U.S.-UK alliance seen outweighing Brexit
trade concerns
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[June 28, 2016]
By David Lawder
WASHINGTON (Reuters) - The United States
looks unlikely to follow through on a threat to relegate Britain to
second-class trade status once its ally leaves the European Union, as it
weighs the potential costs of undermining the countries' close
diplomatic and military ties.
President Barack Obama had warned ahead of Thursday's "Brexit"
referendum that Britain would move to the back of the queue on U.S.
trade priorities if it voted to leave the bloc, well behind a
much-larger U.S.-European trade deal now under negotiation.
But in the face of a severe financial market reaction to the vote to
leave the EU, U.S. officials are making more supportive statements
about the strength of the U.S.-U.K. "special relationship" and
stressing that they are still analyzing the impact of "Brexit" on
the European trade talks.
Security and trade experts said Washington is wary of adding to
Britain's economic pain, which could hamper its ability to maintain
its commitments to NATO and U.S.-led efforts to fight terrorism. A
poorer Britain may not be able to afford its pledge to spend 2
percent of its GDP on defense at a time of increasing threats from
Russia, nor a new fleet of nuclear submarines that form a key part
of the West's nuclear missile deterrent.
"The U.K. could become smaller and weaker. If that happens, then you
wonder if they can sustain the defense spending and the effort to be
globally oriented," Nicholas Burns, a former U.S. ambassador to
NATO, told reporters after an Atlantic Council event on Monday.
"That's what we worry about with Britain leaving. Britain was the
strongest American partner inside the EU."
Some trade experts also said that a deal on the U.S.-European
Trans-Atlantic Trade and Investment Partnership (TTIP) was unlikely
for years now without Britain at the table, which could open an
opportunity for a separate deal with the U.K.
"The 'back of the queue' statement will be forgotten by the next
administration, if not sooner," said Gary Hufbauer, a senior fellow
at the Peterson Institute of International Economics. "In my view,
TTIP is either dormant or dead in the wake of Brexit."
It may be easier for Washington to negotiate a bilateral trade deal
with Britain, a "like-minded" country that is more open to free
trade than the 27 remaining EU members, said Miriam Sapiro, a former
deputy U.S. Trade Representative.
"A U.S.-UK agreement could create leverage to get TTIP done more
quickly, and it's an easier agreement to do," Sapiro said.
CALMING WORDS
As U.S. Treasury Secretary Jack Lew and Secretary of State John
Kerry sought to contain the damage from Brexit in public appearances
on Monday, they both refrained from repeating Obama's trade warning.
Lew told CNBC that a trade deal with the EU remains a priority
because it has been under negotiation for several years, but he did
not rule out the possibility of separate talks with Britain once
Europe and the UK agree on separation terms.
"Any separate negotiation with the U.K. will have to take a course
in part determined by what happens between the U.K. and EU," Lew
said. "So it is, I think, very much in the interest of all parties
to maintain open trade relationships. The U.S. and the UK have a
special, deep relationship that will continue."
White House spokesman Eric Schultz added that the administration was
"working through" how the "Brexit" vote would affect the TTIP talks.
"If we have to start negotiating separately with the United Kingdom,
that's going to start from a different vantage point, especially
because we've had years of progress."
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A taxi driver holds a Union flag, as he celebrates following the
result of the EU referendum, in central London, Britain June 24,
2016. REUTERS/Toby Melville
Schultz said that U.S.-U.K. economic ties "remain strong and vibrant
as they have been, and the special relationship had not suffered
because of the vote.
The more conciliatory tone "is about stabilizing the economic
situation," said Heather Conley, European Program Director at the
Center for Strategic and International Studies, a Washington think
tank. She added that since markets were "already punishing" Britain
for the vote, there was no need for the Obama administration to pile
on.
RECESSION THREATENS DEFENSE BUDGET
Goldman Sachs' top economists told clients that they expect Britain
to enter a recession within the next year as investment plans shrink
and credit tightens in the vote's wake..
Both Standard and Poor's and Fitch Ratings cut their credit ratings
for Britain, anticipating damage to its economy from Brexit, while
the shares of British homebuilders have tumbled as much as 40
percent in two days.
The British government is scheduled to make a final decision this
year on replacing the four aging submarines that carry its Trident
intercontinental nuclear ballistic missiles, a program that could
cost as much as $167 billion.
British Defense Minister Michael Fallon told parliament on Monday
that the government maintains its commitment to the BAE Systems
program and hoped a vote on the decision would be held “shortly.”
In another twist, Britain's submarine fleet is based at Faslane on
Scotland's west coast. Should Brexit prompt Scotland to make a
second, successful bid for independence, Britain may be faced with
having to spend billions to build a new submarine base.
Britain's departure from the EU -- which could take several years to
negotiate -- risks undermining Europe's new defense strategy, days
before NATO and EU governments sign a landmark pact to confront a
range of threats from Russia to the Mediterranean, officials say.
NATO allies will be looking for reassurances on Britain's
commitments to the group at a summit in Warsaw in July.
"Things are going to be a lot harder," said a senior Western defense
official involved in EU-NATO cooperation. "NATO planned on linking
itself up to a stronger European Union, not being the default option
for a weakened, divided bloc."
Another U.S. official played down any near-term security concerns
saying: "I don’t think the sky is falling here."
(Additional reporting by Jonathan Landay, Phil Stewart and Ayesha
Rascoe in Washington and Warren Strobel and Robin Emmott in
Brussels; editing by Stuart Grudgings.)
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