A winning hand in Trade Poker

A review of the US-UK Economic Prosperity Deal

Let’s celebrate the US-UK Economic Prosperity Deal and hope that this is just the beginning. The US and UK have so many other trade barriers that should also be reduced or removed to increase trade. But there is also a lot of misinformation flying around, spread by journalists who know nothing about trade and have not bothered to check any of the details before denouncing the deal.

Let’s start with some basics about US tariffs

Yes, this is not a Free Trade Agreement (FTA) in the WTO sense, which is why it is called the US-UK Economic Prosperity Deal (EPD). A free trade agreement requires a substantial reduction in trade barriers, and this is generally taken to mean more than 97% of a country's WTO Most Favoured Nation (MFN) tariff rates.

The President of the US does not have the power to negotiate free trade agreements or change the US’s MFN tariffs; that power lies with the US Congress. Congress can delegate that power by granting a Trade Promotion Authority (TPA) to the President, but these are temporary arrangements. The TPA that was open under Trump's first term expired during Biden's presidency, and it has not been renewed. A TPA allows the President to negotiate trade agreements that Congress can either approve or reject, but it cannot amend or filibuster.

Without a TPA, the US President or his Trade Representative (USTR), can only increase US tariffs for three reasons:

1. Trade Remedy Authority: to address unfair trade practices such as intellectual property theft (Section 301 tariffs);

2. Safeguard Measures and Trade enforcement powers: to safeguard domestic industries from a surge of imports that could undermine local producers (Section 201 and Section 203 tariffs);

3. National Security Tariffs: to protect strategically vital industries (Section 232 tariffs).

All of the US’s recent 25% tariff increases on steel, aluminium, and cars were done under one of these Presidential powers. The President can also remove these tariffs if he is satisfied that the country in question poses no strategic or economic threat to US industry.

The UK was an obvious choice for the US’s first tariff liberalisation agreement. We are not involved in unfair trade practices and have strict laws protecting intellectual property; we could not possibly undermine US producers with a surge of imports, our industrial base is too diminished; and rather than being a strategic risk, the UK is the US’s most reliable ally.

Most of the UK’s media have misunderstood Trump’s increased tariffs; they are not a flat rate on all goods. They are applied at the 10-digit tariff code level, so the 25% tariff was not universally applied, and both the 25% and 10% tariffs were in addition to the US’s MFN tariffs. So the US tariff on UK cars was not 25% but 27.5% (25% plus the MFN 2.5%). But the steel and aluminium goods were mostly tariff-free previously, so the US’s tariffs increased by only 25%.

The poker player

Trump has mentioned many times that his opponents “don’t have the cards,” and this poker reference should not be overlooked. In effect, he is the billionaire at the Trade poker table who has just raised the stakes, knowing that none of the other players has the cash to match his bet, let alone raise it. Nor, of course, do they “have the cards.”

So yes, Trump is merely removing the tariffs that he applied, because that is all he can do, and it is all that he needs to do to show UK politicians the error of their own high trade barriers. Until Trump increased US tariffs on everyone’s goods, the world’s economies took for granted the US’s very few trade barriers, but happily kept US goods out of their own markets with massive barriers, generally the non-tariff variety to avoid falling foul of their WTO commitments. But trade barriers, just the same.

Even after the UK left the EU and its massive trade barriers, the UK kept most of its own tariffs at similar levels, claiming that this would help with trade negotiations. Yet the UK’s FTAs with Australia and New Zealand kept high tariffs and small quotas for up to 16 years on the products that Australia and New Zealand produce most efficiently. Any UK media commentators claiming that the US UK EPD is not an FTA, should study the tariff liberation in these two technical FTAs: reducing low tariffs on goods that the partner country doesn’t export, while keeping high tariffs and quotas on the few goods that it does export, will not increase trade regardless of what you call the agreement.

What are the benefits of the US UK Economic Prosperity Deal?

Well, for a start, the deal has saved Jaguar Land Rover, the UK’s largest car manufacturer, as well as the UK’s other luxury car manufacturers. The US bought UK cars worth almost £9 billion in 2024, equal to 27% of total UK car exports measured by value. The UK only exported 106,000 cars to the US last year, but they were worth almost as much as the 603,000 cars that the UK exported to the EU in 2024. UK car exports to the US were worth more than twice the value of car exports to China.

The US is a very valuable market for the UK, and UK cars do not undercut US cars; they are much more expensive and so are not deserving of a Section 201 or 203 tariff. In fact, it is the opposite – losing the US market would have caused serious harm to the UK’s car industry. So, this is a definite win for the UK. Even though the tariff reduction from 25% to 10% is limited to 100,000 cars, it is still much better than the 25% tariffs still applied to many of their EU competitors.

