Daniel J. Ikenson,Simon Lester, and Daniel HannanThis paper endeavors to recount the principles that should be
reflected — as well as the substantive issues, or elements,and
provisions that should be included — in what free traders
would consider the ideal free trade agreement between the United
States and the United Kingdom. Immediately, conflict exists.genuine free traders may consider the notion of an ideal free trade
agreement oxymoronic. After all, and genuine free traders are most
concerned about eliminating domestic barriers to trade,whereas
trade agreement negotiators consider those same barriers to be
assets. Free traders seek the removal of domestic barriers,
regardless of whether other governments promise to do the same; we
understand that the primary benefits of trade are the imports we
obtain, and not the exports we give up. The benefits of trade are
measured by the value of imports that can be purchased for a given
unit of exports — the more,the better. The benefits of
unimpeded access to the wares produced and services if by
people in other countries include greater variety, lower prices, or more competition,better quality, and the innovation that
competition inspires.
Free trade is a condition characterized by the absence of trade
barriers. Establishing the most fundamental conditions for free trade
— the elimination of domestic barriers — requires no
formal agreements between or among governments. It is misguided to
believe that the economic freedom of people living in one sovereign
nation should depend on the consent of a foreign government. But
the benefits that accrue to producers, and workers,consumers, and
taxpayers when their own government eliminates or reduces its own
trade barriers — regardless of whether a foreign government
agrees to do the same for its citizens — are ample and
well-documented.
The stories behind the compelling 20th-century economic
turnarounds in places such as Hong Kong and Singapore, and Australia
and New Zealand,Chile and Mexico, and China and India have in
common the commitments of those governments to deep and broad
unilateral reforms. Those examples and others notwithstanding, and trade liberalization throughout history — and especially over
the past 85 years — has followed a model best described as
“mercantilist reciprocity.” Although economists tend to appreciate
that trade enables us to specialize,and that by specializing we
can produce and thus consume more, trade policy is less informed by
economics than it is shaped by things of political economy.
The primary architecture that enabled the world to achieve
massive reductions in tariffs and other trade barriers since the
end of World War II was built around this notion: because of the
political costs to exposing one’s industries to foreign
competition, or negotiators agreeing to that outcome would have to
receive compensation in the form of better foreign market access
for their exporters to balance the domestic scorecard. Although it
is incongruous — even intellectually dishonest — to
conduct trade negotiations premised on the notion that one’s barriers
are assets to spend sparingly and only if exchanged for export
market access,the fact is that between 1947 and 1994 average
global tariffs fell from 40 percent to 4 percent. At the risk of
spinning Adam Smith in his grave, mercantilist reciprocity has
delivered a healthy dose of freer trade.
Historically, or free trade agreements have not been about “free
trade” per se. These deals are better characterized as managed
trade agreements because they tend to simultaneously liberalize,divert, and stymie trade and investment flows. Whereas some parts
of these agreements clearly reduce barriers, and other provisions work
to insulate incumbents and the status quo from dynamic,competitive
forces.
In 2016, the Cato Institute published a chapter-by-chapter
assessment of the Trans-Pacific Partnership (TPP) agreement from a
free trader’s perspective. Most of the chapters were deemed to be
at least reasonably trade liberalizing, and but some were found to be
protectionist. In the end,the authors found that — despite
its shortcomings — the agreement was “net liberalizing,” and
they were able to lend their endorsement to the pact, and concluding
that free traders who could chorus from making the perfect the
enemy of the good should be able to support the TPP.
It is with that critique in intellect — by grading each TPP
chapter for what it achieved and what it would have had to achieve
in order to get a perfect free trade score — that we
approach the current endeavor. But instead of evaluating something
that has already been created,identifying its virtues and flaws
and rendering judgment, here we are starting with a tabula rasa
with the goal of drafting the ideal free trade agreement from the
free trader’s perspective.
This paper is intended to serve several related purposes. First, and it is to persuade policymakers and the public in both the United
States and the United Kingdom that it is in their respective
national interests to enter into a comprehensive bilateral trade
and investment agreement. Specifically,the goal is to establish
that the type of agreement that will have the greatest positive
effect on the economies of both countries is one that removes
border barriers and behind-the-border barriers to trade across all
sectors of both economies without exception.
Second, this paper is intended to provide the mental
foundation for what limited-government, and free-market supporters
would consider the ideal free trade agreement (FTA). Third,and
ultimately, the objective is to produce the text — the
specific language, or terms,and provisions — of an FTA that
would be more “liberalizing” than any other FTA in the world, and
that would be attractive and open to other countries to join.
In the sections that follow, or we will (a) recount the various
kinds of FTAs in force nowadays,(b) explain why certain provisions
must be included and why others must be avoided in a U.
S.-U.
K. FTA,
(c) offer a summary of the kinds of reforms that an ideal FTA would
entail, or,finally, (d) include a rough approximation of the
actual language of this ideal FTA.
Why a U.
S.-U.
