UK and NAFTA
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The UK and NAFTA: Other Considerations

On August 28, the US International Trade Commission (USITC) released its findings on "The Impact on the U.S. Economy of Including the United Kingdom in a Free Trade Arrangement with the United States, Canada, and Mexico."

To estimate the effect of eliminating trade and investment barriers on the US and UK economies, USITC looked at two scenarios: (1) Britain joining NAFTA while retaining privileges of a member of the EU; and (2) abandoning the EU to join NAFTA and facing the common external tariff from the outside.


"A large number of barriers have been reported to affect a variety of service industries in each of the four countries. The most significant of these affecting trade volumes are in the banking and securities, insurance, and telecommunication service industries."

USITC Investigation No. 332-409, August 2000, Table ES-1

The United States is the UK's single largest trading partner and accounts for about 90 percent of the UK's trade with North America. The United States and the UK are the world's largest providers of foreign direct investment and are also the largest recipients of foreign direct investment. They are also each other's largest source of foreign investment.

The report found that tariffs and other trade barriers between the UK and the North American countries are low, so eliminating these barriers is likely to have a small effect on trade and output in the countries involved. The effect on both the U.S. and the UK Gross Domestic Product (GDP) is measurable but negligible; as a percent of GDP, it is close to zero for both countries.

The study conclusions are based rather heavily on the bilateral trade and investment impacts in the manufacturing sector. USITC has put in cautions throughout the study, especially in relation to services and non-tariff barriers. The executive summary stresses that, "The results reported below reflect tariff eliminations and do not, in general, account for the liberalization of nontariff barriers, nor do they take into account any retaliatory trade measures that the UK may face."(page XIV). Significantly, the service sector is the preserve of non-tariff barriers.

The report points out that,

In 1998, the United States supplied 62 percent of Canada's service sector imports and 22 percent of the UK service imports. The United States itself imported $165 billion in services.

A large number of barriers have been reported to affect a variety of service industries in each of the four countries. The most significant of these affecting trade volumes are in the banking and securities, insurance, and telecommunication service industries.

In relation to these same industries, the report later notes, "Barriers in these areas have economywide effects as these industries constitute integral components of the commercial infrastructure." (page 3-23).

As a result, the USITC study actually does not estimate the effects of eliminating all barriers, recognizing that a "quantitative assessment of the effects of removing most nontariff barriers was not feasible…"(page X).

This limitation also arises with respect to foreign direct investment. This is unfortunate in that USITC is reporting that, finance, insurance, and real estate account for over 40 percent of UK-owned direct investment assets in the United States ($186.8 billion) with manufacturing in second place at 32 percent of assets ($143.6 billion). (Table 2-8). Similarly, over 58 percent of the assets of U.S. affiliates in the UK ($537.2 billion) are in the finance, insurance, and real estate industries. Most of the rest of U.S. direct investment assets in Britain are in manufacturing ($217.5 billion, or 24 percent). (page 2-8).

One might have expected that existing restrictions and limitations of investment could be a major focus in a free trade negotiation. However, USITC states that,

This analysis proceeds on the assumption that the investment provisions of any UK-North American FTA would primarily replicate the already existing fairly open national policies and WTO commitments of the parties, rather than lower any substantial barriers in sectors that the various parties have chosen in the past to reserve. The primary results of the analysis thus rely on the indirect effects of tariff changes on FDI rather than on any presumed impact of a UK-North American FTA on FDI policies themselves. (page 4-19).

Clearly, this is a research assumption that might not be the basis for an actual negotiation. For example, the share of UK direct investment in Canada has declined from 5 percent to 2 percent between 1990 and 1996. Canada's share of UK inward investment also declined from 4 percent to less than 3 percent between 1990 and 1996. In other words, some of the NAFTA partners may indeed have an interest in further opening the free trade area investment regime.

Finally, the USITC report does not discuss one of the key features of NAFTA: the dispute settlement provisions and the appeal option to a bi-national panel. Given the value of UK-US trade, and the recent experience of trying to avoid US retaliatory measures on EU products, namely cashmere, a common dispute mechanism could have advantages for both countries.

Whatever the limitations of the report, it appears to have stalled the proponents at least temporarily. We do however expect Mr. Black to press on.

ISSN 1492-7187, TRADE POLICY MONITOR, October 2000,
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