By Tristan Donaldson
The Labour government has been handed control of the UK in a transitional time for world politics. The US just elected Donald Trump, and the EU project looks to be somewhat faltering as EU powerhouses like Germany and France stagnate economically. It is in these circumstances that Labour must look to grow the UK economy. With mixed reactions from within the UK to Labour’s first budget, seeing protests in recent weeks from farmers, Starmer’s government is now looking outside its borders for economic success and growth. International trade must be an area of high priority to achieve this growth.
But where will Starmer turn to now? On the one hand, there is Trump over the pond, who certainly does not see eye to eye with the Labour government ideologically, and influential figures around Trump like Elon Musk have personally criticized the Starmer government. On the other hand, there is the EU. Starmer has already been trying to develop stronger diplomatic ties with the EU since entering office, and I believe this is where the Labour government will look to put more of its eggs when it comes to trade. The EU is already the UK’s biggest trade partner and is certainly more aligned ideologically with Labour than Trump.
There are also options further afield in Asia and countries like Australia. However, in a post Trump political climate, we must analyse the UK’s state of play when it comes to US trade and explore where the UK can go from here. Will Trump come for the UK with costly tariffs? Will he be more friendly? Will the UK be forced to emphasise trade elsewhere in a more stable partnership?
As of the second quarter of 2024, the United States remains the UK's largest trading partner, accounting for 17.6% of total UK trade. Total trade in goods and services between the two nations amounted to £304.3 billion, with UK exports to the US at £188.2 billion and imports from the US at £116.1 billion. This represents a slight decrease from the previous year, with exports down by 0.4% and imports by 3.5%.
The trade relationship is characterized by a substantial surplus in favour of the UK, particularly in services. In 2022, the US accounted for 26.9% of the UK's outward foreign direct investment (FDI) stock, amounting to £511.5 billion, and 34.0% of the UK's inward FDI stock, totalling £702.5 billion.
Some significant strides have been made with US-UK trade over recent years: most notably recently signing a trade pact with Texas, the second largest US state economy, during the Sunak government. Despite growing economic ties, the Biden administration did not come close to agreeing on an FTA with the UK. This was due to multiple factors including ongoing issues with Brexit, as well as differing agricultural and food standards between the two nations.
During President Trump's first term (2017-2021), the UK and US engaged in several rounds of trade negotiations aimed at establishing a bilateral FTA. However, these discussions faced challenges, including disagreements over agricultural standards and digital services. Despite the absence of a formal FTA, trade between the two nations remained robust, with the US consistently being a top destination for UK exports.
Trump's administration implemented protectionist trade policies, including tariffs on steel and aluminium imports, which affected UK exporters. The UK government sought exemptions and engaged in negotiations to mitigate these impacts, highlighting the complexities of trade relations during that period.
President Trump's re-election brings renewed focus on protectionist trade policies. Proposals include imposing universal tariffs of 10-20% on imports and a 60% tariff on goods from China. While the UK is not the primary target of these tariffs, the interconnected nature of global trade means that such measures could indirectly affect the UK economy.
Analysts suggest that these protectionist measures could reduce UK economic growth by 0.5 to 0.7 percentage points in the first two years of Trump's second term. Additionally, increased tariffs may lead to higher inflation and interest rates in the UK, affecting consumer spending and business investment.
The prospect of a UK-US FTA remains uncertain. Trump's administration has indicated a preference for bilateral trade agreements that favour American interests. Stephen Moore, a senior economic adviser to Trump, suggested that the UK should align with the US's "free enterprise" economic model rather than the EU's "more socialist" system to facilitate a trade deal.
However, the UK government faces challenges in balancing its trade relationships with both the US and the EU. Bank of England Governor Andrew Bailey cautioned against choosing sides in a potential trade conflict between the US and the EU, emphasizing the importance of maintaining active dialogue with both partners.
Trump’s ‘America first’ outlook does make the US a wary trade partner for the UK, as he will not look to give any friendly deals because of the UK’s ‘special relationship’ with the US. In light of potential US protectionist policies, the UK may seek to strengthen economic ties with the EU. The EU remains a significant trading partner, accounting for a substantial portion of UK exports and imports. Re-engaging with the EU could involve negotiating improved trade terms, reducing non-tariff barriers, and enhancing regulatory alignment to facilitate smoother trade flows.
Starmer’s government has been looking to build diplomatic ties with the EU since coming into office. However, since the UK’s decision to leave the EU, the EU has been wary to give the UK any favourable deals, so as not to undermine the importance and favourability of EU membership. If Starmer wishes to rebuild economic ties with the EU, this will have to be a much more long-term project.
There is also the internal issue of Brexiters in the UK and the seeming finality of the referendum. Starmer has committed to not overturning Brexit so as to not upset the public, as many would see it as a betrayal of a democratic decision. The UK government would need to balance the benefits of closer economic ties with the EU against the desire to maintain an independent trade policy.
Beyond the US and EU, the UK has opportunities to diversify its trade relationships. Engaging with emerging markets in Asia, Africa, and Latin America could open new avenues for trade and investment. The UK has already pursued trade agreements with countries like Japan and Australia, aiming to expand its global trade network.
Additionally, participation in multilateral trade agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), could provide the UK with access to a broader market base and reduce reliance on traditional trading partners.
The likelihood of a UK-US FTA under President Trump's second term remains uncertain. While there is mutual interest in strengthening trade ties, significant challenges persist. Differences in regulatory standards, particularly in agriculture and digital services, pose obstacles to reaching a comprehensive agreement.
Furthermore, the UK's need to balance its relationships with both the US and the EU complicates the negotiation landscape. The UK government must carefully consider the implications of aligning too closely with one partner at the potential expense of the other.
Having evaluated the UK’s present international trade situation, I think the UK is in a position of concerning insecurity. Although Trump does not seem to be indicating he will target the UK with tariffs, he certainly will not look to give the UK any favourable treatment. Trump’s ‘America first’ outlook will mean easy handouts for Starmer, and as an infamously temperamental man, we do not know when Trump’s mind will change when it comes to the UK and tariffs.
Although trade with the US will look to remain strong, I am sure Starmer knows he will be walking on eggshells for the next four years when it comes to US trade relations. To me, it is clear Starmer’s government is pursuing stronger economic ties with the EU. But the EU is having its own issues, with the rise of right-wing populism spreading across Europe and other countries are increasingly unwilling to put the EU’s priorities over their own. Russia has also been squeezing the EU economy through control of energy access, and globalisation has shrunk the industrial and economic strength of key EU members like Germany. Combine all of this with the EU’s hesitance to help benefit the post-Brexit UK, Starmer will equally find it challenging to achieve a fast and favourable trade deal with the EU.
However, I do believe the ideological alignment between Starmer and some of those more centrist actors in the EU project will at least provide some common ground for the UK to strengthen these relationships. This process may be drawn out and patience will be required, but if we can rebuild these economic ties, it will hopefully provide much-needed growth in the UK’s economy.
Image: Flickr
Comments