David Henig is the Director of the UK Trade Policy Project at the European Centre for International Political Economy (ECIPE). 

Just for a short time, all went quiet in the UK trade world. A Labour government meant the end of Conservative traumas over EU relations regularly resurfacing. President Biden didn’t do trade deals with anyone, and new UK Ministers made few swift decisions. Meanwhile, the EU reset has been more about smiles than substance.

To be fair, that wasn’t going to last. Though the secrecy instincts of Whitehall linger with a new government, there isn’t much point in a trade strategy shaped without extensive external input and some controversy over decisions. This will need to happen at some point (whether before or after publication) and is an inevitable consequence of choosing priorities.

Similarly, judging by ministerial visits, the only trade deal close to conclusion is with the Gulf Cooperation Council, which if agreed is likely to prove controversial, perhaps in terms of labour and environmental provisions, as well as making only a limited contribution to growth. Meanwhile, arguments over the level of ambition shown in the UK-EU reset are intensifying, as UK stakeholders advocating for ambition increasingly hear frustration from their contacts in Brussels.

 

The Trump Agenda

President Trump’s re-election changes everything. Trade is a significant part of his agenda, specifically raising tariffs – which we know to be economically damaging. Suddenly commentators are talking about trade again, specialists are being invited to offer their views, and ministers are expected to give answers. Some raise the spectre of a 1930s-style trade meltdown or, more realistically in an age of international supply chains, of interlinked trade wars.

Around two-thirds of UK trade takes place with the US or EU, and these relationships are up for grabs. They are also interrelated in what we could call a new ‘great game’ between those two and the other major powers of world trade: China certainly, and India arguably. This is the geopolitics which the middle powers including the UK, Canada, Japan, and Mexico will need to navigate.

Starting with the basics of Trump’s plans, what is most discussed is a tariff on all goods imports, of 10-20%, with those from China charged higher at around 60%. There is no clarity as to whether this comes on top of MFN levels or not, and that probably doesn’t matter. This seems highly unlikely to be implemented.

Given that a large proportion of imports will be intermediate goods, and others, final consumer goods with no immediately available domestic substitutes, such a policy would be immediately economically damaging to the US. Large companies based in the US will already be making their cases for exemptions, and what we are more likely to see will be targeted or used as bargaining leverage.

More likely is the US starting a series of individual trade conflicts which need to be considered separately, but which could add up to potentially considerable economic damage. Given the integrated nature of global supply chains, it is hard to quantify that with any accuracy, but it will require constant UK government attention to manage.

 

How should the UK respond?

The UK is likely to be affected in at least three ways: it is a flagrant breach of WTO rules, about which we generally care quite deeply. It may also lead to a global trade war. Finally, the US is our largest single trade partner.

Taking the last first, on UK figures only 30% of our exports to the US are goods. Yet that is still £59 billion, a little under 15% of our goods total. Our sales of whisky, Rolls Royce engines or medicines may well be at risk. No government can ignore this, and doubtless officials have prepared plans for retaliatory measures if necessary. Of course, there will also be talks of a deal, either a full trade agreement or something more partial. Trump is more of a deal-maker than Biden, but anything substantive would probably once again become stuck on agricultural standards on which UK and US approaches seem irreconcilable.

On the second, the UK has so far stood aside from trade conflicts with China. This may become increasingly difficult as the threatened Trump tariffs may be used as leverage for the UK to align more with the US against China. Equally Trump’s tariffs may also lead to EU-US conflict, with the UK as residual damage, or many other permutations. This won’t be a good time for investor certainty.

For world trade rules it is hard to be positive, and maintaining broad agreement outside of the US would seem to be the best case. This will not be a conducive environment for WTO reforms and new plurilaterals, such as on e-commerce. Survival will be the name of the game.

The UK response should be different this time. Unequivocally the UK government will ideally declare a continued commitment to fair global trade rules. Under Trump’s first Presidency there were suspicions that this would be abandoned if the US offered any kind of bilateral deal, which increased suspicion globally without any evident upside. It should also work hard with other like-minded middle powers to counterbalance Trump-induced turbulence.

Various commentators have suggested that the UK government acts as an honest broker between the US and EU, or perhaps trade one off against the other. These should be rejected as not credible. We are novices in the world of trade negotiations, and this will be a battle of heavyweights in which our goal should be not to be crushed by either. It is far better to try to stay out of the fray as much as possible.

Others have seen the election of President Trump as the perfect opportunity for the UK to get closer to the EU, and for the government to put energy into a reset that already shows signs of losing momentum. For some supporters, there will also be the fear of the US pressuring the UK to choose which rules we follow.

Conclusion

What should be the principle here is to follow the money, or rather the main trade flows. With around half our trade, the EU relationship is far more important than that with the US. That’s even been recognised by Robert Lighthizer – USTR under the first Trump term and still close to the President.

Such a commitment isn’t absolute, where the UK can be a rule setter as in financial services, we should do so. For goods, if we have to be followers, the EU is the better model. This makes more economic sense, similarly on climate change measures where we have broad political agreement. There’s no doubt that it is in the UK’s economic interests to seek smoother trade with the EU, but ideally, that shouldn’t come at the expense of wider trade to which we remain committed.

Trade policy is back, it hardly went away in truth. However, in starting with a realistic view of the world, this UK government is better prepared. That needs now to extend to thinking through the limits of what’s possible, in bilateral and multilateral terms. In some ways, it will be every country for themselves. In others, there will be a lot of coordination and discussion. Setting out a clear path in public – one that includes respect for global rules, open trade, and follows our main economic interests – would be a very good start in responding to the new times.

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