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The Future of UK’s trade relations: NAFTA, the EU customs union or simply a bilateral agreement?

    During the U.S. Presidential campaign, Donald Trump vowed to leave the North American Free Trade Agreement (NAFTA) unless it was improved to his liking. Although not much has been claimed about what exactly this entails, critics of the deal argue that NAFTA is to blame for job losses and wage stagnation in the US, driven by low-wage competition, companies moving production to Mexico for lower costs and a widening trade deficit. As such, Trump’s ‘make America great again’ administration will attempt to renegotiate the free trade agreement that has existed between Canada, the U.S. and Mexico since 1994. As Canada and Mexico welcome talks to discuss the agreement, an opportunity for the UK to join NAFTA arises.

    Currently, the UK is part of the EU customs union which is a form of trade agreement whereby countries in the union do not impose tariffs on each other’s goods and impose common external tariffs on goods from countries outside their customs union. Countries that are part of the customs union are unable to negotiate other bilateral trade deals due to the model of ‘shared sovereignty’ which would mean that if the UK chooses to join NAFTA, they would have to leave this customs union. In leaving the customs union, the UK will be subject to external tariffs imposed by other countries within the union, and would no longer benefit from the EU’s 56 free trade agreements. Such agreements provide better access to markets outside of the EU including Korea, Mexico and Chile. A result of this implies that UK exporters could face higher tariffs and other trade barriers in these markets. However, this result seems unlikely as NAFTA membership would improve access to not only the Mexican market but, as the trade bloc ensures greater sovereignty, the UK will not be restrained from stipulating their own favourable trade agreements with countries outside the EU customs union.

    Before making the decision on whether to join NAFTA, the UK government needs to assess whether a trade agreement with the U.S., Canada and Mexico – as well as the potential to promote additional trade deals – is more advantageous than remaining within the customs union. NAFTA has not been renegotiated since 1994 and thus predates the rise of the internet which will not suit the UK whom increasingly conduct their trading services online. There is also no guarantee that all three countries will approve a renegotiation of NAFTA. The agreement has had a positive impact on Mexico’s productivity and consumer prices, and any renegotiation could hit their economy through uncertainty and suspended investments which is why the Mexican government are reluctant to change the agreement. Even if Trump manages to get Canada and Mexico to renegotiate the agreement, there is no assurance that the outcome will be favourable for the UK but the UK can at least present their concerns before reaching a decision.

    Although a trade-off between trade relations with NAFTA countries and the EU customs union members seems to exist, the UK could join the European Free Trade Association (EFTA) alongside NAFTA. EFTA - whose four members are non-EU states including Iceland, Liechtenstein, Norway and Switzerland - has negotiated free trade agreements (FTAs) with 27 countries. In comparison to EFTA, the EU has 18 FTAs with countries outside of Europe. This demonstrates that leaving the customs union opens up more opportunities for trade deals. In addition to this, even if the UK decides not to join EFTA, leaving the customs union could reduce UK protectionism, and this would enable the UK to stipulate trade agreements with the EU and the U.S, Mexico and Canada. In this case, no choice will be required regarding whether a trade deal with NAFTA countries is more beneficial than one with countries within the customs union. Thus, joining NAFTA and being subject to its rules (which do not stipulate trade deals with non-NAFTA countries) would not directly restrict potential EU-UK trade relations. The UK should take this opportunity to join the trade bloc.

    The most significant trading partner within NAFTA for the UK is the U.S., where the UK exports about $50bn annually and is a key source for UK foreign direct investment. Instead of joining NAFTA, should the UK merely form a bilateral trade agreement with the U.S? Although it may be arduous to conclude a free trade agreement with three other countries as opposed to one, expanding trade partners to include Mexico and Canada will not harm the UK and such relations will help the UK economy prosper. Commercial and economic relations between Canada and the UK are historically strong and mutually advantageous and the UK is by far Canada’s most important commercial partner in Europe. In terms of Mexico, British products tend to have a significant presence on the market and latest data suggests UK exports in services have been gaining importance, with an increase of 20.95% in 2015. Given such relationships, why limit trade relations to one country when you can be part of a deal that includes free trade with three?

    Although joining NAFTA may increase the number of trade deals the UK can make in comparison to the customs union and ensure greater sovereignty, it is uncertain whether the value of such deals outweighs the value of customs union trade deals. As the post-Brexit government seek to formally trigger Article 50 to exit the EU and uncertainty clears, they should take all the above into account and determine whether joining NAFTA is more beneficial compared to staying in the customs union.

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    Comments

    Julian Hawksworth - About 598 days ago

    An informative, balanced; and very detailed article. Thankyou, for sharing this with a wider audience (via Facebook).

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