leaving the largest trading bloc on the planet without any clarity about future arrangements feels premature.”
DeVere Group international investment strategist Tom Elliott agrees: “Any meaningful trade deal will imply such a break with the EU as to make it not worthwhile.”
The economic gains from such a deal will be dwarfed by the economic cost to the UK of attaining it, Elliott says. “The UK government's own review, in November 2018, calculated that GDP growth over a 15-year period from leaving the EU with no trade deal could be 7.7 per cent smaller than otherwise and 5 per cent with a Canada-style agreement. Meanwhile the gain to the UK economy of a US trade deal was measured at adding just 0.2 per cent to GDP over the same period. This reflects the fact that half all UK exports currently go to the EU, while only 10 per cent to the US.”
Therefore, for investors on both sides of the Atlantic, it will involve looking for areas of potential growth. “For UK investors this means a generally depressed domestic stock market as the economy adjusts to life outside the EU on potentially damaging tariffs and quotas set by Brussels.” However, he says, “Areas of interest might be services – if a US trade agreement will cover services – such as financials, insurance and healthcare, as both countries have competitive advantages in particular aspects of these.”
While the US agriculture and pharma sectors might expect to see more sales to the UK, trade from the UK might be autos (generally considered to be built to a better spec than in the US), life sciences and fintech.
Any US-UK trade deal has to include pharma and agriculture. Trump has made this clear, and this approach is supported by both sides in Congress. However, says Elliott, “There is little UK domestic appetite for either.” US trade demands include Britain changing the way the National Health Service (NHS) prices drugs and allowing in more US pharmaceuticals. Even if this leaves investors panting, it could prove catastrophic for the Prime Minister Boris Johnson’s popularity.
The UK’s automotive industry is increasingly export-led. According to the SMMT (The Society of Motor Manufacturers & Traders), since 2006, at least 75 per cent of UK production of finished vehicles has been destined for overseas markets. As much as 81.5per cent of all vehicles made in Britain are exported, 17.9 per cent to the US. However, last month Mnuchin threatened new tariffs on UK carmakers after the UK chancellor Sajid Javid defied increased pressure to cancel the new tax on tech firms. Dealing with the tariff issue is going to be a key part of future UK-US talks.
But where to invest, says Elliott, is the least of the problems for investors. “To do a trade deal that Congress wants, the UK needs to make a clean break with EU 'level playing field' rules, hence the government’s current refusal to consider alignment with EU rules as part of any EU trade deal.” However, the EU has made it clear that deviating from its rules will result in no trade deal by December 31, the date Boris has said he will walk away from negotiations if there is no EU deal on the table. “There is no way the US –or any other country – will sign a deal with the UK before knowing what the UK's obligations and rights are regarding EU trade. I would offer a 60 per cent bet that the UK effectively remains committed to EU regulations on many aspects of trade, in order to prevent economic chaos, making any trade deal with the US very hard to achieve.”
The journey to a trade agreement could take years and there are many obstacles to overcome first. Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, told Reuters, “There are very deep-rooted issues on which the United States and the UK are diametrically opposed.”
There could be some upsides though. A trade deal could mean harmonisation of certain regulatory standards such as in the insurance market, with the potential rewards for investors making the inevitable admin worth it.
Malcolm Mason, partner at Keystone Law, warns of taking laws for granted. “As with most Anglo–American relations, there is a tendency on both sides of the pond to presume that because the countries share a common language, the same goes for a commonality of laws and practices,” he says.
“This is most apparent when it comes to employment and labour laws and practices in that they both emanate (historically) from the English common law. This, however, is far from correct. Over the years, there have been countless examples of US businesses trading in the UK and vice versa making dreadful and extremely costly mistakes in this area based on this erroneous presumption. Aside from the potential embarrassment and expense, this sends a powerful message to the local workforce, not only of a lack of respect and understanding but a lack of regard – by their foreign owner, employer or partner – when it comes to their employment and labour laws and practices.”
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