DEAL OR NO DEAL?
NOTE: I wrote this post over the weekend. I think it is relevant to note the events announced this morning. I am happy to hear that negotiations with China have resulted in a 90-day pause on the excessive tariffs, dropping our tariff rate to 30%. I applaud the Trump Administration for these efforts and hope that the outcomes are positive for both countries.
The announced goal of equitable trade faces extremely high hurdles. Reaching equal import/export numbers will be difficult. It would be easy to decrease purchasing from China through sanctions and tariffs; it would be much more difficult to force Chinese consumers to purchase more American-made products. The US and China have distinctly different political and economic systems; I do not think negotiations will alter our political/economic system, nor theirs.
I will address some of these issues later this week.
Meanwhile, here is an analysis of the deal announced early this week with the UK.
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Mr. Trump: "Together with our strong Ally, the United Kingdom, we have reached the first, historic Trade Deal since Liberation Day."
In 2024 The UK imported $80 B of goods from the US. It exported $68 B of goods to the US. Those imports from the UK represented two-tenths of one percent of all US imported goods.
Using the Trump equation for calculating reciprocal tariffs, the “tariff gap” between the UK and the US was (80-60)/80 = 25% (a surplus FOR the US)
And following the Trump Administration logic, the UK should be imposing a 12.5% tariff on all imported American goods, because the US has been “ripping” them off for years. And, as Mr. Bessent said, the US should just accept those tariffs and move on, without any retaliatory moves.
Nevertheless, the two countries negotiated a “trade deal”.
It is critical to read the words at the beginning of the document:
“Both the US and UK recognize that this document does not constitute a legally binding agreement.”
As for the US - Article I, Section 8 gives Congress the “Power to Lay and collect Taxes, Duties, Imposts, and Excises.” And “To regulate Commerce with foreign Nations.”
Article II, Section 2 gives the President the “Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two-thirds of the Senators present concur.”
In other words, whatever Mr. Trump negotiates with any other country, the Senate must approve it by a two-thirds vote. The President has no unitary authority to enact a trade agreement with any other party, domestic or international.
As for the UK - after the PM signs an agreement, it must be available for public comment, and then it must be ratified by the Parliament.
So, it is clear that although the leaders of the two countries signed an outline of an agreement, nothing will be in effect until ratified by the Congress in the US and the Parliament in the UK.
We can assume that this deal/outline is a template for future deals with other countries, so it is important to understand what this deal does and what it doesn’t do.
Let’s take a look at that deal:
The agreement signed is referred to as the EPD (Economic Prosperity Deal). It has 3 admirable core objectives:
First, to grow the trade between the two countries, creating good high-paying jobs.
Second, to remove barriers to businesses to increase investment and trade between the two countries
Third, to ensure that the partnership between the two countries is fair, reciprocal, future-facing, and built on a shared vision.
Importantly, at the beginning of the document is a statement that underscores that it is just an outline. The two countries “are immediately beginning negotiations…to develop and formalize the proposals made in this document.”
Tariffs
Both countries agree that they “intend” to reduce applied tariff rates on a “range” of originating goods in each country.
There are only 3 specific groups of products enumerated in this agreement: beef, ethanol, and cars. Everything else is left for discussions at some later time.
Here are the specifics for those items that are included:
BEEF
Currently the UK places a 20% tariff on imported US Beef AFTER the first 1,000 tonnes are imported. (A “tonne” is a metric ton, measured as 1,000 kilograms and is equal to 2,205 lbs.) of imported beef. Until 1,000 tonnes are imported there are NO tariffs. The new agreement raises that quota from 1,000 tonnes to 13,000 tonnes, and it is reciprocal for Beef imported to the US from the UK. So, the UK would be incentivized to increase their imports of US Beef, and the US would be incentivized to increase imports of British Beef, right?
Not really.
As I said above, no tariffs are assessed on US Beef until the imports rise above 1,000 tonnes. But…last year the UK imported a total of 300 tonnes of beef from the US. The UK did import over 241,000 tonnes of beef in total; so, this agreement, which sounds nice is pretty immaterial. If the UK were to increase US Beef imports by the amount allowed under this agreement (from 300 tonnes to 13,000 tonnes, or an increase of over 4,000%!) it would still represent a total of only 6% of UK Beef imports. This is complicated by another section of this agreement (see below) which restricts imports that do not meet the sanitary and agricultural standards imposed by law within the UK. For beef, this includes restrictions on imports of any beef from cattle that have been treated with hormones. This excludes the vast majority of American Beef.
Regarding the reciprocal exports from the UK to the US, the total amount of beef exported from the UK to the US last year was insignificant, so increasing that quota is totally irrelevant. As a beef exporter, the US has no incentive to purchase UK beef.
As Macbeth says: “Sound and fury, signifying nothing.”
