U.S.-UK Trade Deal Illustrates Trump’s Shifting Trade Policy

Inu Manak is a fellow for trade policy at the Council on Foreign Relations.

The United Kingdom (UK) secured the first trade deal with the Donald Trump administration this week, setting a possible template for other nations. While it’s not a full-fledged agreement, it addresses President Trump’s recent tariff hikes, sets priorities for cooperation, and lays the groundwork for future discussions on a range of issues. The agreement’s five pages of text are minuscule compared to the phonebook size of most trade deals, which likely means the announcement’s immediate economic effect will be similarly small.

But trade deals are not just about economics. They are also a tool that can shape the system of rules by which two or more countries engage with each other—and the rest of the world.

This is exactly where this new deal gets interesting, so let’s break down the major takeaways.

A New Tariff Baseline

Trump’s “Liberation Day” announcement on April 2 set 10 percent tariffs on all imports. It also targeted additional “reciprocal” duties at countries with which the administration perceived a trade imbalance with the United States. While President Trump walked back the reciprocal duties, beyond those placed on China, the flat 10 percent rate stayed in place.

These tariffs are consequential. They alter the commitments that the United States has with the 166 member nations of the World Trade Organization (WTO), where each country agrees to cap tariff rates at certain levels with all members. This is commonly referred to as the most favored nation (MFN) rate. There are exceptions to MFN, often when two or more countries negotiate and sign a trade agreement that offers better rates between themselves. But this typically involves a comprehensive deal that covers all trade between the negotiating parties.

Why does this matter? In the newly announced U.S.-UK Economic Prosperity Deal, Trump’s 10 percent across-the-board tariff is preserved. This means that this is a new baseline tariff for the United States, and its acceptance by the UK signals that it may become the de facto U.S. MFN rate. This has important consequences for two reasons. First, more than 80 percent of global trade takes place under MFN terms, and accepting unilateral revisions to it opens the door for other countries to take similar action. Second, with the UK unable to successfully push for its removal, countries next up in the negotiating queue may be locked into a similar fate.

The bottom line is that with zero movement on the 10 percent tariff, the UK is no better off than it was on April 2, which isn’t encouraging for future negotiations.

Fuzzy National Security Tariffs

Two of the major tariffs to be negotiated were the 25 percent tariffs Trump levied on vehicles and automotive parts, as well as the 25 percent duties on steel and aluminum. The White House cited Section 232 of the Trade Act of 1962 for these levies, which gives the president authority to raise tariffs for national security reasons.

The UK received a much-needed reprieve on vehicle tariffs, but again, it still finds itself worse off than where it started the year. These automotive levies were converted into a quota, meaning that UK imports were capped at a 10 percent tariff (presumably in addition to the 2.5 percent MFN rate) for the first 100,000 vehicles. If exports exceed that quota, the 25 percent tariff still applies. Since the quota amount is roughly what the UK exports to the United States anyway, there could only be a slight drop in automotive trade.

On steel and aluminum, the details are fuzzier. It appears that the two countries agreed to negotiate a quota, but no specific figure was mentioned. The UK would be required to meet some tracking standard to measure the content of those products, which is also unspecified. The agreement also leaves room to negotiate down duties on Section 232 investigations that have not yet concluded, which includes pharmaceuticals. This means that the UK will need to negotiate a new deal on each and every one of the 232 investigations opened by the White House.

Traditional Elements in a Unique Deal

While it is true that this deal is the first of its kind, there are several elements that nod to trade agreements of the past. For example, there is a substantive section on addressing several non-tariff barriers, such as health and safety standards for food and agricultural products, trade facilitation measures like paperless trading, and efforts to cooperate on standards.

In addition, there is a reaffirmation of previous agreement commitments, such as the Government Procurement Agreement, which provides preferential access to the procurement markets of some WTO members. Both countries also signaled their interest in negotiating “an ambitious set of digital trade provisions” that would include financial services. The United States was the longtime frontrunner of modern digital trade rule advocacy until the Joe Biden administration, so this is a welcome resumption of U.S. leadership.

For U.S. trading partners, this provides an opportunity to build on past efforts and to look for ways to enhance discussions on issues in need of reinvigoration.

Setting the Table for a New U.S. Trade Policy

This U.S.-UK deal sets the tone for trade policy under the Trump administration, and there are a few other notable elements likely to affect all U.S. trading partners.

First, one of the priorities outlined is collaboration on economic security. The United States does not have a clearly defined economic security strategy, but this agreement sheds light on how it could develop. One of the first points under the heading “strengthening alignment and collaboration on economic security” points to an intention to coordinate efforts “to address non-market policies of third countries.” This is obviously talking about coordinating economic policies towards China. What this means practically remains to be seen, but it suggests that the United States wants to ensure that its approach towards China is mirrored by its trading partners. Not all U.S. trading partners may agree with the U.S. approach, so how this plays out in subsequent deals will be important to watch.

Second, in the section addressing tariffs, there’s a paragraph that does not elaborate on a major detail that could affect all future tariff reductions and trade concessions. The text states that “to ensure U.S. and UK firms can benefit from these changes in practice, both countries intend to apply rules of origin that maximize bilateral trade and prevent non-participants from using our bilateral arrangement to circumvent tariffs.” Rules of origin in a trade agreement determine a product’s percentage or composition that must originate in the jurisdictions of the parties to the agreement. For example, in the U.S.-Mexico-Canada Agreement, 75 percent of a passenger vehicle’s parts must come from Canada, Mexico, the United States, or a combination of the three.

In a way, there’s nothing different about the inclusion of this type of provision in a trade deal, but it suggests that by emphasizing bilateral trade, the United States could end up fragmenting global supply chains if the rules of origin it demands are too stringent. Trading partners that are plugged into global supply chains will need to strike a balance between those demands and remaining economically competitive. If the rules are too stringent, some firms could just decide to reduce trade to the U.S. market—or else they will pay a higher cost for doing so.

Third, the announced deal frequently mentions the “preferential” nature of the concessions, meaning that the deal is simply between the U.S. and the UK. This is quite typical of a trade deal, but it’s important to keep in mind that the U.S.-UK Economic Prosperity Deal isn’t what most trade experts would call a trade agreement.

But, since this isn’t a traditional trade deal, perhaps the most important thing to watch for is whether the UK extends some of the concessions it has made to the United States to other countries. So far, the UK has agreed to more beef and ethanol imports, among others. Under MFN rules, however, the UK should extend those benefits to all WTO members. The text makes clear “that this document does not constitute a legally binding agreement.” The United States has many more deals to negotiate, so this is just the first of many that could undercut this core principle of the international trading system, which could slowly bleed it into oblivion.

Finally, it’s important to keep in mind that this deal is a framework for future talks, though it has some immediate effect on a few major trade irritants. What this means is that negotiations will be ongoing for the foreseeable future. For U.S. trade policy writ large, this means a new approach whereby no deal is ever really done, as each one is subject to constant modification and threats of withdrawal.

So, while markets could have cheered the signing of Trump’s first trade deal, there’s still a long way to go before there’s any sign that the current uncertainty about U.S. trade relations with the rest of the world will ever normalize.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.