The U.K.'s tariff balancing act

Summary

Summary of "The U.K.'s Tariff Balancing Act" – The Indicator from Planet Money

Release Date: February 11, 2025
Host: Waylon Wong and Paddy Hirsch
Producer: Corey Bridges

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Introduction

In the February 11, 2025 episode of The Indicator from Planet Money, hosts Waylon Wong and Paddy Hirsch delve into the United Kingdom's challenging position amidst escalating U.S. tariffs under President Donald Trump's administration. As Trump aggressively employs tariffs as a tool for enforcing trade policies, the UK finds itself navigating a precarious path between maintaining its strong ties with the United States and managing its deep-rooted economic connections with the European Union.

The U.K.-U.S. Special Relationship Under Strain

The episode begins by highlighting the unique and historically robust relationship between the U.S. and the UK. Paddy Hirsch sets the stage by describing how President Trump has been leveraging tariffs to influence international trade dynamics:

"Trump is not a fan of the EU. He says that their trade relations are unfair to the US and need adjusting tariffs look like a real possibility."
(00:28)

Waylon Wong elaborates on the immediate threat to the UK’s steel industry following Trump's executive order imposing a 25% tariff on all steel imports into the U.S.:

"With Trump signing an executive order for a 25% tariff on all steel coming into the U.S., that threat became real for the UK steel industry."
(00:28)

Balancing Act: Between the U.S. and the EU

The UK's dilemma stems from its strong bilateral relationship with the U.S. juxtaposed with its intertwined economic ties with the European Union. As Trump targets the EU, the UK's dependence on European trade complicates its ability to independently mitigate the impact of potential tariffs.

Catherine Thomas, Associate Professor at the London School of Economics, asserts:

"UK is out of line. And we'll say the UK but European Union is really out of line."
(01:30)

Hirsch interprets this statement as part of Trump's broader strategy, though Waylon Wong acknowledges the ambiguity:

"It seems that using tariffs on goods are proving to be a useful instrument for all sorts of policy goals."
(01:58)

Trump's Tariff Strategy and Its Implications

The hosts discuss President Trump's approach to tariffs, particularly focusing on his disdain for the U.S. trade deficit. Meredith Crowley, a Professor of Economics at Cambridge University, provides insights into Trump's motivation:

"I think when he tells people we have a trade deficit, they're not buying our stuff. He's trying to explain to people, you don't have a job because somebody's not buying something made in America."
(03:04)

Waylon Wong points out that the auto industry has been a significant target for Trump's tariff policies, aiming for what he terms "reciprocal tariffs":

"The U.S. import tariff on automobiles is 2 1/2 percent. In Europe, it's 10%. And he looks at that and says, that's very unfair. I want the Europeans to lower their import tariff on automobiles."
(03:38)

The UK's Intertwined Trade with the EU

The episode emphasizes how the UK's trade is intricately linked with the EU, making any direct tariffs on the EU potentially harmful to the UK. Hirsch notes:

"You see, most of the car made in the UK go to Europe, and they use parts that are part of the European supply chain."
(04:17)

This deep economic integration means that unilateral actions by the U.S. against the EU could inadvertently affect the UK, posing a strategic dilemma.

Potential Strategies for the UK

Facing this conundrum, the UK, under Prime Minister Sir Keir Starmer, must negotiate to preserve its interests without alienating either the U.S. or the EU. Meredith Crowley suggests that the UK needs to offer "golden baubles" to the U.S. to gain favorable treatment:

"You need to hold out a golden bauble in front of the President and offer it up."
(08:11)

One potential area where the UK could leverage its strengths is pharmaceuticals. As Meredith Crowley highlights:

"One of the UK's biggest exports to the US is pharmaceuticals... it's something that might be something at the time of like American manufacturers have long wanted better access to being able to sell American pharmaceuticals."
(08:22)

However, integrating deeper into the U.S. pharmaceutical market would require significant policy changes in the UK, particularly concerning its National Health Service (NHS), which would be politically challenging.

Insights from Past Negotiations

The hosts draw parallels with Trump's previous negotiations with Canada and Mexico, where concessions were often formalized through pre-existing agreements:

"Mexico was happy to codify something that already existed and Trump could then point to it and call it a win."
(07:22)

This suggests that the UK might adopt a similar tactic by formalizing existing favorable policies, thereby securing concessions without overhauling its systems.

Challenges and the Path Forward

Despite potential strategies, the UK faces significant challenges. Balancing the demands of a protectionist U.S. administration while maintaining its critical economic ties with the EU is no small feat. Additionally, internal constraints, such as the NHS's structure, limit the UK's flexibility in offering valuable concessions.

Waylon Wong sums up the precarious situation:

"The UK is not doing that well at the moment, to put it mildly. So what to do?"
(06:54)

Meredith Crowley reinforces the necessity for the UK to find sustainable solutions that align with both its strategic partners without compromising its economic stability.

