Unlock Editor’s Digest Lock for Free
“How much legal structure does this transaction have?” a trade lawyer from a well-known company asked me yesterday. “It’s almost the same as this napkin.”
Even the architects of trade contracts announced between the US and the UK do not call it an economic or legal beauty. Although it appears that there is no signed document, and purely designed to escape the tariffs that Donald Trump has imposed on steel and cars, the agreement is closer to a protection payment to mob bosses than a liberalisation agreement between sovereign states.
Whether a transaction is politically valuable is a calculation that can only be done by the UK government. Certainly, it did not grant us enormous amounts of access to the UK market to the exporter. But no matter what short-term profit it gives to the UK, it doesn’t do much for the integrity of the global trading system.
The UK is not even one of the economies most affected by Trump’s tariffs. The automotive industry is primarily export-oriented, but is primarily directed towards the EU. The US is less than a fifth of UK exports. There is a relatively small steel industry, with less than 10% of exports crossing the Atlantic. And with little trade surplus with the US, the UK was not threatened with so-called “mutual” tariffs beyond its 10% baseline obligation announced on April 2, and was then suspended a week later. For example, the EU faces an additional 10% points of tariff if Trump finds the courage to bring it in and risk another financial market meltdown.
This new agreement poses risks to the UK before considering the broader meaning. Given how enthusiastic the UK is, there is no guarantee that Trump will not come back more. According to the poet Rudyard Kipling, what about Dane Geld – the protection money that the medieval Anglo-Saxon England king bought up the Viking Invaders is that “After paying him Dane Geld once, you will never get Dane.”
During his first term, trading partners can make ad hoc transactions with Trump, such as a “phase 1” deal with the US and China, and make sure they are reasonably stuck. But as Canada and Mexico can prove, Trump in the second term is likely to change the deal and will be responsible for it, perhaps after it is agreed. Despite an absolute lack of evidence that Canada’s smuggling was present on a prominent scale, these countries’ pledge to close out fentanyl smuggling was first accepted and then immediately rejected by Trump.
The deal with the UK is expected to be a full trade deal for next year, but now it itself puts it in a weak negotiation position. Trump can withdraw these concessions at any time if these consultations do not follow his path.
On the other hand, the most important risk is not the UK itself, but the global trading system. Part of the transaction involves reducing the protection of imports of ethanol and beef from the United States, not from other countries, even though this is not a formal legal trade agreement. Thus, the UK undermines the “most advantageous state” principles underlying the multilateral trading system. Authorities bear the reliability by claiming that it is compatible with the rules of the World Trade Organization as part of a broader package. If other countries want to make a fuss, the WTO Dispute Resolution Hearing may quickly sort it out. By accepting to continue to face 10% baseline tariffs, the UK has normalised its deeply regressive movement.
When the UK left the EU, part of the pitch was that it would become a vigorous and aggressive advocate for free trade and multilateral rules. It plays a creative and catalytic role in the WTO, free from the protectionism of EU dressing. Additionally, when participating in the Asia-Pacific CPTPP agreement, we will link to the world’s great power regions for trade.
The UK encourages others to do the same by rushing to deal quickly with US pressures. Over the past few weeks, the EU and CPTPP have made tentative moves towards cooperation to protect rules-based trading systems. China, Japan and the EU are all resisting bounce back against a swift agreement by the US. China claims it will come to the negotiation table on its own terms. The EU today revealed its latest list of retaliation targets against the US. These efforts are currently undermined.
Certainly, the UK can make political choices. You can choose to pay Dane. It managed to escape the worst Trump tariffs for now. However, the promise that post-Brexit UK will prove to be an unwavering anchor for a rules-based international trading system appears weaker than before.
alan.beattie@ft.com
