US-UK trade deal: Would an agreement change anything?

A US-UK trade deal, warmly suggested by US President Donald Trump, aims to help Britain avoid the direct impact of global trade tensions. This demonstrates that the White House has accepted the statistical logic of the US-UK trade balance, with both countries exporting roughly equal amounts of goods to each other, fostering a sense of economic parity.

In fact, according to US data, US exports to the UK are even slightly higher than imports. Therefore, there is no reason to believe that the UK is "taking advantage of" or "cheating" the US, as the President has accused many other countries and the EU. Consequently, the likelihood of reaching an agreement that avoids further trade barriers is high, promoting continued economic cooperation.

But this is not the kind of comprehensive US-UK free trade agreement widely discussed during the Brexit period, which aimed to reduce almost all existing tariffs. It is important to remember that the Trump team never really prioritized a broader agreement, as they believed the UK would not truly break away from the EU in order to reach a deal. This perception influenced the scope and ambition of potential trade negotiations.

The UK government is unlikely to further antagonize farmers or its own supporters by putting US agricultural imports or the pricing of the UK National Health Service (NHS) on the negotiating table. Furthermore, in terms of trade in goods, the UK government has already prioritized its "Brexit reset" plan, a food standards agreement and some customs arrangements aimed at reducing newly created trade barriers with the EU. Notably, the senior official in charge of that negotiation was in the Oval Office at the time. This highlights the UK's focus on maintaining trade relationships with both the US and the EU.

As Sir Keir Starmer has called it, the narrower "economic agreement" revolves mainly around technology, which the UK calls "further integration of the two countries' tech industries." Perhaps the best analogy is that the technical expertise of the London-Oxford-Cambridge triangle could become a boost to a thriving AI-driven Silicon Valley, much like the City of London is to New York's Wall Street. It is crucial that Vice President and Big Tech ally JD Vance will lead part of the US negotiations. This strategic alignment could significantly benefit the UK's tech sector.

This strategy will have implications. Trump's team is already opposing digital services taxes. The UK's digital services tax, introduced in 2020, levies a 2% fee on revenue from social media, internet search engines, or online marketplaces operated by large tech companies. While it raises a modest £700 million to £1 billion annually in the UK, many other countries have followed suit since the UK and France began cracking down on Big Tech companies' revenues. The White House wants to "stop this spread," which may mean persuading the UK to lower or abolish the tax. Chancellor Rachel Reeves advocated raising it from 2% to 12% four years ago. This highlights the potential for conflict between the US and UK on digital taxation policies.

Similarly, the Vice President mentioned in the Oval Office that US tech companies are unfairly affected by what he called "freedom of speech" issues. This seems to refer to the Online Safety Act. The law aims to make social media companies and search engines protect British children and adults from illegal, harmful material, although some argue that it could stifle free expression online. As I understand it, the likelihood of making changes in this regard is currently small. This suggests a potential clash between US concerns about free speech and UK efforts to regulate online content.

The ultimate takeaway will be huge investments integrated into the world's most capital-rich tech companies. Can the UK begin to attract back some of the investment that has flowed to Dublin? Will the EU stand idly by and allow the UK to develop into an offshore center for US tech companies to serve the whole of Europe? These questions underscore the potential for significant economic shifts and geopolitical implications.

There are two other important issues. It is not uncommon for warm words spoken in the Oval Office to be quickly overturned by subsequent actions. President Trump, sitting next to the British Prime Minister, described the EU's levying of VAT as a trade restriction, but he did not seem to realize that the UK was doing the same thing. This highlights the potential for inconsistencies and misunderstandings in trade negotiations.

Even if the UK avoids President Trump directly imposing new tariffs, the open UK economy would be affected by a broad trade war involving most of the G7 and other countries. This remains a possibility. This could not only lead to a collapse in world economic growth and potentially push up inflation again, but could also completely upend the operation of the World Trade Organization. The potential for a global trade war remains a significant threat to the UK's economic stability.

The British Prime Minister has said that the UK does not have to choose between the US and other allies, but this may not seem to be the case to them. The UK's strategy appears to be to become the Switzerland of the global economy, i.e., to remain neutral in a world of trade turmoil, not sitting on the fence, but tiptoeing along a wobbly fence. This precarious balancing act underscores the challenges facing the UK in navigating the complexities of global trade relations.