Conclusion

"The U.K.'s Tariff Balancing Act" provides a comprehensive exploration of the UK's challenging position in the midst of escalating U.S. tariffs under President Trump. The episode underscores the complexity of maintaining strong bilateral relationships while being economically tethered to powerful blocs like the EU. As the UK navigates this intricate landscape, the balance it strikes will be pivotal in shaping its economic future and international standing.

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Notable Quotes:

• Paddy Hirsch:
  "Trump is not a fan of the EU. He says that their trade relations are unfair to the US and need adjusting tariffs look like a real possibility."
  (00:28)

• Catherine Thomas:
  "The UK is out of line. And we'll say the UK but European Union is really out of line."
  (01:30)

• Meredith Crowley:
  "I think when he tells people we have a trade deficit, they're not buying our stuff. He's trying to explain to people, you don't have a job because somebody's not buying something made in America."
  (03:04)

• Meredith Crowley:
  "One of the UK's biggest exports to the US is pharmaceuticals... it's something that might be something at the time of like American manufacturers have long wanted better access to being able to sell American pharmaceuticals."
  (08:22)

• Paddy Hirsch:
  "You need to hold out a golden bauble in front of the President and offer it up."
  (08:11)

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Produced by Corey Bridges, engineered by Kwesi Lee, fact-checked by Cooper Katz, and edited by McKim Kicking Cannon. The Indicator is a production of NPR.

Transcript

[Waylon Wong]

Npr. This is the indicator from Planet Money. I'm Waylon Wong.

[Paddy Hirsch]

And I'm Paddy Hirsch. As President Trump strides about the world, slapping the cudgel of tariffs into the palm of his hand, America's trade partners are rushing about the place like potential victims in a slasher movie, wondering who's going to be next.

[Waylon Wong]

One country that's uniquely unsure about its status. The UK it has a strong and deep strategic relationship with the US which is good, but it's also tightly bound to Europe on trade, which is not so good. Trump is not a fan of the eu. He says that their trade relations are unfair to the US and need adjusting tariffs look like a real possibility. And with Trump signing an executive order for a 25% tariff on all steel coming into the U.S. that threat became real for the UK steel industry.

[Paddy Hirsch]

Has the UK been caught between a rock and a hard place between its two largest trading partners? What can it do to keep Trump sweet? That's coming up after the break. The US and the UK Have a special relationship. A sense of shared history, values and culture, an extensive cooperation on foreign policy, security issues, and trade. So when the President of the United States makes an announcement like, so the.

[Catherine Thomas]

UK Is way out of line. And we'll say the UK But European Union is really out of line.

[Paddy Hirsch]

UK Bit of a word salad there.

[Waylon Wong]

I mean, we've been eating a lot of those lately, and you can imagine the frisson this must have sent up the back of the Brits. Don't we have a special relationship? What does he mean out of line? What does he want? I can't answer that one. I have no idea.

[Paddy Hirsch]

Catherine Thomas is an associate professor at the London School of Economics.

[Waylon Wong]

It seems that using tariffs on goods are proving to be a useful instrument for all sorts of policy goals. Canada, check. Mexico, check. The threat of tariffs has brought America's trading partners to the table and allowed Trump to claim that he has run concessions from them on policies that are only adjacent to trade, although some of those policies were already in place. So just how much of a concession is debatable?

[Paddy Hirsch]

Well, Trump slapped tariffs on China last week and now appears to have his eye on the European Union, America's fourth largest trading partner. Now, the UK Isn't part of the EU anymore, but it is so tightly bound to Europe by its trading relationships that any punitive tariffs levied on the EU could include the UK So what.

[Waylon Wong]

Does Trump want from the eu? Well, there is one area where he has been particularly vocal, and that's on the balance of trade between the US and its European trading partners, because they've.

[Catherine Thomas]

Really taken advantage of us. And, you know, we have over a $300 billion deficit. They don't take our cars, they don't take our farm products. They take almost nothing.

[Paddy Hirsch]

That $300 billion deficit's an interesting number. It depends on how you read the data. But regardless, Trump hates it when the US Has a trade deficit of any size with another country, as in, that's when they sell us more than they buy from us. Meredith Crowley is a professor of economics at Cambridge University.

[Meredith Crowley]

I think when he tells people we have a trade deficit, they're not buying our stuff. He's trying to explain to people, you don't have a job because somebody's not buying something made in America. And I think he's effectively able to persuade people that that might be true.

[Waylon Wong]

One area that he's paid particular attention to, Meredith says, is the auto industry.

[Meredith Crowley]

One specific example that Trump has highlighted a lot has been what he calls a reciprocal tariff. And so what he means by that is, for example, the U.S. import tariff on automobiles is 2 1/2 percent. In Europe, it's 10%. And he looks at that and says, that's very unfair. I want the Europeans to lower their import tariff on automobiles.