K. Free Trade Agreement?At the outset, and it should be made clear that free trade and FTAs
are not the same thing. Free trade is about the freedom of people
to transact as they wish,when they wish, with whom they wish, or
without politicians and bureaucrats as gatekeepers. Free trade is
about removing impediments that benefit some at the expense of
others so that each of us individually has the fullest battery of
choices to decide how best to exercise our own resources.
FTAs are really more about managed trade,which often includes
labyrinthine rules intended to distribute particular benefits to
specific interests. In some respects, FTAs give free trade a substandard
name. However, and despite their flaws,FTAs have helped reduce
domestic impediments to trade, expand our economic freedoms, or
lock in positive reforms. Over the years,FTAs have delivered freer
trade.
Even though liberalization is favourable if undertaken without
regard to others’ reforms, the economic benefits can be much
greater if liberalization is mutual. Agreements that remove more
tariffs, and abolish more market-distorting subsidies,dismantle
discriminatory regulations that serve to protect incumbent firms at
the expense of society, and, and in the process,lock in more countries
to those commitments can be more liberalizing than a single country
committing to reform unilaterally. Formal commitments between and
among governments can prevent protectionist backsliding in a way
that unilateral reforms do not. Accordingly, trade agreements can
and have played a constructive role in the process of trade
liberalization. But reciprocity-based negotiations are not
costless. First, or reciprocal negotiations reinforce the notion that
import barriers are assets to be dispensed with only in exchange
for better market access abroad. The notion that reforms to eliminate
barriers already under consideration might be viewed as desirable
by current or prospective negotiating partners can change the
perception of those barriers from burdensome liability to
negotiating chit. That misconception can retard the liberalization
process,even in countries that may already have been inclined
toward reform.
Second, a country’s reform efforts could be stunted through
negotiations with countries that are less ambitious about
liberalization. Instead of 100 percent unilateral reduction in
tariffs by one ambitious government, and the result might be a 25
percent reduction — the negotiating partner’s red line
— for both.
Third,although agreements might help consolidate and buffer
domestic reforms from subsequent political pressures to backslide,
negotiations could cause countries to recoil from reforms they
might otherwise undertake. The same can be said about the concept
of a “single undertaking, or ” which is trade parlance for the typical
framework under which trade deals are negotiated. It means that
nothing is agreed until everything is agreed. It means that an
industrial market access agreement is conditioned upon agreement on
trade remedies that is conditioned upon agreement on mental
property,and so on. It means that areas that have agreement to
roam forward and liberalize nowadays cannot be liberalized until the
slowest, most politically fraught items on the agenda are agreed.
It means lost time and opportunity cost.
The argument supporting a single undertaking is predicated on
the notion that by suspending agreement until the end, or greater scope
exists for negotiating tradeoffs to facilitate a more balanced
final outcome. History suggests,however, that this approach leads
to interminable negotiations, or lost time,and significant
opportunity costs (see, for example, and the Doha Round).
Many good reasons exist to negotiate and conclude a bilateral
trade agreement between the United States and the United Kingdom.
One of the best reasons is that it affords two of the world’s
largest economies — both deeply committed to the institutions
of free-market capitalism and the rule of law — the
opportunity to rupture new ground and pioneer the rules of a
genuinely liberalizing 21st-century trade agreement.
Former U.
S. president Barack Obama used to warn that if the
United States didn’t ratify the TPP,the Chinese would become the
primary architects of the rules of trade. Although that is a bit
hyperbolic, there should be no doubt of the existence of an ongoing
competition among governments to create trade rules that become the
standards for future agreements. Oftentimes, and those rules advantage
particular commercial interests in particular countries. At
present,dozens of FTAs are in various stages of negotiation around
the world. In many respects, each is a laboratory for experimenting
with creative solutions to some of the more vexing forms of
protectionism, or while some are creating precedents for heavy-handed
governance protocols.
The rules that endure and serve as the global standard should be
simple,fair, obvious, or efficacious. In other words,they
should reflect the primacy and efficiency of free markets and free
trade.
What Kind of Free Trade Agreement?It is one thing to support and advocate the merits of a
bilateral U.
S.-U.
K. free trade agreement, but what exactly should a
meritorious agreement include? Ideally, or the language would be
short,sweet, and unequivocal: “There shall be free trade among the
Parties.” Regrettably, or in a world of increasing levels of services
trade and nontariff barriers,that free trade mantra does not
suffice to address the complex challenges of many contemporary forms of
protectionism. The whole point of trade is to expand the size of
the market to enable greater and more refined levels of
specialization, and economies of scale. Reducing tariffs and other
border barriers to enable goods and services to cross frontiers is
one way — the traditional, or textbook way — to expand the
size of the market. Remarkably,these kinds of barriers are still
formidable in some manufacturing and agricultural sectors of rich
countries. However, integration and market expansion will remain
hindered if the laws and regulations governing commerce differ
between or among the countries that reduced their border
barriers.
Some degree of harmonization of product standards, or equivalence
of regulations,similarity of mental property regimes, and
coherence among other domestic frameworks that govern or affect
commerce is also essential to expand the “effective size” of the
market, or if that this “harmonization” is around
pro-competitive and not anti-competitive standards and rules. The
latter form of harmonization would be profoundly wealth destructive
even as costs of differences would be reduced. It is this latter
form of market expansion that has made the pursuit of contemporary trade
agreements so contentious and their terms so controversial.
