UK Chancellor Rachel Reeves Talks Targeting Increased US Trade Despite Trump Tariffs Threat

Summary

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Bloomberg Talks: UK Chancellor Rachel Reeves Talks Targeting Increased US Trade Despite Trump Tariffs Threat

Date: February 26, 2025
Host: Bloomberg
Guest: Senior UK Government Official (Chancellor Rachel Reeves)
Episode Focus: UK fiscal strategy, defence spending, US trade relations under the possibility of a new Trump presidency, and their impact on economic and global security.

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Episode Overview

This episode features a timely and candid discussion with UK Chancellor Rachel Reeves on the government's fiscal plans, the recent decision to increase defence spending, and the potential for bolstering US-UK trade despite looming tariff threats under a potential Trump administration. The conversation also tackles the economic aftershocks of Russia’s invasion of Ukraine, impacts on global growth, the state of development aid, and the government's commitment to fiscal discipline.

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Key Discussion Points and Insights

1. UK Defence Spending and Fiscal Constraints

• The UK government is committing to increasing defence spending to 2.5% of GDP by 2027, primarily funded by reductions in overseas development assistance.
• Ambitions beyond that (3% of GDP) are contingent on future economic and fiscal contexts.

Quote (Government Official):
"We set out a clear plan for taking defence spending to 2.5% of GDP by 2027 and that will be funded by cuts in overseas development assistance. That is the right thing to do given the threats we face from Russia on the continent of Europe." [01:19]

• UK’s higher defence spending is explicitly tied to the security situation in Europe, especially in light of Russian aggression.

Quote:
"A strong economy depends on strong national security and strong defence, which is why we've made that decision to invest in our defence capability." [01:19]

2. The Prospect of Further Defence Spending and Trade-Offs

• The Prime Minister's ambition for 3% of GDP on defence is acknowledged but is not guaranteed, described as dependent on both the fiscal situation and military necessity.

Quote:
"Yes, we want to take defence spending to 3% of GDP... but that will be dependent on economic and fiscal circumstances and also military need." [01:57]

3. US-UK Relations and Tariff Threats under Trump

• Reporter raises the prospect of direct UK benefits (such as withdrawal of Trump’s threatened 20% tariffs) in exchange for the UK's increased defence obligations.

Quote:
"The Prime Minister will be meeting President Trump to discuss a range of issues. ... Right across Europe we increase spending on defence to play our full part within NATO and to keep the continent of Europe safe against Russian aggression." [02:39]

• The Chancellor remains optimistic about future UK-US trade relations, citing precedent from the previous Trump administration.

Quote:
"Last time that President Trump was in the White House, trade and investment between our two countries increased. And I have every confidence that that can happen again." [02:39]

4. Ukraine War and Global Economic Impact

• The quest for peace in Ukraine and its potential “peace dividend” for global growth is discussed, but with an emphasis on the necessity of a "just and durable peace."

Quote:
"The human sacrifice in Ukraine has been immense. ... Russia's illegal invasion of Ukraine has also placed a heavy burden on the global economy, with higher energy prices, higher food prices and disruption to global trade." [03:37]

• Any economic upside ("growth dividend") from a possible peace is firmly attached to the quality and sustainability of that peace.

Quote:
"It is essential, it's a just and a durable peace if we are to get the benefits, both for Ukraine and indeed for the global economy." [04:23]

5. Aid Cuts and the West’s Role in Global Development

• UK’s decision to cut aid is defended as an outcome driven by the changing security landscape post-Ukraine invasion.

Quote:
"It's a wake up call to countries around the world, but particularly in Europe, and it's right that we have increased spending on defence." [04:54]

• The interviewer raises the risk of China and Russia filling the void in development aid left by the West’s withdrawal.

Quote:
"I think it's important that countries play their full role in both providing defence and in providing aid. Britain has made ... the right decision to protect our national security, to strengthen our defence in the face of Russian aggression." [05:29]

• The Chancellor links economic strength to national security multiple times, reinforcing the narrative that these are not mutually exclusive.

6. UK Fiscal Responsibility and OBR Forecasts

• Questions arise about upcoming fiscal events and the government’s commitment to following Office of Budget Responsibility (OBR) forecasts.
• The Chancellor does not rule out further fiscal action but reasserts the government’s adherence to previously set fiscal rules.

Quote:
"The Office of Budget Responsibility are going through their process at the moment in terms of providing a forecast. I'm not going to give a running commentary on that, but I will respond to it on 26 March. And the fiscal rules that I set out... are non negotiable and we will take whatever action is necessary to continue to meet those fiscal rules." [06:19]

Quote:
"Whatever the OBR say in March, I am very clear we need to go further and faster to grow our economy and further and faster to improve and reform our public services, including improving productivity in our public services." [06:42]

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Notable Quotes & Memorable Moments

• On Defence Spending:
  "A strong economy depends on strong national security and strong defence..." [01:19]

• On Trump US-UK Relations:
  "Last time... trade and investment between our two countries increased. And I have every confidence that that can happen again." [02:39]

• On Ukraine’s Impact:
  "Russia's illegal invasion of Ukraine has also placed a heavy burden on the global economy..." [03:37]

• On Fiscal Rules:
  "The fiscal rules that I set out in the budget in October that Parliament have endorsed are non negotiable." [06:19]

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Timestamps for Important Segments

• 01:00: Start of discussion: UK fiscal and defence plans
• 02:25: UK approaches to the US regarding tariffs and trade under Trump
• 03:26: The war in Ukraine, peace prospects, and economic impacts
• 04:42: Western aid cuts and influence in the developing world
• 06:04: On OBR forecasts and upcoming UK fiscal event

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Conclusion

This episode offered a clear-eyed look at the UK’s post-Ukraine defence posture and its balancing act between fiscal responsibility, national security, and international trade. The government remains optimistic that US trade relations will prosper regardless of tariff threats, and is firm in its belief that increased defence spending is essential for both security and economic strength. The Chancellor was noncommittal on prospective fiscal events but steadfast on adhering to existing fiscal rules, emphasizing the need for further economic and public service reforms.