[Waylon Wong]

And it actually looks as though the EU might do just that. The Financial Times quoted a senior EU official saying the EU might be willing to lower import tariffs for all foreign vehicles.

[Paddy Hirsch]

Yeah. And this car story is a good illustration of the extent to which the UK is bound to the eu. So tightly bound that it might be hard to separate the two. You see, most of the car made in the UK go to Europe, and they use parts that are part of the European supply chain. Because of this, the UK also levies a 10% tariffs on cars imported from anywhere outside of Europe, including from America.

[Waylon Wong]

Right now, it's not clear if the UK will have to fall in line with Europe on this or any other issue. Meredith says the UK will be hoping that despite these ties to the eu, Trump will nod to this special relationship and give the UK a break.

[Meredith Crowley]

The UK is very tightly linked to the US through foreign direct investment. So before the UK left the European Union, it was in some sense the place where American companies poured their investment into the uk and then that was a launch pad for US entry into Europe. And having left the European Union, it's possible that the trade fight that's looming with President Trump could leave them a little bit outside side of the severe punishments Europe will face.

[Paddy Hirsch]

The British Prime Minister, Sir Keir Starmer will be making a number of points to Trump to sway him to leave the UK out of a fight with the eu. First, on a particular bugbear from Trump's first term NATO spending.

[Meredith Crowley]

There's been a sense that the NATO members in Europe don't pay as much for their own defense spending as the United States does. And I think one thing which is not a completely unreasonable request from the United States is to ask European countries to spend more for their own defense, given what has happened with the war in Ukraine.

[Waylon Wong]

So the UK looks pretty safe here. NATO members are required to spend 2% of their GDP on defense, which the UK does. So that may make it look better in Trump's eyes.

[Meredith Crowley]

Another long running bit of a dispute between the US And Europe has to do with the taxation of American multinationals. President Trump looks close to the tech industry in the United States, so it might want some concessions around tax policy.

[Paddy Hirsch]

Yeah, so the UK looks good here too. It's a very friendly place, tax wise to American companies. But it's not just tax policy that Trump has concerns about when it comes to tech. The US and the EU are a long way apart on the way tech companies should be regulated. And the EU already appears to be doubling down on its regulatory stance.

[Waylon Wong]

Fortunately for the uk, it's not part of the eu, so it could craft its own tech regulations, which might keep Trump happy. The danger, of course, is that that might alienate the eu, which is Britain's largest trading partner.

[Paddy Hirsch]

Yeah, so the Brits are in a tough spot here. Right. They're trapped between their two largest trading and security partners who are far apart on all sorts of issues. And the UK is not doing that well at the moment, to put it mildly. So what to do?

[Waylon Wong]

Meredith says Prime Minister Starmer needs to find something that he can sell Trump that will make everyone happy. She cites an example from the negotiat over the trade agreement with Mexico during Trump's last term.

[Meredith Crowley]

One of the really unusual provisions of that treaty is that it established a minimum wage that would be paid to automobile workers in the Mexican automobile sector. You know, it's something at the time it was like $16 an hour, $17 an hour. So very high sounding wage. Except this was actually just about what they were paying in all Mexican automobile plants at the time.

[Paddy Hirsch]

She says Mexico was happy to codify something that already existed and Trump could then point to it and call it a win. And something similar seems to have transpired in Trump's recent tariff avoidant negotiations with Canada and Mexico.

[Waylon Wong]

Canada agreed to beef up border security, and Mexico committed to sending 10,000 troops to its border. But Canada's parliament had already passed a new border Security and Drug interdiction bill in December, and Mexico had already sent about 15,000 troops to its northern border. Back in 2019, I heard one person.

[Meredith Crowley]

Describe it as you need to hold out a golden bauble in front of the President and offer it up. And so the question is, what golden baubles can the UK offer to the United States?

[Paddy Hirsch]

That's a good question. Does Keira Starmer have any baubles?

[Waylon Wong]

He might in his little pill bottle. Because One of the UK's biggest exports to the US is pharmaceuticals, Meredith says there might be something there for the UK to offer in the uk.

[Meredith Crowley]

American pharmaceutical manufacturers have long wanted better access to being able to sell American pharmaceuticals, especially the most cutting edge products within the uk. But it's very hard for super high priced American medications that have only incremental improvements over the previous generation to get approved in the uk.

[Paddy Hirsch]

Well, that would require some very big changes to UK policy, in particular in the way that it runs its National Health Service. The nhs, of course, is something of a golden calf in British politics, particularly for Labour governments. So making any kind of change to it would be a very big ask for Starmer.

[Waylon Wong]

This episode was produced by Corey Bridges with engineering by Kwesi Lee. It was fact checked by Cooper Katz. McKim kicking cannon is our editor and the indicator is a production of npr.