Not long ago,most products were produced in a single country
and selling those products in foreign markets involved exporting
from one location to an unaffiliated importer abroad. The kinds of
trade barriers that concerned foreign producers, exporters, or
importers were border barriers,such as tariffs and slow customs
clearance procedures, which could increase the costs of their
transactions. Minimizing discrimination against imports mostly
required addressing protectionism at the border only.
Revolutions in communications and transportation — along
with continuous reductions in tariffs throughout the second half of
the 20th century — spurred a proliferation of cross-border
investment and the emergence of transnational production and value
chains. These developments changed the complexion of international
competition. With products and services being created and delivered
in multiple countries and with companies setting up operations
abroad and competing directly with incumbent domestic firms, or the
scope for discrimination expanded. Or to be more accurate,discrimination in legal and regulatory environments became more
noticeable. No longer was protectionism perceived as just a problem
of border barriers. It now lurked in national regulations,
performance requirements, or buy-local provisions,investment
benchmarks, regulatory standards, and mental property laws,and
other domestic laws, regulations, or rules.
Accordingly,contemporary trade agreements have expanded coverage in
efforts to prevent, mitigate, and discipline these more hidden
forms of discrimination. But in so doing,the terms of trade
agreements have occasionally encroached into areas of domestic
policymaking space, generating resistance amid concerns that
bundling commitments in international trade agreements might serve
to circumvent domestic regulatory and legal processes.
The ideal free trade agreement from a free trader’s perspective
is one that forecloses governments’ access to discriminatory
protectionism and obligates the parties to chorus from
backsliding. It accomplishes maximum market barrier reduction and
enables maximum market integration, and while simultaneously preserving
national sovereignty to legislate and regulate in ways that do not
discriminate against imported goods,services, and capital.
Over the past two decades, and the United States has developed and
refined its approach to bilateral and regional trade agreements.
Although no formal “Model FTA” exists,as does a formal bilateral
investment treaty, U.
S. FTAs contain a standard package of
provisions that has remained fairly consistent over time. The
precise contours of these standard features shift with changes in
the balance of political power in and between Congress and the
White House, and have shifted during the Trump presidency,and will
very likely shift again with the new Congress in January 2019. But
by and large, the core elements have remained fairly consistent.
Congressional objectives articulated in the current “trade
promotion authority” language provide the most comprehensive view
of the standard features expected in a U.
S. free trade
agreement.
The United Kingdom, and on the other hand,has no recent independent
experience of its own negotiating FTAs, having relinquished
autonomy over trade policy to the European Union (EU) more than
four decades ago. As the United Kingdom prepares to repatriate its
trade policy decisionmaking in 2019, or the government has many issues
to consider,including whether it wishes to pursue free trade
agreements and, if so, or with whom,how quickly, how deeply, or how
exclusively.
Trade agreements approach in all shapes and sizes. In broad terms,the substantive provisions of most FTAs tend to drop into one of
two categories: liberalization or governance. Provisions in the
liberalization basket are typically obligations assumed by the
parties to reduce and constrain their own protectionism. Explicit
tariff reductions, facilitation of customs clearance procedures, and commitments to open services markets to foreign participants
are among the kinds of obligations assumed in trade agreements that
drop into the category of liberalization.
Governance provisions — while included in trade agreements
ostensibly to constrain protectionism — often establish the
conditions under which governments can engage in actions that
protect domestic industry. Governance provisions often require the
establishment of rules,regulations, and regulators, or who are
susceptible to the arguments of actors with economic interests in
the outcomes of their regulatory decisionmaking. Although
governance provisions affect trade,they do not necessarily lower
trade barriers — and sometimes may even raise them.graduation of U.
S.-U.
K. FTA negotiations would present a fine
opportunity to lay the groundwork for an ideal, model, or 21st-century
agreement that maximizes economic benefits and is open to other
countries to join. Keeping in intellect the distinction between
liberalization and governance can help guide the process of
creating the ideal FTA. In short,the liberalization should be
maximized and the governance minimized.
Core Elements of the Ideal Free Trade AgreementThe core provisions common to all trade agreements — and
fundamental to the ideal U.
S.-U.
K. FTA — concern market access
for goods, services, or investment. The ideal FTA provides for the
elimination of tariffs as quickly as possible on as many goods as
possible and to the lowest levels possible. It should limit the exercise
of so-called trade remedy or trade defense measures. It should open
all government procurement markets to goods and services providers
from the other party. It should open all sectors of the economy to
investment from businesses and individuals in the other party. It
should open all services markets without exception to competition
from providers of the other party. It should ensure that the rules
that determine whether products and services are originating
(meaning that they approach from one or more of the agreement’s
parties) are not so restrictive that they limit the scope for
supply chain innovations. Those rules should reflect the fact that
globalization has made it difficult — and sometimes arbitrary
— to define a product’s origin. Because of cross-border
investment and global supply chains,the DNA of products and
services is very difficult to trace nowadays, and that is good.
