Brexit: Straining the Anglo-American Economic “Special Relationship”

British Prime Minister David Cameron announced 24 February that there would be a referendum on UK membership to the European Union. Recent fears regarding immigration and extensive financial ties to Brussels have prompted the Conservative government to renegotiate the terms of its membership in an attempt to achieve a ‘better deal’ with regard to the UK’s participation in the highly-integrated EU. The potential for a British exit from the EU has already stoked fears across the continent, leaving many wondering what type of future lies ahead for the most liberalized economic trading bloc in the world. As the U.S. is one of the UK’s largest trading companions and shares many of its core economic principles, the White House has become increasingly aware of the potential for a Brexit to damage the Anglo-American economic relationship and the “Special Relationship” as a whole.

Image courtesy of The White House, 2013. Public Domain.

Image courtesy of The White House, 2013. Public Domain.

Historically, the Anglo-American relationship has been one of the closest in history, especially in the context of both economic theory and practice. Adam Smith’s The Wealth of Nations is the cornerstone of the liberal economic narrative, which both countries have embraced to an unparalleled extent. According to a Congressional Research Service report, ‘The U.S.-UK bilateral investment relationship is the largest in the world. In 2013, U.S. foreign direct investment in the UK was $571 billion. Total U.S. corporate assets in the UK stood at nearly $5 trillion in 2013, representing 22% of total U.S. corporate assets abroad’. It is also important to take into account that this level of investment occurs even though the U.S. belongs to the highly-integrated NAFTA trading bloc. In addition to FDI and corporate assets, the report states that firms representing both the U.S. and UK employ large amounts of people in the opposing country. ‘In 2013, UK affiliates employed about 987,000 U.S. workers, and U.S. firms employed approximately 1.27 million people in the UK’.  These statistics represent a mutual theoretical and practical understanding of International Political Economy as well as a clear harmony in banking and trade practices.

If, however, the UK decides to leave the EU, the economic bonds that hold the Anglo-American relationship together will be strained. Firstly, exiting the EU will nullify the trade agreements that the UK has with the U.S., because all of the UK’s deals go through the EU. While many from the pro-Brexit campaign say that it will be simple to rearrange the previous trade deals, recent announcements from the White House have put this dream in jeopardy. According to U.S. President Barack Obama’s most senior trade official, ‘America is not in the market for a free trade deal with Britain alone’. By ruling out a separate trade deal with the UK alone, the U.S. is leaving the UK vulnerable to huge tariff hikes. Currently, according to The Telegraph, the EU falls under the United States’ ‘most-favored-nation-trading-group’, which has an average tariff rate of less than three per cent of the value of a product. If the UK were to leave the EU, the tariff rate would immediately increase to more than 80 per cent of a products value, similar to those paid by China and India. In terms of damage from a U.S. point of view, the EU without the UK will be much less willing to provide assistance to the U.S. in times of crisis. Historically, the UK has been much more pro-U.S. than the rest of the EU, as can be seen in Tony Blair’s full endorsement of the War on Terror as well as Operation Desert Storm in Iraq. Without the UK in the EU, the U.S. will have a tougher time garnering support for its international strategies.

Needless to say, if these tariff rates were allowed to persist for any reasonable length of time, the result would be devastating to the British economy. The 80 per cent tariff rates imposed on China and India are explicitly for the purpose of protecting American manufacturing jobs, and are not designed to be pushed on a country with higher labor costs than the U.S. The price of American goods would skyrocket, and the United Kingdom would have to look to other countries to offset the increase. This would naturally shift the UK trade eastward, relying on cheap goods from China and South-East Asia.

Inevitably, a disconnect between the trade policies of the UK and the EU would strain the Anglo-American Relationship. Higher tariff rates would push the two apart economically, which would affect all other aspects of the relationship. An example of this could manifest itself in closer economic ties between the UK and China, which would force the UK and U.S. apart in both a diplomatic as well as military capacity. In addition, an exit from the EU would entail a major theoretical disparity between the U.S. and the UK. The U.S. and the UK have been among the most vocal advocates for the liberalization of world markets. A UK exit from the EU would signal a retreat from this ideology, and with the U.S. still pushing for fewer barriers to trade, this divergent outlook could quickly affect the historically prized “special relationship” between the U.S. and the UK. From the American perspective, a UK-less EU is an inherently less friendly one. The post-World War II UK has been a friend to the U.S. and, according to Tony Blair, acted as an ‘Atlantic bridge’ for the United States to influence European politics. A fully-fledged exit from the EU, however, would seriously harm this relationship and plunge Britain into economic uncertainty.