Trade triangle: U.S., Britain, and European Union

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Former U.K. trade adviser Shanker Singham said London can pressure Brussels in a “game theory” triangle with the U.S. and EU. He said supply chains will “rapidly reorient” away from EU markets to other nations if Brexit talks fail, while the EU will worry about Britain pulling away from its standards regime on key areas like agriculture.

“If there was no U.S./U.K. agreement then naturally the EU would feel a bit more comfortable about its negotiating position,” Singham said. “If I was a lamb farmer or a beef farmer in France or Ireland or anywhere else in Europe, I would be very uncomfortable right now.”

But others argue Britain is wrong to think it can intimidate the EU, because it cannot afford to jeopardize vital commerce with the bloc and has already bartered away much of its clout by accepting new trade barriers across the Channel.

Meanwhile, trade experts question whether, in fact, Washington and the EU could be using Britain to gain leverage over each other as part of their own trade dance.

Others agree the U.K.’s game is to make Brussels believe it could lose something it wants. “Never underestimate the irrational things that jealousy can make you do,” one seasoned trade observer in London noted. “That said, you do have to fancy the object of affection and truly believe you are being bested.”

The threat of regulatory divergence appears to be a big driver for the U.K. One senior official close to the Brexit negotiations highlighted to journalists at a recent briefing the areas where Britain might “have to decide” whether to follow a U.S. or EU approach.

Meanwhile, a debate is raging in Cabinet about how far to push implicit threats to EU food standards, amid fears Britain could allow in low-welfare animal products from the U.S. that are banned in Britain — like chicken that needs to be washed in chlorine — at the risk of undercutting farmers.

International Trade Secretary Liz Truss is pushing for a freer hand in negotiations with the U.S., while more cautious ministers, led by Food Secretary (and former fruit farmer) George Eustice, are keen to protect the U.K. agricultural sector, a senior government figure told POLITICO. Who wins will determine the scope of any possible threat to the EU.

But trade experts questioned how the mood music coming out of London will land in Brussels. “The EU probably doesn’t believe the U.K. will damage farmers,” said David Henig, U.K. director of the European Centre For International Political Economy.

Sam Lowe, a senior research fellow at the Centre for European Reform, also argued British attempts to game the EU on standards won’t work. He pointed out that Britain has little to threaten the bloc with, having already accepted new barriers to trade with Brussels.

“This could have been much more of an issue if the U.K. was trying to get a much deeper relationship with the European Union than it currently has, in that there would be a much bigger discussion about trade-offs and avoiding costs,” he explained. “But essentially the U.K. has decided to eat a huge amount of economic pain when it comes to its trading relationship with the European Union in order to have the freedom to do these deals.” He added, “I’m unsure as to why negotiating with the U.S. puts any pressure on the EU in this instance.”

Others believe threats from Britain aren’t credible because the EU is a far more important trading partner for the U.K. than the U.S. The U.K. relies on the bloc for around half its exports and the U.S. for around a fifth, so there is more to lose from Brussels than there is to gain from Washington.

One EU official said U.K. attempts to talk up U.S. trade are ideological: “The reality is that the EU is still the most important trading partner.”

Harry Broadman, a former U.S. trade negotiator and managing director at Berkeley Research Group, said with U.K. exports to the EU tripling those to the U.S. “it’s hard to see at the aggregate level how London can use any substantial cross-sectoral agreement it might strike with Washington to tame Brussels. The probability of it striking a deal with Washington is frankly low in the first place.”

He added, “If anything, if I were a trade negotiator working on behalf of the U.K. my biggest fear is the EU and U.S. would play off the U.K. between them.”

Indeed, U.S. and EU negotiators know each other well after long-standing and unsuccessful attempts to strike a deal of their own, and could well be comparing notes on their experiences with Britain, trade experts note.

Broadman pointed to financial services as one area where the EU could exploit its position in having more to offer the U.S. than Britain — especially after some firms moved jobs from the U.K. to the Continent in the wake of the Brexit vote.

Meanwhile, some in Brussels expect the U.S. to take advantage of Britain, perceiving it as desperate for a trade deal to justify the vote for Brexit.

“Obviously, we don’t have much intel … but we did hear that the Americans are partly instrumentalizing these talks because they know the British need this success,” the EU official quoted above said. There are ongoing disputes over Chinese firm Huawei and a tax on tech giants that Washington wants Britain to back down on.

Lowe, from the Centre for European Reform, said the U.K. could be a staging post for the U.S. in clinching a deal with Brussels, after EU-U.S. talks stalled. It is common for big economies to pick off a small nation in a global zone to set a precedent “before pivoting toward the bigger prize,” he said.

If the U.S. can convince the U.K. to change all the rules it disagrees with, Washington will have more leverage to argue against EU restrictions on American production methods and products, Lowe added. “If they can get us to eat everything they put on the table, then it helps them in their discussions with the European Union, which is of course the bigger prize for the U.S. because it’s a bigger market.”

Meanwhile, getting one over on the EU by striking a quick deal with Johnson is no doubt a motivation for Donald Trump.

Indeed, U.S. Treasury Secretary Steven Mnuchin said the U.K. was at the “front of the line” for a trade deal with Washington — countering the pre-Brexit warning from former President Barack Obama.

“We are players in a triangle with the EU and the U.S. — we’re just not the terribly important players in it,” said Henig, from the European Centre For International Political Economy. He added, “At worst we are pawns in their struggle, or we are played off or just ignored.”

But there are reasons for the U.S. and U.K. not to rush into a deal — not least the ticking clock of the Brexit transition period and the U.S. presidential election in November — which make the EU the default priority for Britain or at least limit the scope of a possible London-Washington pact.

The U.K. is a crucial entry point for U.S. companies into the EU single market, and those firms are desperate to know what the relationship between London and Brussels will be. Marjorie Chorlins, executive director of the U.S./U.K. business council in the U.S. Chamber of Commerce, said clarity on the future U.K. relationship with the EU “is of paramount importance to American investors and exporters.”

She said firms are pleased to see trade talks between Washington and London but “knowing the final disposition of the U.K./EU deal is the more important near-term objective.”

Washington appears to accept a deal with Britain will not be done this year, as Trump initially hoped, even if the U.K. is pushing to clinch a pact before the November election. “It’s going to take time to be honest,” U.S. Trade Representative Robert Lighthizer told an Economics Club of New York event last week.

That will be a relief in Brussels — if it is worried at all. EU negotiators are not letting on.

“We wish the U.K. the best of luck in its parallel negotiations with the U.S., Japan and others over the next six months,” an EU official said. “We are obviously following these negotiations closely.”

Barbara Moens and Doug Palmer contributed reporting.

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