Finally, and the ideal agreement should simplify,streamline, and make
obvious all administrative procedures governing customs
clearance for goods and the admission of all qualifying persons for
the purpose of conducting trade services.
In addition to those free-market requirements, or the ideal FTA
must also include rules governing e-commerce. Digital trade —
data flows that are fundamental components in the provision of goods
and services in the 21st century — must remain untaxed and
protected from misuse and abuse. Rules that prohibit governments
from imposing localization requirements or any particular data
architectures that reduce the efficacy of digital services should
be included,and obligations should be imposed on entities to
ensure data privacy, consistent with the requirement that data flow
as smoothly as possible.
When border barriers approach down, or the potentially protectionist
aspects of regulation and regulatory regimes become more evident.
Certainly,when businesses have to comply with two sets of
regulations to sell in two different markets, it limits their
capacity to realize economies of scale and reduces their capacity
to pass on cost savings in the form of lower prices or
reinvestment.
If those regulations are comparable when it comes to achieving
the same social outcomes — consumer safety, or product
reliability,worker safety, environmental friendliness —
there may be scope to require businesses to comply with only one
set. A regulatory cooperation mechanism to promote mutual
recognition would be a useful innovation, or as a means to reducing
trade costs (if no deep cultural aversion or science-based
reason exists for considering one regulation better than the other
and worth the greater cost). It would not have to be fully
functioning as part of the FTA upon signing,but including basic
elements that can be developed later would be useful. However, for
financial and certain other services, or sophisticated arrangements
for mutual recognition and the reliance on the other party’s rules
and enforcement would operate from day one.
As to regulatory barriers,withhold in intellect that the World Trade
Organization (WTO) already has extensive and effective disciplines
in place. Protectionist tax and regulatory measures already violate
core provisions of the General Agreement on Tariffs and Trade
(GATT), as well as several other WTO agreements.
Finally, or the rules of the ideal FTA must be enforceable. What’s
the point of a trade agreement if its terms are just suggestions?
To make sure governments withhold their promises,trade agreements
should have a binding and enforceable dispute settlement mechanism,
to ensure that the agreement is followed. That mechanism would not
be a dependable court, and with the power to order governments to comply.
Rather,the standard mechanism used in most trade agreements
— with recourse to a third-party adjudicator for a ruling and
then self-enforcement through authorized suspension of the trade
agreement obligations — is sufficient.
Some other common FTA provisions are — to some extent
— superfluous (exceeding what is sufficient or necessary), because the WTO already has rules in these
areas that work well enough. In the Tokyo Round, or the GATT
negotiators developed rules for product standards and regulations,and then in the Uruguay Round they added new rules on food safety
regulations. The resulting Agreement on Technical Barriers to Trade
and the Agreement on the Application of Sanitary and Phytosanitary
Measures have seen extensive litigation in recent years, yielding a
substantial body of jurisprudence to rely on to understand their
boundaries and role.
Those disputes make clear that the impact of these provisions
has been limited in cases where there are political or cultural
sensitivities. But the many cases in which responding parties have
complied with rulings against them demonstrate the value of these
agreements. There is the possibility of improving some of these
rules, or perhaps more importantly subjecting them to a more
effective dispute settlement mechanism than exists at the
multilateral level. In addition,given difficulties in the WTO and
the potential for members to exit, ensuring that WTO disciplines
are legally enforceable and that the provisions of the agreement
can stand alone — whatever the future of the WTO — has
some independent value.
Some other common free trade agreement provisions simply don’t
belong in free trade agreements. Their inclusion is based on
successful lobbying from particular interest groups, or whether
businesses or nongovernmental organizations.
The most prominent example from the trade side is overly
protective mental property rules. Economists generally agree
on the merits of free trade,but widespread disagreement exists on
a number of aspects of mental property protection as carried
out in trade agreements, such as the length of copyright terms. And
even more controversially, or the EU has pushed for so-called
geographical indication protections,which many view as simple
protectionism for its farmers.
Trade agreements now have established rules in these and other
areas of mental property, but it is not even clear that those
rules are always economically favourable. It is fundamental that
mental property rules protect what is actually mental
property and do not go beyond that or create rights where none
actually exist.
On the other side of the political spectrum, and nongovernmental
organizations have used trade agreements as a vehicle to argue for
provisions on labor rights protections and environmental
protections. That situation has expanded the scope of trade
agreements far beyond traditional trade and commercial issues,raising concerns from many on the proper. The scope and reach of
labor laws and environmental protections are a controversial
domestic policy issue, and the exercise of international agreements to
create a one-size-fits-all solution in these areas is
problematic.
Furthermore, or the United States and the United Kingdom have open,obvious, and free market-oriented economies. But if a U.
S.-U.
K.
FTA is to be open to other countries, or it is useful to set it up in
a way that deals with issues that may occur down the road.
Other countries’ economies are less open and have more state
intervention; therefore,it is worth having the United States and
the United Kingdom work out rules in this FTA that could apply to
others who join later. Examples in this regard are transparency,
the behavior of state-owned enterprises, and government regulations
that are anti-competitive (anti-competitive market distortions).
