The mad dash for trade deals

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0:32Good morning from the Financial Times. Today is Thursday, July 3rd, and this is your FT News Briefing. The EU is under pressure to weaken its artificial intelligence regulations, and the U.S. wants to get trade deals done before higher tariffs kick back in. Plus, the U.K. has a big fiscal hole and not a lot of great options to fill it. I'm Sonia Hudson, and here's the news you need to start your day.

1:11The CEOs of several dozen large European companies want Brussels to pause its AI Act. Those firms include Airbus and BNP Paribas. They sent an open letter calling for a two-year delay on implementing the law, which is considered the world's strictest. The CEOs warned that the regulations are threatening the European Union's competitiveness in the global AI race. The EU was already considering watering down key parts of the law that are set to go into effect in August. The European Commission said it's sticking with the main goals of the AI Act, but it also said all options are on the table right now.

1:59President Donald Trump's so-called Liberation Day tariffs have been on pause for the last few months. But that's supposed to end on July 9th. Countries have spent the last few months racing to negotiate trade deals with the U.S. with not that much to show for it. Here to give us an update on the trade war is the FT's Amy Williams. Hi, Amy. Hi. Hi. So get us up to speed on where the U.S. is at when it comes to new trade deals. What kind of progress has been made since Liberation Day? Well, the U.S. has been negotiating frantically and intensely with some of its biggest trading partners. And U.S.

2:37Treasury Secretary Scott Besant has said in recent weeks that the U.S. is in very serious talks with around 18 countries that looks to strike deals that could head off the highest levies that Trump has threatened ahead of next week's deadline. So far, though, it has only struck these trade agreements with the UK. And yesterday, we got news that the US has signed a deal with Vietnam, too. It's also signed an agreement with China, which is more of a truce than a deal. We haven't seen any text on that. But it has deescalated the huge punitive tariffs that both Beijing and Washington had placed on each other earlier in this year.

3:22All right. So three countries kind of have a truce or a framework for a trade deal. But, you know, we are just about a week out from this July 9th deadline. How is the U.S. thinking about these talks now with that deadline so close? I think the U.S. will look to close as many trade deals as it can ahead of the middle of next week. But it's going to have to really work hard. A lot of these countries are demanding more tariff relief than Donald Trump is willing to give. And it's likely that we'll see the U.S. close early piecemeal deals and then agree to keep talking to these countries. So we saw that with the U.K.

4:04We've seen that with Vietnam. They've made an agreement on a couple of products and they've lowered tariffs in some areas. But the U.S. has maintained high tariffs in other areas and countries will need to continue to haggle and negotiate over those going forward. Yeah. So for those countries that are negotiating with the U.S., what sort of strategies are we seeing from them? A lot of countries are coming to Washington and pledging to buy U.S. goods. So if you remember in April when Donald Trump launched the reciprocal tariffs, one of his big complaints was the U.S. trade deficit. So he essentially wants other countries to buy more U.S.

4:44goods. So many of these countries are coming and saying that they will buy more U.S. weapons, they'll buy various agricultural products from the U.S. The U.S. has also complained about what it calls non-tariff barriers. So this is stuff like digital services tax, value added tax in the case of the European Union. Those are harder for countries to change just because it often involves sovereign law on their part. But there are some rules and regulations that countries can tweak a bit to try and keep the U.S. happy. So in some of the talks, there are negotiations over that sort of thing, too. OK, so it sounds like there is a lot of deals or agreements that are in the works.

5:22But since we're so close to this deadline, I got to ask you straight up, are you expecting the Liberation Day tariffs to snap back into place next week? I think some of the countries will see increased tariffs next week. So Donald Trump has already threatened Japan with this. He said that he will send them a letter and their tariffs could reach as high as 30 or 35 percent. Japan is a major U.S. trading partner and ally and also has been negotiating quite intensely with the U.S. If they don't reach a deal and then get hit with even higher tariffs than Trump outlined as part of his reciprocal tariff blitz, then that is bad news for countries that don't reach agreement.

6:11Amy Williams is the FT's U.S. trade and climate correspondent. Thanks, Amy. Thanks, Sonia.

