The U.S. and U.K. announced a framework for future trade discussions on Thursday.
One of the key questions around whatever framework for future trade talks is: Does it expand trade between the two countries or is it merely a fig leaf that covers up an increase in trade taxes?
In this case, where many of the details are still being negotiated, the agreement is a memorandum of understanding that over time may yield a productive framework for trade or not.
The pact, billed as the first of many to come, may provide clues for the shape of potential future agreements with other nations.
Among the provisions that were announced, UK manufacturers would be allowed to send 100,000 cars into the United States under a 10% tariff — rather than the 25% rate that the administration imposed on auto imports.
Engines and plane parts from Rolls-Royce Holdings PLC will be able to enter the U.S. market tariff free and a British airline will buy $10 billion worth of planes from the U.S., said Commerce Secretary Howard Lutnick.
But even with these particulars, the agreement neither comprehensive nor complete. For example, the deal keeps in place a 10% baseline tariff imposed on all nations, including Britain.
For beleaguered UK industries, the reduction in specific tariffs on automotives and steel products will be welcome news. And the removal of tariffs on steel and aluminum will support a struggling metals industry in the UK as will the exemption of aircraft engines.
But the boost to growth to the British economy from the reduction in tariffs is likely to be minimal. Indeed, the UK is still in a significantly worse position than just a few months ago. For now, we see no reason to upgrade our forecast of just 1% growth this year.
Market reaction
The non-response across financial markets tells me everything we need to know.
Many Americans when they hear about the agreement will likely envision something like the picture below. Those of us who work in finance, economics or run a business are going to see something different.
This does not provide the clarity necessary to lift the fog of uncertainty created by a trade war of choice.
In 2023, the average U.S. tariff on imported UK goods averaged 3.3% while it averaged 3.8% for UK imports of American goods.
That is one baseline to evaluate whatever memorandum of understanding that is presented and the trade talks that will emerge in its aftermath.
It is important to note that the U.S. runs a small surplus of $4.6 billion with the U.K. and the two economies are about as close to being integrated as can be with respect to finance.
The U.S. has more than $1 trillion in foreign direct investment in the U.K.
From our vantage point, the scope of any framework will revolve around the four A’s: autos, agriculture, aerospace and artificial intelligence. Much of that work has yet to be done.
Read more of RSM’s insights on the economy and the middle market.