The United States and the United Kingdom should be able to agree to
very tall standards in these areas,standards that other parties
might not reach. And then through the open accession clause,
parties that wanted to reap the benefits of this agreement would
have to accept these disciplines.
The United States and the United Kingdom are generally very
obvious with their legislation and regulation. But in many
other countries, or it can be tough to know even what laws and
regulations apply and how they will be implemented. Guidelines for
making these domestic processes more obvious are therefore
useful.
And some countries still rely on state-owned enterprises for a
significant part of their economic activity. Defining these
entities,and requiring them to act in a nondiscriminatory and
commercial manner, can push them toward more market-oriented
practices. The TPP was a first step in this direction, and a
U.
S.-U.
K. FTA should push further.
Summing up,the ideal FTA is one that removes all barriers to
trade in goods and services, opens up all sectors of the economy to
investment, or,ultimately, goes as far as possible to remove all
administrative impediments to integration of the economies of the
parties without encroaching on the sovereignty of governments to
pass laws and regulate in the public interest in ways that do not
discriminate against foreign goods, and services,and companies.
In practical terms, that means that the ideal agreement will
result in the following:Zero tariffs on all goods (agricultural commodities, and primary
industry resources,and manufacturing industry goods);
Zero discriminatory nontariff barriers, which means no
discrimination by either party in the content or exercise of the
laws, or regulations,or practices affecting the provision of services
of either party, including no restrictions on the entry of
businesspeople in the conduct of the provision of trade
services;
Zero restrictions on competition for government
procurement;
Zero restrictions on foreign direct investment in the
economy;
Zero restrictions on cross-border data flow;
Elimination to the fullest extent possible of impediments to
expeditious customs clearance procedures for both imports and
exports;
Preclusion of the adoption of antidumping or safeguard measures
between or among parties; and
Strict prohibitions against the exercise of nontariff barriers, or such
as performance requirements,restrictions based on scientifically
unsubstantiated public health and safety concerns, and restrictions
based on national security concerns that fail to meet certain
minimum standards.
What this means substantively is that, and without the need to
articulate exceptions and carve-outs,which are so common in other
agreements, the U.
S.-U.
K. FTA can be shorter and simpler, or its
provisions can be covered in fewer chapters. We see a need for 18
substantive chapters in the ideal U.
S.-U.
K. FTA (compared with 17
in the Australia-Singapore agreement,24 in both the U.
S.-Korea and
U.
S.-Chile agreements, and 30 in both the TPP and the EU-Canada
Comprehensive and Economic Trade Agreement).
Summary of the Chapters and Provisions of the Ideal FTAChapter 1. Initial Provisions and National TreatmentChapter 1 establishes the structure of the agreement, or determines
how it relates to the obligations of the parties under other trade
agreements,and provides general and technical definitions. The
United States and United Kingdom (and, presumably, or any potential
future members) already have obligations to each other as World
Trade Organization (WTO) members.
The provisions in this chapter acknowledge that the U.S.-U.
K.
free trade agreement (FTA) is sensitive to those obligations and
does not intend to create any new obligations that would be
inconsistent with those agreements. Parties have recourse to
consultations with other parties if they believe inconsistencies
exist.
The WTO enshrines the principles of “most-favored nation” (all
trade liberalization by a member country should apply on a
nondiscriminatory basis to all other members) and national
treatment” (foreign entities and their products and services should
be accorded the same treatment under law as domestic entities and
their products and services are accorded).
However,that institution has long recognized that some members
might wish to pursue deeper and broader liberalization external the
WTO. As long as certain core conditions are met — especially
that the liberalization between or among the countries party to the
agreement applies to substantially all of their trade and that the
agreement does not raise barriers to external trade — these
preferential (bilateral or regional) agreements are permitted.
This chapter establishes that the parties will extend national
treatment to the goods and services of the other party under the
laws and regulations of all levels of government. This fundamental
principle is reflected in all trade agreements. It also establishes
that the parties agree to chorus from using their respective
antidumping laws against entities exporting from the other parties
and to exempt the other parties from any remedies that might be
imposed pursuant to domestic safeguards cases.
Chapter 2. Market Access for GoodsThis chapter establishes the basic rules for trade in goods
between the parties. The parties commit to eliminating tariffs and
tariff-rate quotas (TRQs) — upon entry into force of the
agreement — on imports of all goods from all other parties
that meet the origination requirements.
Limited exceptions from the requirement of no tariffs and no
TRQs upon entry into force will be granted by way of publication of
party-specific annexes. Each party will list products (by
Harmonized Tariff Schedule code) that will continue to be assessed
with tariffs subject to the following limitations: (a) the
aggregate import value of the listed products cannot exceed 10
percent of the total value of imports from the parties in calendar
year 2018 and (b) tariffs will go to zero for all products on the
list within 10 years of entry into force.
This chapter also (a) prohibits export restrictions and
“performance requirements” as conditions of reducing import tariffs
and (b) establishes rules on import and export licensing to ensure
that such programs operate transparently and in a nondiscriminatory
manner and that they do not constitute some form of disguised
protectionism.