6:22The U.S. has abruptly stopped shipping certain high-value weapons to Ukraine, including interceptors for its air defense system. That's now raising concerns about Kiev's ability to defend itself. The move comes just days after Russia hit the country with a huge missile and drone bombardment. Ukraine's foreign minister called in a top U.S. diplomat for talks on Wednesday. In a statement, he said that scaling back on aid only encourages Russia to continue the war. Now, the U.S. is still offering other forms of military aid to Kiev, but the Pentagon said it is reexamining its approach.

7:09The UK government has a big problem, a five billion pound problem. Prime Minister Keir Starmer was hoping to save that money by cutting some benefits in a welfare reform bill. But this week he decided to water down the legislation. Here to talk through what options the government has now is the FT's Sam Fleming. Hey, Sam. Hi, Sonia. Let's start with some background here. What exactly happened with the savings from the welfare reform bill? The UK government has been working for a while towards a big welfare reform package, which effectively is aimed at overhauling disability and sickness benefits in the UK.

7:49And what happened this week was there's been a big revolt among Labour backbenchers over the reforms, which they were concerned were extremely unfair and harsh. And the prime minister ended by late in the day on Tuesday, gutting a lot of the contents of this welfare overhaul. but it creates a big fiscal problem in the UK budget. All right, so the government was planning to fill this hole through the welfare reform bill. The main source of savings got scrapped earlier this week. Are there other areas of the UK's budget that it could trim instead? It's not easy, really, because the Labour government has already set out its spending plans for the coming three years in terms of day-to-day spending.

8:34Then when it comes to welfare spending, this is an area which, in a sense, has become very difficult terrain for the Chancellor and Prime Minister, given what's just happened. And so as a result, it's not obvious where savings would come from in terms of expenditure. There certainly could be stuff that the party does on tax, however. Yeah, let's talk a little bit more about that. What options does the government have to bring in more money through either tax increases or borrowing? Well, taking those in reverse, I think when it comes to borrowing, it would be quite difficult for the government to come back in the autumn and say, we made some losses because of the scrapped reforms, and we're just going to borrow instead.

9:16the UK bond markets are already on edge really about the fiscal position in the UK. They're concerned that borrowing is not going to be reined in. And particularly now, they fear that this is a government which can't make its pledges on spending discipline stick, that spending could end up going up. So if you then think about tax policy, I think this is where most analysts expect the movement to come. What are some of the options for the types of tax increases that they could in pairs? Well, the backdrop to this is that Labour's room for manoeuvre is very heavily constrained when it comes to tax hikes.

9:52And that's because of the election manifesto that they ran on last year when they won the general election. That contains some pretty stern pledges promising not to increase income tax, national insurance contributions, or value-added tax, which are three of the biggest taxes in the country. But there is one tax hiking measure which I think is looking increasingly likely, and that would be to an extend a freeze that the last government put on the income tax and other tax thresholds at which higher rates of tax kick in. If you extended that freeze, that would effectively mean that more people get dragged into higher rates of tax under a process called fiscal drag, and that raises a fair bit of cash.

10:31So it seems like the Labour government is in a tight spot here. What's at stake if they can't pull this off and can't plug this fiscal hole? I don't think in a sense that is likely. I think they are going to have to take measures to plug the fiscal hole. What this government lives by and previous governments do in the UK is these fiscal rules, they're self-imposed fiscal rules, but it's very bad for credibility in the financial markets if the government doesn't meet those fiscal rules. You I think you're going to have to see some sort of consolidation in order to shore up confidence among investors in UK government debt.

11:10Sam Fleming is the FT's economics editor. Thanks, Sam. Thank you.

11:21Before we go, I want to say goodbye to a core member of our team. Our senior producer, Kasia Broussalian, is leaving the FT for an exciting new opportunity. Over the last two years, Kasha has helped take the show to another level. She's worked with reporters across the world to bring you sound-rich features that make you feel like you're in the story. And she has this way of seeing the bigger picture, even in the most niche stories. Not only did Kasha make the show better, but she also made working on it really enjoyable. So Kasha, you've been an incredible colleague, and we're going to miss you a lot.

12:00You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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