Trump, trade and the special relationship

Last week saw the first big trade deal since what Donald Trump dubbed “liberation day”, and it was between the US and the UK. In some ways, it’s a non-deal deal — there are lots of details that have yet to be inked, or don’t take effect for some time, or are subject to change. Trump loves to keep even his deals up in the air, to create a sense of uncertainty which gives him more control.

But the top lines are that 10 per cent tariffs remain the new normal baseline (much higher than when Trump took office), but UK auto tariffs on cars into the US gets lowered from 27.5 to 10 per cent, with a quota of 100,000 vehicles. US farmers get to sell more beef, ethanol and machinery in the UK, though British food safety standards won’t be tweaked to accommodate chemically treated American chicken. The two countries will do more partnering together on supply chains in areas like steel and pharmaceuticals.

At first glance, this would seem to solidify the so-called special relationship. OK, so 10 per cent is the new normal, but at least Britain is the first country to get a deal with America, and thus more market and policy certainty. Given that America is the UK’s single largest trading partner, that’s important.

But to me, the whole thing underscores the incredibly weak position that Brexit has put the UK in relative to both the US and Europe. If Britain were still in the EU right now, it might have provided some of the necessary momentum for the region to do what it must do and unify both politically and economically to create a countervailing force against global populism and conflict. As it is, yes, the Germans had trouble getting Friedrich Merz in as chancellor, but he’s there now, despite a big win for the far right, and there’s no doubt that both the Germans and the French are ready to spend more on defence and unify more on foreign policy.

What’s really needed is the deepening of European capital markets. That’s where the British come in. Part of Trump’s calculation in trying to stay chummy with UK prime minister Sir Keir Starmer isn’t about trade — Britain is America’s 11th largest overseas market, so not crucial. It’s about making sure to keep Europe destabilised and divided. I can’t tell you how many American investors I speak with who would love to move money out of dollars into eurobonds or invest in new business ventures across the continent if they knew they would have access to deeper and more liquid capital markets.

By keeping the UK aligned with the US, Trump is making Britain feel it still has its special relationship with the US, relative to European countries, and won’t suffer any fresh economic blows. But in fact, that is keeping Britain from doing exactly what it should do, which is find a backdoor way into Europe, and build a common consensus with France and Germany about how to handle not only the second coming of Trump, but Chinese mercantilism too.

My colleague Martin Sandbu, a Norwegian economist based in London who writes a column and the Free Lunch newsletter, is with me as a respondent today. Martin, I have a few questions for you. First, what’s your reaction to the deal? Second, do you agree with me that Starmer’s relationship with Trump is keeping the UK from doing what it should do, and moving much closer to continental Europe? Finally, how do you expect any future US-EU trade deal to play out, and what will it say about the state of the global trading system?

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Martin Sandbu responds

Hello Rana — I’m a longtime fan of Swamp Notes so it’s exciting to finally be dipping my toes into the Swamp myself. And what could be Swampier than this supposed big trade deal? For it is neither big nor a deal and may, as you intimate, not be primarily about trade but about geopolitical positioning.

The most striking thing about the “deal” itself is that the meagre document the two sides finally published some time after the announcement says explicitly that neither sides consider anything in it a legally binding agreement. I think those who expect a real free trade agreement — ie an international treaty — to come out of this at the end will be disappointed. That isn’t how Donald Trump rolls, and even when he does, I know people in Ottawa and Mexico City who can tell you how reliable Trump’s signature is. That doesn’t mean the “deal” — if it sticks — doesn’t provide some benefits to the UK, even if they consist of being punched a little less hard by the bully across the ocean. 

But at what cost? Just as the details were beginning to trickle out, I happened to be speaking to a British trade expert whose main fear was this would be “the UK letting the global side down”. And that’s what’s happened: by celebrating the “deal” the UK has endorsed Trump’s new baseline of high tariffs across the board with just small carve-outs that may save existing export-dependent jobs but will make it very hard to expand exports further. One story circulating here is that Jaguar Land Rover was getting ready to announce job losses and that it now doesn’t have to do so. If true, that means Trump has learned he can extort his closest partners and get much of what he wants. In the case of cars, JLR and others will now have to deal with “just” a 10 per cent tariff instead of a 25 per cent one, but only on the first 100,000 cars, pretty close to normal exports. So forget any expansion into the US.

On your second question, I differ from you: the one harm the UK hasn’t inflicted on itself with this is to make it harder to deepen relations with the EU. In the agricultural part of the deal (beef imports) the UK has clearly refused to weaken its regulatory standards — a precondition for easing food and plant trade across the English Channel. Standing one’s ground there reveals that the government is more determined to fix some of the Brexit damage than it usually lets on in public. In fact I would go further: in the short-term, the “deal” with Trump gives Keir Starmer more political space to announce ambitious goals at next week’s EU-UK summit. That’s because, bad as it is, Thursday’s announcement neutralises any political opposition from those Brexiters who shout that Starmer’s EU rapprochement torpedoes any chance of a trade deal with the US. So in the short run, at least, I think this week’s trade politics hasn’t played into Trump’s divide-and-rule strategy for Europe, which I am sure you are right to say that he is pursuing. But let’s see what happens on tech regulation as the negotiations continue. Instead, the deal is much more obviously aimed at China, where it seems the tariff exemptions on steel are tied to the UK squeezing out Beijing’s influence on the sector.

Finally, what about the EU? While the UK has let the global side down, I don’t agree with those who think this puts pressure on others to follow — certainly not the EU, which knows its own strength very well. (If anything, it may encourage the EU, too, to be more ambitious with the UK next week).

From what I can tell, the EU still scratches its head about what the US wants from it. But it — and China — will have learned two things. One is that Trump feels he needs some ostensible success. The other is that Trump will take a nonbinding promise to buy something to count as such a success. So you may expect a greater willingness to play along with appearances, as well as meaningless promises like buying more natural gas, if that helps things along. But I would be surprised if the EU or China shake hands on a “deal” where all the concessions are from their side relative to the pre-Trump baseline, like the UK has. 

“Liberation day” showed that Trump is not a serious policymaker, and everyone has now seen that his notion of what constitutes a “trade deal” is also deeply unserious. That can only increase the attraction of striking real, binding, agreements, with countries that are serious. So it may just be that Trump has given globalisation a new lease of life — without the US.