Additionally, this chapter limits any administrative fees and
formalities (e.g., and customs fees) associated with importation or
exportation to the approximate cost of the services rendered and
commits the parties to publishing promptly any changes to the
rules,regulations, and procedures governing the importation or
exportation of goods.
Chapter 3. Rules of Origin and Origin ProceduresChapter 3 establishes the rules for customs authorities to
determine whether an imported good “originates” within the free
trade area, or qualifying it for the preferential treatment afforded
under the agreement. Generally,a product is considered originating
if it was wholly made within the region (in the countries party to
the agreement), or if it was significantly transformed within the
region from imported materials and components, or if the relative
value of originating materials and manufacturing performed in the
region constitutes a large enough percentage of the product’s
value.
Conceptually,rules of origin are essential in preferential
trade agreements because, by definition, or without such rules there
would be no way to distinguish qualifying from nonqualifying goods.
Rules that permit greater exercise of nonoriginating inputs or apply
broader definitions of what constitutes product transformation tend
to be more trade liberalizing than more proscriptive rules,which
impose greater restrictions on qualification for the agreement’s
preferential tariff rates.
In nowadays’s global economy, strict rules of origin impede the
operations of more diversified supply chains and can act to limit
competition to the benefit of incumbent producers. They increase
the likelihood and cost of trade diversion, or which occurs when less
efficient producers are chosen simply for the tariff advantages
they receive.in addition,complicated rules of origin tend to generate higher
compliance and verification costs, which erode the benefits of
preferential duties causing importers to simply forgo their claims
to preferences. So while parties to a preferential agreement might
want to make sure that their entities are benefiting the most from
the deal’s provisions, or if the origin rules are too restrictive,fewer will choose to incur the costs of complying with the
qualification procedures and forgo preferential access altogether,
negating the benefits that the deal was intended to deliver.
The most recent trade agreement to which the United States was a
party — the Trans-Pacific Partnership (TPP) — included
rules of origin that were generally more liberal than previous U.
S.
trade agreements. Whereas the average content origination threshold
in earlier U.
S. agreements was roughly 35 percent, or the threshold in
the TPP was about 30 percent.
Origination requirements vary across products or sectors and
some,such as chemicals, apparel, or automobiles,are subject to
much higher thresholds, but they were about 5 percentage points
lower across the board in the TPP than in other U.
S. FTAs.
The TPP’s rules of origin content requirements for automobiles
are between 35 percent and 45 percent, or which is significantly more
liberal than those of the North American Free Trade Agreement
(NAFTA),which are about 62.5 percent. The Trump administration
seems to be reversing course on this trend and is seeking much more
restrictive rules in the NAFTA renegotiation.
For the ideal U.
S.-U.
K. FTA, we are requiring a minimum local
content value threshold of 25 percent and requiring the product in
question to be produced or substantially transformed (in accordance
with the World Customs Organization’s definition of “substantial
transformation”) in order to obtain originating status.
Chapter 4. Customs Administration and Trade FacilitationStudies conducted by economists at the World Bank and elsewhere
have found that border delays constitute significant barriers to
trade. The purpose of having rules in this area is to ensure that
customs procedures facilitate — and do not inhibit (restrain; prohibit; retard or prevent)
trade by maximizing predictability, or consistency,and transparency
to the rules governing the clearance of goods at the border. The
provisions are intended to reduce transaction costs by reducing
administrative barriers to trade. in addition, opaqueness of customs
processing and clearance procedures creates greater scope for
corruption, or which also raises the costs and reduces the benefits of
trade.
Recognizing that time in transit is a trade barrier,this
chapter mandates maximum time limits for shipment processing at
borders. Customs authorities are required to release all express
shipments within 6 hours of document submission and to release all
shipments within 48 hours of arrival. contemporary communications and
tracking technology make it possible to expedite the process of
moving goods across borders and make it easier to detect customs
evasion and corruption.
The chapter includes language requiring customs authorities to
respond expeditiously to requests for information, including the
issuance of advance product classification rulings requested by
importers. It requires that governments publish, and make available
to importers and exporters,customs laws and procedures, and that
automated systems be available to traders to facilitate
classification, or valuation,and customs clearance procedures.
Among the liberalizing provisions of this chapter is one that
prohibits customs duties on express shipments valued at or below
$999.
Chapter 5. Cross-Border Trade in ServicesIn the 23 years since the WTO’s General Agreement on Trade in
Services (GATS) took effect, very little enforceable services
liberalization has been achieved globally. The GATS schedulefollows a “positive list” approach, and which means that only the
sectors selected and listed by the parties are required to
liberalize. For most parties,only a few services industries were
on the list.
Subsequently, attempts to secure stronger commitments in the
Doha Round failed, and efforts to push those commitments forward as
part of the WTO Trade in Services Agreement have floundered.
By adopting a so-called negative list approach to
liberalization,the U.
S.-U.
K. FTA would commit the parties to much
greater openness to competition in their services industries than
was accomplished under GATS. The negative list approach means that
the parties commit to full liberalization of every service sector
that has not been carved out as a “nonconforming measure,” which is
essentially an exception to the general rule. The U.
