Is Trump’s trade war de-escalating?

The decision of US President Donald Trump to rush through a limited UK/US trade deal and to announce it in a hastily convened press conference took the UK government and much of the world by surprise. UK prime minister Keit Starmer was planning to spend his time at VE Day celebrations. The timing seems to have been dictated by the initiation of trade talks with China.

Mr Trump seems to want to show China that the US can do deals with other countries, and that they will make concessions on tariffs and trade terms to keep their trade with the US. The UK was one of the easiest ones to do as the trade in goods between the UK and US is in balance and the number of issues that annoys the US is proportionately lower than with China, the European Union (EU) and Japan, which run large surpluses.

China has indicated it is not going to impose its 125% retaliatory tariff on all items as it struggles to adjust to the big shock the trade tariffs are administering to its industry. President Trump must be under pressure from US business and some of his supporters and advisers over the negative impact his 145% tariffs are having on domestic concerns.

Any US company relying on imports of Chinese components or final products is being badly hit by the need to pay large tariff bills on all future deliveries. The tariffs are way higher than their margins on the products they are making, so they are faced with big damage to profitability and cashflow. They must put through large price rises.

The truth is that China and the US still need each other and have made themselves mutually dependent on the trade between them. It will take time for the two to wean themselves off this dependence.

The UK/US trade disagreements

The UK wanted to remove the new special tariffs on steel and aluminium. It succeeded, although there needs to be further talks about the replacement regime. It wanted to remove the special tariff on cars. It settled for its removal for a quota of exports for 100,000 vehicles based on recent sales levels. It accepted that cars would now face the general 10% tariff they did not incur before. I

The UK government wanted reassurances that pharmaceuticals would not face new barriers. Some doubt remains over this issue. It wanted to keep its EU-derived SPS regime (Sanitary and Phyto sanitary rules for beef, chicken, dairy etc). This was agreed, so Downing Street can say it is not accepting imports of hormone beef and chlorine-washed chicken. It also wanted to remove the 10% general tariff, but this stays.

The US wanted better access for its farm products. High tariffs on items such as beef and orange juice imposed by the UK will be brought down. It wanted the end to the Digital Services Tax (DST) on its leading companies. It also wanted modification of the online harms legislation, which the US believes restricts freedom of speech too much and may result in excessive fines on US companies. These remain for further discussion over a possible digital agreement.

Both sides agreed to have free trade in planes and aviation parts, helping Rolls Royce sell its engines to US plane makers.

As a result, the average tariff paid by the US on exports to the UK will fall and the tariff on UK exports will be higher than before the Trump rises. One estimate suggests the UK average tariff on the US will halve to around 2% whilst the US average tariff on the UK will treble to more than 10%. The US claims $6bn of extra tax revenue.

US farmers will still encounter what they regard as unfair barriers to selling more meat and dairy from food regulations but will benefit from a substantial reduction in some UK agricultural tariffs. The US press release says there is more detail to be worked out to replace the cancelled steel and aluminium special tariffs, as well as leaving out any detail on issues such as digital and pharmaceuticals.

The UK government has stressed the help these changes give to the UK car makers and Rolls Royce. The US press release recites the areas where the US thinks the UK is still too restrictive and claims credit for more US tariff revenue and more UK market access for US farmers.

Is the rest of the world queuing for a deal?

Most countries that have been hit by the Trump tariffs want to see them removed through talks. Discussions with Korea and Japan have been mentioned as well advanced, as good allies of the US and significant traders.

Canada and Mexico already have a Free Trade Agreement with the US, but Washington has nonetheless imposed and threatened high tariffs as President Trump thinks the trade with them is unfair. He wants concessions to continue the Free Trade Agreement.

China and the EU, with large surpluses, are keen not to appear weak in their dealings with the US. China has imposed high retaliatory tariffs – and the EU is consulting over how far to go with its retaliatory action. It always takes the EU time to move on such matters. Trade is an EU-competence, but Brussels needs to consult members and try to reach a consensus before setting out a policy and a negotiating mandate.

The US Commerce Department, the US Trade Representative and the US Treasury Secretary are conducting talks with many countries and seeking to impose some order on the process. They need to respond to the president’s latest ideas on a regular basis, and to channel his wish to conduct much of the diplomacy himself at a head-of-government level in ways which are helpful.

The UK deal shows the president wants deals, but they are not always the finished article, requiring more details to be thought through and incorporated in legal text. Mr Trump seeks to use his powers of office in an area where Congress traditionally also has a role. If it comes to concluding a wide-ranging new trade treaty or agreement, Congress will need to ratify. The president must rely on narrower executive trade powers and on his right to negotiate for the US.

Canada and Mexico are covered by the US-Mexico-Canada Agreement, which President Trump negotiated in his first term. It replaced the NAFTA system for the three countries and is due a review next year. The president said to Canadian Prime Minister Mark Carney that he still supported the agreement but argued that Canada violated it in many ways.

There are disagreements over rules of origin where the US thinks products with too little Mexican or Canadian content are passed off as qualifying goods. Reviving and perhaps amending this agreement is a possible way forward for these three close trading partners.

US/China

The China row is the big one. The president has singled China out for penal trade stopping tariffs of 145% and China has retaliated. Both sides wish to avoid any suggestion they are giving in. The opening of talks is a good sign, but it is going to take a lot of diplomatic skill to reach an outcome that both can sell to their domestic audiences.

It is in the interests of both parties to try to find a way to reduce the tensions. Currently we see plunging US/China trade levels, weak shipping rates, and great uncertainty for businesses dependent on these trades. Most stocked up a lot just before the tariffs came in to allow more time for negotiators to try to find a way to lower and fewer tariffs.

China is the President’s main target as he sees the country as a large rising power challenging US political and military supremacy as well as running an unacceptably large surplus with the US on its trade account. The US has imposed many restrictions on technology trade as it wishes to keep or to establish technological leads in crucial areas. Any trade deal will mean less trade and less exchanges between the two superpowers.

US/EU

President Trump dislikes the EU and has accused it of trade cheating to run a large surplus. The feeling is mutual, with the EU threatening retaliatory tariffs and wishing to take on President Trump.

The EU protects its farmers with high food tariffs and a range of regulations. The US says the EU does not respect science and blocks farming methods that produce cheaper food. The EU dislikes the dominance of US digital companies and regularly takes them to court and fines them for infringements of EU laws. France offers competition to some US weapons production and seeks protection for EU media and films.

President Trump seems less preoccupied with getting a deal with the EU than he is with China, Japan and his near neighbours. The EU does not allow the same personal diplomacy as independent states, as French President Emmanuel Macron and German Chancellor Friedrich Merz do not have control over the trade policy of the EU. The EU itself often puts forward two or more presidents to represent it, with its President of the Council, President of the Commission and President of the Parliament.

Conclusion

Markets are right to see that President Trump wants some deals to find a way through his trade wars with everyone. The UK was a small step in that direction and was always going to be one of the easiest to land. More details need to be worked out. It is also clear that markets need to accept tariffs will be generally higher after this process, with the president seeming to want at least a minimum 10% tariff overall.

Markets will remain volatile, fluctuating on progress or setbacks. with the big trade deals needed with China, Japan, Canada, Mexico and the EU. The president should now be in a hurry to get some more deals, as the global supply chains and trade patterns are being damaged by current uncertainty and by the ultra-high tariffs on Chinese goods.