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Transcript

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Bloomberg Audio Studios Podcasts Radio News the Prime Minister.

[Interviewer / Journalist]

Was saying that he wants to restore the aid budget to 0.7% of GDP and to get defence back up to get defence up to 3% of GDP. This implies a much bigger state and even with strong growth, it seems not remotely possible within the fiscal rules without big tax cut rises or big spending cuts. Do you agree?

[Government Official / Politician]

We set out a clear plan for taking defence spending to 2.5% of at GDP by 2027 and that will be funded by cuts in overseas development assistance. That is the right thing to do given the threats we face from Russia on the continent of Europe. A strong economy depends on strong national security and strong defence, which is why we've made that decision to invest in our defence capability.

[Interviewer / Journalist]

But beyond for the next parliament it would be 3% of defense spending is the ambition, and that's when it would get more difficult within the fiscal rules and without big cuts or big tax rates.

[Government Official / Politician]

The Prime Minister was really clear yesterday. Yes, we want to take defence spending to 3% of GDP, given the threats that we face. But that will be dependent on economic and fiscal circumstances and also military need. But we've set out that fully funded, fully costed plan in the next two years to take defence spending to two and a half percent of GDP to improve our national security and to make our economy and our country stronger.

[Interviewer / Journalist]

The Prime Minister is going to be meeting President Trump on Thursday. You have just increased defence spending, which is obviously what he would like. Do we hope to get anything in return? Do we hope, for example, for him to withdraw the threats of 20% tariffs possible?

[Government Official / Politician]

We've increased defence spending to improve the security of Britain and it's in our national interest to do that. The Prime Minister will be meeting President Trump to discuss a range of issues. But it is important that right across Europe we increase spending on defence to play our full part within NATO and to keep the continent of Europe safe against Russian aggression. In terms of the future trading relationship between the UK and the us, last time that President Trump was in the White House, trade and investment between our two countries increased. And I have every confidence that that can happen again. And I know that the Prime Minister looks forward to talking about those issues and many others in his meetings with Donald Trump tomorrow.

[Interviewer / Journalist]

Obviously there is talk about peace deal in Ukraine within weeks. The US hope. Would that be. Would that be good for growth globally? Would it be good for growth in the uk? Is this something you'd be hoping for?

[Government Official / Politician]

I set out in my G20 contribution at the Finance Ministers meeting today the importance of peace. But a just and durable peace, that is what the people of Ukraine need and deserve and that is what will contribute to a stronger economy. The human sacrifice in Ukraine has been immense. But of course, Russia's illegal invasion of Ukraine has also placed a heavy burden on the global economy, with higher energy prices, higher food prices and disruption to global trade. But first and foremost this is about protecting the sovereignty of Ukraine and protecting the security of Europe.

[Interviewer / Journalist]

But you think a peace dividend might bring a growth dividend as well?

[Government Official / Politician]

Well, there's no doubt been the case that Russia's invasion of Ukraine has played a role in in the higher inflation and the weaker growth that we've seen. But it is essential, it's a just and a durable piece if we are to get the benefits, both for Ukraine and indeed for the global economy.

[Interviewer / Journalist]

We've had to slash our aid budget to afford the defence spending. The US are doing the same. Sweden, France, Germany, they're also reducing their aid spending. Does this mean that the west has given up on the developing world?

[Government Official / Politician]

The world has changed hugely in just the last few years since Russia's invasion of Ukraine. It's a wake up call to countries around the world, but particularly in Europe, and it's right that we have increased spending on defence. To take us to 2.5% of GDP is a fully costed and a fully funded plan. It's in our national interest to do so and that is why we're taking that action.

[Interviewer / Journalist]

Do you think it's a risk that China and Russia possibly could fill the gap if we leave? If we take our foot off the pedal for development assistance in the developing world?

[Government Official / Politician]

I think it's important that countries play their full role in both providing defence and in providing aid. Britain has made the decision, the right decision to protect our national security, to strengthen our defence in the face of Russian aggression. And that's why we've increased defense spending, are increasing defence spending to two and a half percent of gdp. That's the choice that we have made. It's in the national interest. It's also good for the economy because a strong economy depends on strong defence and strong security.

[Interviewer / Journalist]

And just finally then, you've had two OBL forecast rounds. Can you confirm that the March 26 fiscal event will not will not be the fiscal event. It will just be a group of OBR forecasts as you as you originally said it would be.

[Government Official / Politician]

The Office of Budget Responsibility are going through their process at the moment in terms of providing a forecast. I'm not going to give a running commentary on that, but I will respond to it on 26 March. And the fiscal rules that I set out in the budget in October that Parliament have endorsed are non negotiable and we will take whatever action is necessary to continue to meet those fiscal rules.

[Interviewer / Journalist]

Not ruling out a possible fiscal event.

[Government Official / Politician]

I'm not going to provide a running commentary on the ongoing OBR forecast. We took the action that was necessary in October to put our public finances on a firm footing. But whatever the OBR say in March, I am very clear we need to go further and faster to grow our economy and further and faster to improve and reform our public services, including improving productivity in our public services.

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