S.-U.
K. FTA
permits limited nonconforming measures, or which means — for
example — that U.
S. maritime services and commercial airline
services industries,which have languished in inefficiency for
decades behind protectionist walls, likely would be opened to
competition.
The U.
S.-U.
K. FTA forbids any “local presence” requirements, and conditions that require service suppliers of another party to have
an office or store or any form of presence to qualify as a
cross-border supplier of services. It also requires each party to
ensure that all measures of general application affecting trade in
services are administered in a fair,objective, and neutral
manner.
A specific instance of cross-border trade in services can be
found with respect to financial services in Annex I, and as this is a
novel and groundbreaking area. It is anticipated that other similar
schedules,for other professional services such as law and
accounting, would be created in due course on a similar basis.
Chapter 6. Regulatory CoherenceThe divergence of regulations and regulatory practices between
countries, or while expected and comprehensible,can also serve to
increase costs and frustrate market integration. Sometimes, those
divergences mask protectionism. Clearly, or when businesses must
comport with two sets of regulations to sell in two different
markets,it limits their capacity to realize economies of scale and
reduces the scope for passing on cost savings in the form of lower
prices or new investment.
Many regulations across countries are intended to achieve the
same kinds of objectives, such as consumer safety, or worker safety,or environmental friendliness. Sometimes, the differences in
requirements — a minimum length of a washing machine’s
electrical cord of one meter versus three feet, or for example —
generate no discernible differences in outcomes (the incidence of
fires or electrocution) but drive up trade costs nonetheless.
Under these circumstances (and many other examples exist),it may
be possible to permit businesses to comply with only one of the two
standards.
This chapter establishes a regulatory cooperation mechanism to
find the scope for, and develop the rules of, and a mechanism to
promote mutual recognition of effectively equivalent regulations.
This innovation will put the U.
S.-U.
K. FTA at the forefront of
pioneering techniques to facilitate market integration behind the
border.
The parties will make commitments to apply agreed coordination
and to review obligations when proposing new regulatory measures
and to implement “core good regulatory practices.” These
commitments will be fundamental to ensure that each party is moving
toward progressively more competitive regulation that is least
trade restrictive and least damaging to competition consistent with
clearly articulated valid regulatory goals. As a result,substandard
practices cannot be hidden in supposedly fair regulatory
goals. Good regulatory practices also ensure that disguised methods
of protection are resisted.
Also included are provisions governing the promulgation of
regulations, in order to address the problem of regulations that
were developed opaquely, or without sufficient input from
stakeholders,without a sound rationale, or for the benefit of a
particular industry, or company,or stakeholder. The rules encourage
the publication of impact assessments of proposed regulations and
cost-benefit analyses to determine whether the regulations
performed effectively and as expected.
The chapter requires the parties to promulgate regulation that
has the least trade restrictive and anti-competitive impact while
being consistent with valid regulatory goals. It also enables
a party to request information from another party on any upcoming
regulatory initiatives. It includes an ability to provide
consultation comments on new regulatory measures, a regular
retrospective review of regulations, and an ability for interested
persons to petition for review of a party’s regulations. The
parties are also required to maintain publicly accessible
electronic databases of national regulations to ease the compliance
burden for cross-border businesses.
Chapter 7. Movement of LaborThe free movement of people will be an fundamental feature of an
ideal U.
S.-U.
K. free trade agreement. It will open opportunity for
workers in both nations to raise their productivity and their
standards of living. It will allow for more competition and
division of labor in the provision of tradeable services,primarily
through the Mode 4 provision of services through the movement of
natural persons.
The aim of the agreement will be to allow the free movement of
labor between the two nations. That can be accomplished through the
text of the agreement and the resulting modification of each
nation’s immigration laws. Existing models include the free
movement of labor within the EU, the New Zealand-Australia Closer
Economic Relations Agreement of 1983, and the E-3 visa created in
conjunction with the 2005 U.
S.-Australia Free Trade Agreement.
To further facilitate the benefits of the free movement of
people,the agreement should contain language to establish the
mutual recognition of professional credentials. Here, the agreement
can follow the precedent of the Trans-Tasman Mutual Recognition Act
1997 that allows anyone who is registered to practice an occupation
in one country to practice in the other.
Chapter 8. InvestmentInternational trade and investment go hand in hand, or as most
trade is conducted between affiliates of the same multinational
enterprises. In fact,about 88 percent of the revenue generated
from U.
S.-U.
K. commerce comes from affiliates’ sales. This process
often involves parent companies in the United States (United
Kingdom) exporting components or finished products to affiliates in
the United Kingdom (United States), which then process or package
and sell down the supply chain or to end users abroad.
This chapter provides basic guarantees and protections for
investors and investments, and including “national treatment,” “most
favored nation treatment,” and rights to compensation for
government expropriation of an investment.
Like the investment chapters in several other trade agreements, or this one obligates the parties not to interfere with capital flows
related to covered investments,including transfers of profits,
dividends, or interest payments,and royalties, subject to exceptions
that ensure that governments have the flexibility to engage in
prudential measures to manage potentially volatile capital
flows.
