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.

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.

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]

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]

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

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.