Partner Article

May prepares to meet Trump - what to expect

By Peter Snaith, Partner at UK law firm Bond Dickinson and James K. Kearney, Partner at US law firm Womble Carlyle

UK Prime Minister Theresa May has secured the coveted first meeting between President Trump and a foreign head of government. Among the goals of each leader in this meeting will be setting a course for a future UK-US trade deal. The policies of each of Prime Minister May and President Trump will be on the line in this first meeting, with Prime Minister May seeking to demonstrate the UK’s ability to strike favourable trade arrangements in the post-Brexit era and President Trump seeking to establish the viability of his “America First” policies on the global economic stage. The fortunes of businesses and investors in both countries are also on the line, and as the details of any bilateral trade understanding begin to take shape they will need to understand how their commercial interests will likely be affected and how they can position themselves to protect their interests and capitalize on new opportunities.

The two leaders begin in broad agreement on their preference for bilateral rather than multilateral trade deals, and the UK will undoubtedly be keen to be at the front of the queue for trade talks with the Trump Administration. However, to benefit from any Trump-led tide in favour of bilateral deals the UK may have to consider steps that would conflict with its continuing obligations as a member of the European Union and increase the risk of a “hard” Brexit.

President Trump’s hyperactive first week in office saw him sign a flurry of executive orders, including US withdrawal from the Trans-Pacific Partnership (TPP). Signing that order, President Trump pledged to negotiate “fair bilateral trade deals that bring jobs and industry back onto American shores”.

A few days earlier Prime Minister May’s Lancaster House speech on Brexit promised that a “Global Britain” would pursue trade deals around the world, unfettered by the block-negotiation and rules of the European Union. She spoke warmly of President Trump’s comment that the UK would not be “at the back of the queue, but at the front of the line” for a trade deal with the USA.

With those words and actions in mind, the scene would appear to be set for rapid progress between willing partners, leveraging the already extensive trade and investment ties between the UK and the US. Currently, the UK does more than US$180 billion in trade annually with the US, making it the UK’s second largest trading partner behind Germany. In addition, each of the US and UK is the biggest source of inward investment to the other country, accounting for material job creation in both economies.

However, even with a strong existing trade and investment relationship to build on, the prospects for striking a trade deal in the short term face potentially strong headwinds. As the UK Supreme Court’s “Brexit” ruling of 24 January underlined, the UK’s freedom to enter into bilateral trade deals is limited because it remains, for now, a full member of the European Union. The Supreme Court ruled that the UK government requires specific authorisation from the legislature before it can “trigger” Article 50 of the Lisbon Treaty – the mechanism for member states wishing to leave the European Union.

It is highly unlikely that the UK Parliament will withhold its authorisation, and it remains likely that Article 50 will be triggered before the end of March 2017. However, that would simply mark the beginning of a two year period designed to allow for the negotiation of the specific terms of exit and the terms of the UK’s future relationship with the European Union. It is entirely possible that the two year period could elapse without agreement. In that event, the UK’s membership would simply end with the hardest of “hard” Brexits.

Crucially, during that two year period the UK remains bound by its Treaty obligations to the European Union and by the rules of its Common Commercial Policy and Customs Union. Consequently, until Brexit takes effect in 2019 the UK is not free to enter into bilateral trade agreements. To do so – indeed, even to negotiate for such an agreement – would be to default on the UK’s solemn Treaty obligations.

The Brexit process therefore presents the UK government with a problem that is both practical and pressing. Faced with the risk of missing such a significant tide, it is conceivable that the UK government might seek to negotiate a deal. It might seek to present any such deal as conditional upon Brexit, or as unconditional but deferred to the point when Brexit takes effect. That could mitigate, but would not eliminate, the UK’s breach. Consequently, there is a further possibility that the UK might simply seek to press ahead with a bilateral deal, viewing it as both a pressing need and as a useful tactic in Brexit negotiations with the European Union. Arguably, securing non-EU trade deals would materially tilt the balance in those negotiations, signalling that the UK does not come as supplicant.

Indeed, early statements from the Trump Administration suggest that there could be no more auspicious time to negotiate a US-UK trade deal. There can be no guarantee that the context would be so favourable by 2019. By that time, the Trump Administration will have faced the test of mid-term elections plus two years of what former UK Prime Minister Harold MacMillan referred to as a politician’s greatest fear - “events, dear boy, events”.

Also, President Trump may find it difficult to embrace the goals and details of a bilateral trade deal given the protectionist rhetoric which propelled him to an election victory. The Trump team has floated a succession of possible actions designed to raise barriers to the entry of foreign-produced products into the US, and limit the outflow of US investment in production abroad. These proposals include strengthening laws imposing “Buy America” restrictions, offering tax incentives for US exporters, and imposing tax penalties on US companies investing in offshore production facilities. Trade agreements, whether bilateral or multilateral, are designed to eliminate, not perpetuate, such measures. It remains to be seen whether the Trump administration will view its interests well-served politically by an early bilateral trade deal with the UK before taking the steps to establish his “America first” trade credentials, a process that may encounter resistance from many in the U.S. Congress and US business community.

In the past, formal statements issued after meetings between heads of government have tended to be anodyne – referring to “constructive” talks or a “frank exchange of views”. Those diplomatic conventions might not survive the Trump treatment, and it will be extremely interesting to see whether a recasting of the US-UK “special relationship” involves the UK taking a copy of Trump’s “Art of the Deal” into its Brexit negotiations and pressing ahead with early bilateral negotiations.

This was posted in Bdaily's Members' News section by Womble Bond Dickinson LLP .