Here’s what could come out of the UK trade secretary’s meeting with Wilbur Ross

Key Points
  • Commerce Secretary Wilbur Ross is to begin two days of talks with Britain Trade Secretary Liam Fox.
  • The pair, along with U.S. Trade Representative Robert Lighthizer, will discuss a possible trade deal between the U.K. and U.S.
  • A deal cannot be formalized until after Brexit.
Wilbur Ross, U.S. commerce secretary, speaks during the 47th annual Washington Conference on the Americas at the U.S Department of State in Washington, D.C., U.S., on Tuesday, May 9, 2017.
Andrew Harrer | Bloomberg | Getty Images

Commerce Secretary Wilbur Ross is to welcome British Trade Secretary Liam Fox on Monday to begin discussions for a new trade deal between the two countries.

The pair will be joined by U.S. Trade Representative Robert Lighthizer for the two-day talks that aim to lay out a continuity agreement allowing businesses from the two countries to continue trading after Brexit.

Many aspects of the U.K.'s relationship with the U.S. are currently governed by wider regulatory and technical agreements held with the European Union, but these will become uncertain once Britain leaves the bloc. Though the U.K cannot formally negotiate independent trade deals until it leaves the EU, it is allowed to prepare for them by holding discussions with current European trade partners, "so as to deliver maximum continuity and certainty for businesses," a U.K. government white paper stipulates.

Why is a deal important?

The U.S. is the U.K.'s second-largest trading partner outside of the EU, importing approximately 20 percent of all Britain's goods and services. The countries also currently share a number of agreements on economics, security and trade, which could be at risk as of March 2019, when the U.K. is expected to formally exit the EU.

Maintaining this special relationship with the U.K. is increasingly important given the new administration's protectionist 'America First' stance and preference for bilateral trade deals rather that multilateral deals, which are seen to disadvantage the U.S. Likewise, the U.K. will be eager to secure new trading relationships outside of those brokered by the EU. However, the U.S. has been critical of other countries' trade surpluses with the U.S. and the U.K., whose trade surplus is an estimated £40 billion, will be starting its dialogue from a tricky position.

Without a deal, the two countries will have to revert to World Trade Organization rules, with tariffs applied universally to countries without deals, ranging from 32 percent on wine to 9.8 percent on cars.

Where do talks stand?

Ross said last month that the U.S. is eager to start trade talks with the U.K. as soon as possible and is confident of a "happy finish."

"From the U.S. side, we've made it clear that we are prepared to begin as soon as the U.K. is ready," Ross said at a Select USA Investment Summit in Washington in June.

U.K. International Trade Secretary Liam Fox outside 10 Downing Street
Carl Court | Getty Images

Fox said at the time that the U.K. was eager to "scope out" its future relationship with the U.S. Trade working groups on both sides of the Atlantic have since been working behind the scenes to lay the groundwork.

More recently, Fox has voiced his rejection of protectionist policies, which he said had emerged from those who had benefited most from globalization.

"It is so concerning to hear the voices of protectionism growing louder. Those who have benefited most from an open, liberal trading environment have a duty to ensure that others are able to take advantage of the same benefits in the future," Fox said Thursday.

What progress will be made this week?

Under EU rules, few details of the deal can be thrashed out this week but U.S. trade officials have suggested that Ross, Lighthizer and Fox will focus on establishing "commercial continuity" as well as exploring possible ways to "strengthen trade and commercial ties," according to Reuters.

Robert Lighthizer, U.S. Trade Representative
Kevin Lamarque | Reuters

"The early discussions will focus on laying the groundwork for commercial continuity for U.S. and U.K. businesses as the U.K. leaves the EU and exploring possible ways to strengthen trade and commercial ties, consistent with the EU's common commercial policy," a U.S. trade official said.

"These discussions will also provide a mechanism for preparing the ground for a potential future trade agreement once the U.K. leaves the EU."

Some commentators are less optimistic. Paul Hollingsworth, U.K. economist at Capital Economics, told CNBC via email Thursday that he is expecting little more than "hot air and some broad ideas."

Which sectors stand to benefit?

Pharmaceuticals, finance, technology and infrastructure are some of the most valuable areas of business between the U.K. and the U.S. This means they are likely to rank highly in trade ministers' negotiations.

Eric Thayer | Reuters

"These are the high value-added sectors where there are synergies to be had by agreeing [on] a common set of standards and legal structures," Simon French, chief economist at Panmure Research, told CNBC via email Thursday.

However, similar aims were proposed under the Transatlantic Trade and Investment Partnership deal and were quickly "bogged down," French cautioned, referring to the delayed proposals for an EU-U.S. deal.

How likely is a deal?

Both parties have a lot to gain — and lose — if their existing agreements fall apart after Brexit. But analysts have suggested that the U.S. may be reluctant to sign up to an agreement until Britain's post-Brexit standing becomes clearer.

In the second stage of negotiations late week, Britain's Brexit minister David Davis faced criticism for his lack of clarity on key issues, such as citizens' rights.

Also, with Congress facing divisions over key issues such as health-care reforms, Hollingsworth suggests the chances of getting approval for a deal are "extremely low at present."

Who will be the winners and the losers?

Under a new U.K.-U.S. deal, businesses could benefit from reduced tariffs, common standards and increased investment. Critics have cautioned though that the U.K. will begin negotiations on the back foot given its reliance on EU trade negotiators over recent decades, leaving U.K. businesses vulnerable to takeovers by U.S. firms.

"The US has many of the world's toughest trade negotiators, whereas the UK has ceded policy and knowhow to the European commission for decades," Adam Marshall, director general of the British Chambers of Commerce, wrote in the Observer on Sunday. "If talks began on a U.S.-U.K. deal over the coming months, I know which of the two I'd put my money on.

"There is a huge risk that UK-based firms will continue to face higher upfront costs and regulatory requirements after any agreement, leaving them at an instant disadvantage to U.S. competitors that would suddenly have wider scope to compete in and buy up chunks of the U.K. market."

What will this mean for Britain's future trade deals?

Success for the U.K. in securing a trade deal with the U.S. will have important implications for other countries considering establishing a bilateral trade agreement with post-Brexit Britain.

A Union Jack flag flies near the Elizabeth Tower, commonly referred to as Big Ben, at the Houses of Parliament in central London, U.K., on March 29, 2017.
Justin Tallis | AFP | Getty Images

"The symbolism of a UK-US 'agreement in principle,' which may be the short-term outcome, will be helpful for other countries considering terms with the U.K.," Panmure Gordon's French suggested.

However, as countries outside the U.S. continue to show favor for global, free-trade agreements, the recently agreed outline free trade deal between the EU and Japan is likely to provide a "more valuable precedent" for those looking to establish over-arching multilateral partnerships, French added.

How will they match the U.K.'s existing trade within the EU?

The U.K. will face a steep challenge if it is to match the levels of trade enjoyed inside the EU.

As of 2016, 44 percent of U.K. exports in goods and services went to other countries in the EU, according to the U.K.'s independent factchecking charity Full Fact. EU countries were responsible for 53 percent of all of Britain's imported goods.

British Justice Minister David Lidington said earlier this month that the he proposed U.S.-U.K. deal would do little to bridge this gap.

"It wouldn't be enough on its own, no," Lidington told the BBC's "Andrew Marr Show."

He added that it would be "a very good thing to have," alongside new deals with emerging economies in Asia and Latin America.

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