But there is a significant caveat in the EPD. The tariff reduction is still subject to US National Security Section 232 tariffs. In a word, this means CHINA. Any UK-made electric vehicle with a Chinese battery or using Chinese computer chips may find that they are still subject to US 25% tariffs, but for US national security reasons rather than industry safeguarding measures. Luckily, the UK’s best sellers in the US markets are large internal combustion engine (ICE) cars, and now that Trump has removed the electric vehicle mandate in the US, I expect UK ICE vehicle exports to the US to increase. And as UK luxury cars are bought for their quality, the additional 10% tariffs shouldn’t have a significant impact on sales.

Aircraft parts and engines

The national security issue is also part of the removal of the 25% tariffs on Iron, Steel and Aluminium products. This one actually benefits the US as well as the UK, as the UK doesn’t export many of the goods on the 25% tariff list, with the exception of aircraft parts. In 2024, the UK exported just over $3 billion of the goods covered by the 25% Aluminium tariffs, of which $2.3 billion were HS 8807300 Aircraft Parts. The UK also exports aircraft engines to the US: these were subject to the additional 10% tariffs. Aircraft engines and parts were traditionally tariff-free, and the additional tariffs would have added to the costs of US airlines, aircraft manufacturers and the US defence forces. Removing these tariffs keeps UK manufacturers in business and, more importantly, in business in the UK, as well as lowering the costs of US aircraft owners and producers. A win for everyone. Provided, of course, that the steel and aluminium used to make the aircraft parts and engines is not sourced from China, or better still, sourced from the US.

Iron and Steel

The UK exported about $1 billion of goods covered by the iron and steel tariffs to the US in 2024, none of which were particularly large exports. However, the UK imports most of its basic steel (HS 72) from Germany and Spain, and most of its articles made with iron and Steel (HS 73) from China. Over 20% of the UK’s imports of HS 73 products came from China in 2024. If this steel is then used to make products that are exported to the US, then they may still have 25% tariffs applied to them. How pedantic the US is about this will be interesting. For example, China supplies 20% of the UK’s steel screws and bolts and about a quarter of its steel tubes and pipes. Will these be counted as a national security risk if part of a car or a plane?

But the UK shouldn’t be surprised by these security caveats in the deal. One of the UK’s steel producers, British Steel, got a special mention in Trump's first term tariffs because, despite the name, it is owned by a Chinese company, Jingye. The removal of the steel tariffs is a small win for the UK, but nothing to shout about.

Pharmaceuticals

The EPD also covers pharmaceuticals, and this is a pre-emptive win. Pharmaceuticals are a very important export for the UK, and the US is the UK’s largest market, importing 27% of total UK exports (£6.6 billion) in 2024, and a third of the UK's pharmaceutical exports in 2023 (£8.7 billion).

Trump hasn’t put tariffs on pharmaceuticals – yet. But he could and has suggested that he might. Pharmaceuticals are generally imported tariff-free internationally and are exempt from the additional 10% tariffs imposed by the US. The US and the UK are both signatories to the Pharmaceutical Tariff Elimination Agreement and have eliminated tariffs on all finished pharmaceutical products covered by HS 30. But the agreement does not cover active ingredients or substances used to manufacture pharmaceuticals.

Incredibly, both the US and the UK discovered during Covid that they were reliant on China to supply them with 80% to 90% of the ingredients needed to make pharmaceuticals. This is most definitely an issue of national security for both the US and the UK. The US has been actively encouraging the pharmaceutical industry to bring this production back to the US, and the UK should be doing the same.

Security of supply chains

Another advantage of the US-UK EPD is that the UK can benefit from the US’s on-shoring initiatives and source the base aluminium, steel, semiconductors, and pharmaceutical ingredients its manufacturers need from the US rather than China. UK manufacturers can then turn these into higher-value aircraft engines, cars, and medicines and sell them back to the US, avoiding the 25% tariffs. What’s not to like?

Agriculture

Of course, no review of a US-UK trade agreement is complete without covering agricultural goods. The US and UK have agreed to work to enhance agricultural market access, strengthen bilateral agricultural trade, and before you say “chlorinated chicken”, the US and UK affirmed that ‘imported food and agricultural products must comply with the importing country’s sanitary and phytosanitary standards and other mutually agreed standards.’

