Tariff tracker, May 9: Why the US-UK trade deal isn’t what it seems

In terms of the highlights, from the UK’s perspective, the deal ensures that US tariffs on automotives are immediately slashed from 27.5%, with steel and aluminium reduced to zero. The deal also provides “unprecedented market access for British farmers with protections on food standards maintained”.

From the US’ perspective, as Trump posted on Truth Social, thanks to this deal “… America will raise $6 BILLION DOLLARS in External Revenue from 10% Tariffs, $5 BILLION DOLLARS in new Export Opportunities for our Great Ranchers, Farmers, and Producers, and enhance the National Security of both the U.S. and the UK through the creation of an Aluminum and Steel Trading Zone, and a secure Pharmaceutical Supply Chain.”

On the face of it, the US-UK trade deal serves many purposes, regardless of the details (many of which are still being worked out). For one, it soothes investors and market participants about the US’ ability to negotiate deals and find a way to get away from punitive levels of reciprocal tariffs announced in April. Further, it provides a framework that the US and other countries may use to arrive at similar trade deals.

The upshot being, the world can find a way to extricate itself from the massive disruption caused by Trump’s tariffs and contain the damage. The relief was immediately visible in key market parameters. The US stock markets rose by more than 1 percentage point even as bond yields rose and, most crucially, the US dollar strengthened across all its peers and rivals.

But there is a second way to look at this deal and that provides a more sombre outlook about what is likely to happen with other trade deals. The fact is that a trade deal with the UK wasn’t really much of an issue. That’s because unlike most other countries — such as India or China, against whom the US had a trade deficit (which was the central irritant and trigger for Trump’s tariffs) — against the UK, the US had a trade surplus.

So, if one was to go by Trump’s logic, the UK should have been levying tariffs on the US and not the other way around. There are just a handful of such countries in the world — such as Australia — against whom the US enjoys a surplus. And as such, this new trade deal with the UK has limited instructive value since most other countries don’t have a similar trade relationship with the US to begin with.

Moreover, the fact is that while the new deal may be an improvement over the April 2 situation, it is not exactly clear if it is an improvement on the situation that existed before the start of Trump’s second term. For instance, tariffs on car imports from the UK were just 2.5% before Trump. Then they went to 27.5% after April 2. Now, they have come down to 10%. So it is not exactly clear how the UK is better off when compared to the situation that existed before April 2.

Similarly from the US perspective, too, it is not clear if genuine opening of markets will happen. Take, for instance, the UK’s food standards on imports. These constitute the so-called “non-tariff barriers” that inhibit US food exports even when tariffs were always almost close to zero. But the UK is not obligated to relax or compromise these standards under the new deal.

On the whole, while the US-UK trade deal raises hopes among global investors, especially as the US Treasury Secretary prepares to meet with Chinese negotiators in Switzerland later this week, it should not be taken as the conclusive proof that forging new trade deals will be easy. In fact, the UK deal shows that the US will likely stick to a base rate of 10%, at least, against the whole world.