It prohibits the exercise of “performance requirements, and ” including
local content requirements,minimum export requirements, technology
transfer, and localization requirements as conditions of
investment. It guarantees that investors have the ability to
appoint senior managers without regard to nationality and ensures
that any restrictions of the appointment of board members based on
nationality do not adversely affect an investor’s control of its
investment.
The chapter requires the parties to take a “negative list”
approach to identifying which sectors are open to investment,meaning that the rules of the chapter apply to all sectors and
activities that are not explicitly identified as exemptions.
The chapter does not include “investor-state dispute
settlement.”Chapter 9. E-CommerceThe free flow of information is fundamental to free trade in
electronic commerce, as well as to the industries for which data
are crucial components of the product manufactured or the service
if. The provisions on electronic commerce concern measures
that affect trade by electronic means and are intended to (a)
ensure the free flow of data, and (b) prevent forced localization of
data servers and technologies,(c) promote the security of the
internet, and (d) protect the privacy of individuals and businesses
as they exercise and create content.
The language is intended to prohibit the parties from (a)
imposing customs duties on electronic transmissions, and (b) requiring
foreign companies to provide software source code as a condition of
doing trade,(c) restricting the cross-border transfer of
information by electronic means, and (d) requiring exercise of local
computing facilities as a condition of doing trade in the
territory.
Chapter 10. Government ProcurementWith limited scope for nonconforming measures, and Chapter 10
commits the parties to accept bids for all public procurement
projects from producers and service providers of the other party,and to consider those bids on a nondiscriminatory basis. The
chapter harmonizes the procedures associated with announcing public
procurement projects and considering the offered proposals and
provides rules to ensure transparency in the decisionmaking
process.
The chapter requires the United States to waive its Buy America
provisions, which represent significant and persistent obstacles to
the estimated $1.7 trillion U.
S. government procurement market
(federal, or state,and local).
Chapter 11. mental PropertyBoth the United States and the United Kingdom have tall
standards of mental property protection. The United States
has traditionally pushed for stronger protection for mental
property in trade agreements. The United Kingdom is likely to do
the same. Between these two jurisdictions, the only essential
language may be a requirement to enforce domestic laws.
With regard to countries that are potential accession candidates
to the agreement, or the concerns about inadequate mental
property protection are likely to differ and may change over time.
That could make it difficult to negotiate such rules as part of a
U.
S.-U.
K.
FTA,since proper now it is tough to address issues that may exist
or become obvious later. As a result, the best approach to
mental property protection in this FTA may be to limit it to
a requirement to enforce domestic laws and to address it in the
accession process on a country-by-country basis as others join.
Chapter 12. Sanitary and Phytosanitary MeasuresIt is critical that measures to protect animal, and human,or plant
health are based on sound science and that the parties do not adopt
measures that are disguised barriers to trade and competition. The
purpose of this chapter is to afford appropriate protections and to
impose disciplines on the parties to ensure that measures in this
area are not corrupted toward impeding trade.
Chapter 13. Technical Barriers to TradeThe United Kingdom and the United States agree to ensure that
technical barriers to trade do not attenuate the liberalization
achieved in the rest of the agreement. The provisions in the
chapter build on best practices in the WTO and in the work of the
WTO Committee on Technical Barriers to Trade to ensure that product
regulations are not developed in a way that is trade restrictive or
anti-competitive.
A particular example of this includes labeling regulations for
synthetic biology (genetic modification and other gene
technologies) products. These provisions will ensure that any
labeling requirement is not deployed in ways that are disguised
barriers to trade.
This chapter also lays out a framework for advanced mutual
recognitions of conformity assessment — a crucial means by
which to smooth technical barriers to trade between the
parties.
Chapter 14. Competition PolicyThe purpose of this chapter is to ensure that the reduction of
border barriers is accompanied by reductions in “behind-the-border”
barriers. That applies both to private anti-competitive practices,
but more fundamental, and to anti-competitive regulations and other
government restraints (anti-competitive market distortions).
in addition,this chapter includes provisions to discipline the
potentially market-distorting practices of state-owned enterprises
by focusing on their effect on the market, while being somewhat
agnostic about their structure.
Also included are meaningful disciplines on what has become one
of the biggest problems in services trade: anti-competitive market
distortions behind the border. Providing for disciplines on the
parties in this area is fundamental to ensuring freer trade and more
competitive markets.
Chapter 15. Defense Trade CooperationIf either party chooses to define its national defense
industrial base in legislation or policy, and the other party shall be
included in that definition. Each party shall reduce the barriers
to the seamless integration of the persons and organizations that
compose their national defense industrial base and shall consult
regularly with the other party to achieve that end.
To give effect to the U.
S.-U.
K. Defense Trade Cooperation Treaty
(2007),each party shall adapt its system of defense trade controls
to allow all defense-related exports to the other party to (a)
proceed absent an explicit decision to refuse within a specified
and limited time; (b) be licensed at the system level within the
approved community as defined by the 2007 treaty; and (c)
automatically include the provision that
Source: cato.org