UK-US trade deal important but not at any price

Much political attention in the UK last week was focused on Chancellor Rachel Reeves’ visit to Washington on the occasion of the International Monetary Fund’s spring talks. But the talk in Britain was mainly about how Reeves would use the visit to handle the highly delicate matter of UK-US trade negotiations.

President Donald Trump is increasingly specializing in creating volatility, uncertainty and, consequently, panic in the global economy and the UK is no exception in this regard. Worse for London, the debacle of imposing additional tariffs comes at a moment that could result in it unnecessarily rushing into agreeing an unfavorable trade deal with the US, which might contribute little to growth and perhaps even mean concessions on issues that could affect public health and social cohesion, with long-term adverse consequences.

The UK government is facing enormous dilemmas in handling the economy, which are as much political and societal as being about “pure” economics, if such a thing exists. When Labour came to power, it had to deal with the Conservatives’ legacy: a horrendous 14 years of low growth, growing inequalities, low productivity, a persistent national debt that has almost tripled since the beginning of the century, and an inflation rate that is still above the Bank of England’s target. Furthermore, there is the ever-lingering impact of Brexit, which has left the UK in an inferior position in trade negotiations.

It is not unreasonable for a government that was elected less than a year ago to expect some patience from the public as it tries to fix a broken economy that has been through leaving the EU, a pandemic and a general neglect of its public services under previous Tory governments. However, patience is not a characteristic of modern politics and promises made during last year’s election campaign have created expectations. The perfect storm that Reeves is facing by dint of her country no longer being part of the largest economic bloc in the world, coupled with the imperative to increase defense expenditure to support Ukraine and increased tariffs, is a real one. Objectively, it should mitigate some of the criticism she is facing, despite some questionable decisions taken since she became chancellor.

For decades, the UK’s economy has been suffering from structural distortion, concealed by more favorable macroeconomic figures

Yossi Mekelberg

Interestingly, what should stop the British government from signing a deal under Washington’s duress is paradoxically one of the country’s most severe economic challenges: its long-standing structural weakness. For many decades, the UK’s economy has been suffering from structural distortion, concealed by more favorable macroeconomic figures. Nationwide employment figures do not instantly reveal the substantial divide of a 10 percent-plus employment gap between the north and the south of the country in favor of the latter.

It is partly explained by the fact that the north and Wales, which largely rely on the steadily declining manufacturing sector, both suffer from markedly lower employment rates than those who rely on a prosperous services sector, which is mainly based in London and the southeast. Such a discrepancy in sources of wealth generation, and along a geographical divide, is a socially destabilizing factor and leaves the economy more vulnerable to fluctuations in the world economy. However, in the case of US tariffs, it provides some sort of a silver lining, as there are no tariffs on services.

Bizarrely enough, increased US tariffs were supposed to be imposed only on countries that have an export surplus with the US. At the end of last year, Britain entered what was admittedly a rare deficit in goods trade with the US, which hardly justifies even the 10 percent across-the-board tariff and 25 percent levies on cars, aluminum and steel.

What Reeves should consider in negotiating a trade deal with the US is that the official government estimate in 2019, while it was hyping up leaving the EU as the magic wand that would guarantee the UK’s future prosperity, was that such a deal would increase the country’s gross domestic product in the long run by no more than 0.07 percent. Not a figure to be sniffed at, but not one that merits selling the family silver, so to speak, by agreeing to the widespread deregulation that the US demands.

Moreover, being too keen to be first to get a deal does not necessarily equate to getting the best deal — rather, it hints at desperation. There are signs that there are pressures building on the US, which currently does not seem to be able to tell the difference between friend and foe, to back off from a trade war with the entire world. Moreover, this US administration is constantly, sometimes daily, changing its policies, including on tariffs, and by that creating a nervousness that has already cost many investors, including American ones, trillions of dollars. These are not the conditions that suggest rushing into a trade deal will be beneficial.

To lower UK tariffs on US car imports to 2.5 percent, as Reeves indicated she was willing to consider, would do little harm, since the market for US-made vehicles imported to the UK is very limited. Nevertheless, concessions in sectors such as agriculture, sanitary and phytosanitary are a different matter.

Being too keen to be first to get a deal does not necessarily equate to getting the best deal — rather, it hints at desperation

Yossi Mekelberg

Although the UK has left the EU, many of its food standards have remained and the practices of many American farmers to use, for instance, growth hormones as a standard element of their beef production or chicken chlorine treatment, are regarded on this side of the Atlantic as creating products that are unsafe to consume. Concessions to allow the import of such goods will face resistance from consumers and health authorities, not to mention farmers.

Similarly, removing trade barriers when they are protectionist in nature is one thing, but to cave in, as was widely reported to be demanded by Vice President J.D. Vance, and backtrack on hate speech and online safety laws, as well as a digital services tax, is putting our societies at risk of being torn apart.

There is always the fear, considering that Trump’s biggest supporters in the UK are the anti-European type, that Washington might try to lure London into a trade deal, realizing the difficulties the Labour government is facing, separately from the EU. This is a temptation that the Starmer government must resist.

Rightly, the British prime minister has said that the UK does not have to choose between the US and Europe. But in the current atmosphere and considering America’s treatment of Ukraine, any trade deal should look at the wider geopolitical implications as much as at preserving British values. And a strong Europe is in Britain’s national interest and should not be compromised.

• Yossi Mekelberg is a professor of international relations and an associate fellow of the MENA Program at Chatham House. X: @YMekelberg