ETHANOL
The UK will allow 1.4 billion liters of US Ethanol to be imported duty-free. This is equivalent to about 400 million gallons of ethanol. Last year the UK imported about 225 million gallons of ethanol from the US, representing about 13% of their total ethanol imports. This new cap will allow the US to compete for additional imports. There are no tariffs or import duties on ethanol imported into the UK from the EU, and transportation is less expensive from the EU than from the US, so competition may be difficult.
Interestingly, the UK recently passed the “Renewable Transport Fuel Obligation” which mandates the increased use of biofuels, including ethanol in transportation. The agreement to remove tariffs on those imports from the US benefits the UK consumer directly and facilitates the ability of the British Government to meet the requirements imposed by that act. Allowing duty-fee imports of ethanol is comparable to the US reducing gasoline taxes.
I don’t think that anyone who had a hand in writing this agreement believes that the tariffs on imported ethanol into the UK are paid for by the US farmers or the US Government.
CARS
The US will reduce its tariffs on imported vehicles from the UK from the 25% Trump-imposed rate to 10% for the first 100,000 vehicles imported this year, as well as UK produced parts for those vehicles. Last year the US imported 102,000 vehicles from the UK with a 2.5% tariff in effect.
So, what vehicles are imported from the UK?
This one confuses me. What is a vehicle from the UK?
Only Aston Martin is owned by a company in the UK, manufactured in plants in the UK, and exported to the US.
There are other autos assembled in the UK that are not exported to the US like Ariel, Lagonda and Lister (UK-owned), Vauxhall (owned by Stellantis, an EU company based in the Netherlands), Caterham (a Japanese company), and London EV (owned by Geely, a Chinese company).
There are also traditional British marques that are presently owned by foreign companies like Bentley (owned by Volkswagen), Land Rover and Jaguar (owned by the Indian company, Tata), Lotus (owned by Geely), McLaren (owned by the Bahraini Sovereign Wealth Fund), Rolls Royce and Mini (owned by BMW), and Morgan (owned by the Italian company Investindustrial). These vehicles are manufactured and/or assembled in the UK, but the ownership is foreign, and the profits go to those foreign companies.
Finally, there are traditional foreign marques make cars in UK for export like the Nissan Juke and Leaf, and the Honda Civic and CR-V.
I can’t figure out which of these groups in considered a UK vehicle, carrying a reduced tariff. Is it a British owned and manufactured product? Or a traditional UK brand made in the UK but owned by a foreign company? Or a foreign brand made in the UK but owned by that foreign country? So, for example, Geely owns Lotus and the London EV. It also owns Volvo, Smart, and makes several EVs of its own brand. If it were to finish assembling any one of them in the UK, could they then be imported to the US with reduced tariffs? What does a “vehicle from the UK” require? Manufactured from X% of locally made parts? Assembled at a plant owned by a UK company? Assembled at a plant in the UK but owned by a foreign company? Or does it simply mean a vehicle which is shipped from a UK port to an American port, irrespective of where it was manufactured or assembled?
Yes, the Jaguars, Land Rovers, Bentleys and Rolls Royce coming into the US will have lower sticker prices than last year. I hope you can afford one.
Back to the agreement…
Commerce Secretary Lutnick gleefully gloated that the US went into trade negotiations with the UK with 10% tariffs and left with 10% tariffs. WE WON!!!
The US is going to create some form of quota to allow for exports of steel and aluminum, as long as the UK secures the ownership of production facilities. (no details, just a goal)
Same thing for pharmaceuticals. (no details, just a goal).
Ditto for “other sectors”, undefined. (no details, just a goal).
Same thing with Agricultural products (but they must meet the sanitary and other standards of each country (see Beef above)). (no details, just a goal)
Same thing with existing accreditation, approval, licensing, and other conformity assessment bodies. (no details, just a goal)
Same thing for additional agreements, industrial goods, international standards, domestic standards, development organizations, etc.
NO DETAILS, JUST GOALS
Same thing for digital trade provisions, financial services, paperless trade, pre-arrival processing, digitalized procedures for movement of goods, economic security, non-market policies of third countries, investment security, export controls, customs cooperation, anti-dumping, countervailing duties, etc., etc.
NO DETAILS, JUST AN AGENDA FOR DISCUSSION
I think you can conclude on your own how much work is left to be done to try to flesh out this agreement. It would seem to require optimistic expectations to think that this “comprehensive agreement” could be done in “the next few weeks”, or that it could move through all of the Senate committees that would need to review and approve it and then be ratified with a vote of two-thirds of the Senate (a greater hurdle than a filibuster!) in that timeframe. The UK would have a smilar process in which the proposed agreement would need to go through Parliament; and then the two approved agreements would need to be reconciled to address any changes made before a final Trade Agreement could become operational.
Similar “agreements” with other countries would need to go through the same processes. The historical yardstick of 3 years for a material trade agreement to be negotiated seems more likely.
And in the final sentence of this deal, the two countries agree that they have the right to terminate this arrangement but need to have further discussions to develop procedures for termination.
That’s it. Not much substance, just an agenda.
So, you tell me, is this a Deal?