The UK has also agreed to increase its WTO quota for US beef to 13,000 tonnes, and the US will allocate 13,000 tonnes of its ‘other countries’ tariff rate quota to UK beef. The UK’s old quota shared between the US and Canada for a mere 1,000 tonnes of beef was not tariff-free; it had a 20% tariff applied to it. And while this may sound high, it is a small fraction of the UK’s MFN beef tariffs, which go as high as 12% plus £2.53 per kilo on boneless beef; the UK’s average applied tariff rate in 2024 was a whopping 55% on US frozen boneless beef. Also, a 13,000 tonne quota for beef is tiny. The UK consumes around 1 million tonnes of beef each year, of which about 300,000 tonnes is imported, almost all of it tariff-free from Ireland.

But just listen to the UK media commentators howl that the Labour Party has sold out UK farmers. They are howling so loudly that they haven’t noticed that the US is also offering a 13,000 tonne quota to UK beef exports. Why isn’t anyone celebrating this? And why, if UK beef standards are so ‘high’, did the UK only export 50 tonnes of beef to the US in 2024, even though the US average applied tariff was only 10%? A fifth of the UK tariff on US beef. A reciprocal 13,000 tonnes of tariff-free beef should be seen as a win for both sides, and hopefully, the UK consumers will overcome their fear of US agriculture and demand larger quotas in the future.

Another agricultural product that was bizarrely tariffed by the UK is ethanol. Ethanol is a compulsory additive to UK petrol as this is part of the UK’s Net Zero pathway. But the UK has very little arable land, and it does not have the climate to grow corn, sugar cane, or most of the crops used to make ethanol. So importing ethanol tariff-free from the US, a country that has masses of arable land and a climate suitable for growing corn, is such a sensible idea that I cannot understand why the UK ever put tariffs of £16 per Hectolitre on ethanol.

UK Whisky imports have zero tariffs even though whisky is the UK’s most valuable agrifood exports, but pure ethanol imported from the US for use in bio fuels, petrol additives, pharmaceuticals, beverage production, industrial applications, cosmetics and perfumes and even as a solvent in the food industry had average applied tariffs of 24% in 2024. Why did we ever do this? Who knows, but now we can import 1.4 billion litres of ethanol from the US tariff-free, which is lucky because we imported 1.38 billion litres (1.08 million tonnes) in 2024. However, I await the Treasury's complaint about the revenue loss.

Unfortunately, although the board displayed in the Oval Office during the announcement of the EPD also mentioned increased UK market access for other US agri-foods listing: cereals, fruit, vegetables, animal feed, tobacco, soft drinks, and shellfish, none of these were mentioned in the General Terms fact sheet. I look forward to reading the full text.

Other geostrategic issues

But the best thing about the US-UK EPD is all of the other things included in the deal, which the media completely overlooked. Most importantly, the UK requested that the US continue to work to lower tariffs on UK goods imposed by the US executive authority as well as those subject to Congressional approval. This is big news and means the US and the UK could be negotiating a full FTA. Something the UK Ambassador, Peter Mandelson, confirmed in a Newsnight interview on May 9^th.

There are other interesting inclusions in the deal, many of which seem to be aimed at China. For example, the deal commits the US and UK to strict adherence to the rules of origin to avoid trade diversion; to combat transhipping and other forms of customs and duty evasion; to strengthen cooperation on economic security; to address non-market policies of third countries; and to commitment to protect and enforce intellectual property rights, labour practices (including addressing forced labour in supply chains), and environmental policies and practices.

The US and UK also intend to recognise their conformity assessment bodies and their accrediting, approving, and licensing processes; extend their mutual Recognition Agreements to cover industrial goods and service regulation; and work to recognise their relevant standards as international standards.

Even services trade, already massive between the US and the UK, will get a boost. The US and UK intend to negotiate digital trade provisions, including financial services; provisions on paperless trade, pre-arrival processing, and digitalised procedures for goods trade; and building on trade and investment security, including data security and cybersecurity. And there was no mention of the UK’s Digital Services Tax, despite UK press speculation that the elimination of this tax would be required to get a trade deal.

Fittingly, as the deal was signed on Victory in Europe Day, the US and UK commit to increasing their economic integration in critical industries and defence preparedness. Additionally, the US and UK agreed to ensure their government procurement markets are more competitive, reciprocal, and secure, but will exclude countries based on security concerns. (The UK’s Procurement Act 2023 allows this.)

The EPD will deepen US and UK trade relations based on mutual trust and a shared commitment to fair and reciprocal trade. They have agreed to consider any changes that may need to be made to this arrangement to ensure that it remains mutually beneficial. They can also terminate this arrangement by giving written notice to the other.

The best part of this agreement? –

‘This document becomes operative on May 8^th 2025’.

Just as Trump promised, no messing about, no red tape, immediate action

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