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Free Trade Agreements (FTA’s) make it cheaper and easier for the businesses to export their goods and services while creating employment opportunities and boosting the economy. However, some economists believe that the FTA’s could create opposite effects, taking jobs from one country to another country. The United Kingdom and the United States have initiated the first round of Free Trade Agreement negotiations earlier this week.
This first round of negotiations involving around 100 negotiators on each side will last for approximately two weeks. DIT’s Chief Trade Negotiation Adviser, Crawford Falconer will supervise all UK trade negotiations and talks will be led by Oliver Griffiths on the UK side. Talks will cover goods and services trade, digital trade, investment and supporting SMEs as set out in the UK’s negotiation objectives.
During the COVID-19 pandemic, while public health and social distancing measures can continue to be respected, this common-sense approach to negotiations will ensure that talks can take place virtually. According to the Department of International trade, as of now, the total trade between the UK and the US was valued at circa 221 billion pounds. Nearly 20 per cent of the UK-US total trade represented the exports. An FTA between the two countries could result in an increase of nearly 7 per cent in the total trade. In this article, we would discuss five things that UK could consider under free trade negotiations.
- Increasing Exports
Scotland is known for its Scottish salmon and Scotch Whisky, high-quality meat, and cashmere (clothing). An FTA could help in lowering tariffs and increasing the exports. The Midlands will benefit significantly from an FTA as it could reduce tariffs imposed on its ceramics and drink exporters.
The North of England is likely to get benefitted from the FTA by exporting meat & poultry, machinery, luxury clothing and other manufactured products. Wales is known for its lamb market, and an FTA could help in building upon its strong exports to the United States.
- Promoting Professional and business services
In the realm of professional services such as accountancy, architecture, and legal services, the UK exported 24 billion pounds of business services to the United States. An FTA between the two countries could allow professionals to serve both the countries, which could eventually lead to more employment opportunities.
- Seeking robust regulatory framework in Financial services
The United States has one of the most powerful regulatory mechanisms in the field of Financial services. The United Kingdom would like to implement similar regulatory mechanisms in this sector, which shall result in increased investments and more opportunities.
- Promoting Automotive industry
Under the existing setup, Cars account for nearly 15 per cent of the total goods exported to the United States. Under the free trade, UK would like to address both tariffs and non-tariff barriers which are applicable at present.
- Seeking increased access in the US market and support in the Defence sector
Resources allocation is of key importance in an FTA. Under free trade, UK would like to seek access to procurement sites in the United States, so that the businesses of the UK can participate in bidding for Government tenders at all levels.
US has proved its dominance time and again in the defence sector. It is a global market for new age weapons and world class military intelligence technology. An FTA could help UK in bolstering its defence sector.
Why FTA?
Free trade means trade between the countries without any barriers, tariffs, quotas, embargoes, domestic subsidies, and other duties getting in the way. Free trade will enable greater efficiency in the world market and improvement in the allocation of world resources, which are scarce. There is a need for optimum utilisation of resources in the world. During free trade, the member countries have incentive to specialise in producing goods and services in which they have a cost advantage and are among the best in the business. This would enable the countries to cater not only the domestic demand but also to get revenue through the doors of the world market.
The countries should not be concerned about the goods and services which they cannot produce, because as a member of FTA, those goods and services can be imported freely. So, in terms of allocation of resources, they would be going to countries who are efficient and best at producing those goods and services, which is very good for the world allocation of resources. This will enable the access to countries to goods and services which they cannot produce.
It is good for both, the consumers as well as producers. Businesses can access raw materials from other markets and produce goods in their own country. As the trade barriers are relaxed, new players would enter the economy. This increases the competition in the economy and hence would drive the prices lower which would benefit the customer. In addition, new entrants can collaborate with the domestic players and help them with technology transfer.
Also, under free trade, when a country is producing goods & services for many other countries, it is likely to be benefitted by economies of scale. Furthermore, the exporting country would generate economic growth by supplying to the world. Consumers would have a wider range of option to choose from each segment of goods & services.
Under a free trade setup, the country has an absolute advantage over other country, when it can produce goods & services more efficiently in comparison to the other country. Therefore, the less resourceful country must import the goods & services from the resourceful country.
For trade to be mutually beneficial, for each country it is important to exploit this comparative advantage, there should be suitable rate of exchange which must lie between the opportunity cost rate of production.
The trade pact might pose certain challenges for UK
Under a free trade set up we talk about lower tariffs and ease of doing business. But participants often tend to forget about the shipping of goods & services produced in one country to another. Moving across the Atlantic Ocean will not be cheap. The transport costs will be significant and might distort the cost advantages. Also, an FTA will not factor the exchange rate fluctuations, which can be detrimental for the cost advantages.
Under a free trade, the focus of the member countries is lost from the domestic industries. Moreover, they are likely to collapse as they are not mature enough to face stiff competition as they might not be efficient or might lack the cost advantage of producing goods. Moreover, R&D investments are ignored and there is no incentive for the domestic players to withstand the competition.
