The U.K.'s tariff balancing act

0:00NPR.

0:11This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Patti 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. 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 U.S.

0:47and 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 U.K. steel industry. Has the U.K. been caught between a rock and a hard place, between its two largest trading partners? What can it do to keep Trump sweet? It's coming up after the break.

1:15The US and the UK have a special relationship, a sense of shared history, values and culture, and extensive cooperation on foreign policy, security issues and trade. So when the President of the United States makes an announcement like this... So the UK is way out of line and we'll say the UK, but European Union is really out of line. Bit of a word salad there. I mean, we've been eating a lot of those lately. And you can imagine the fristle. 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.

1:51I have no idea. Catherine Thomas is an associate professor at the London School of Economics. 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. 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.

2:32Now, 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 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 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. That$300 billion deficit's an interesting number. It depends on how you read the data.

3:09But regardless, Trump hates it when the U.S. 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. 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. One area that he's paid particular attention to, Meredith says, is the auto industry. One specific example that Trump has highlighted a lot has been what he calls a reciprocal tariff.

3:49And so what he means by that is, for example, the U.S. import tariff on automobiles is 2.5%. 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. 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. 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 cars made in the UK go to Europe, and they use parts that are part of the European supply chain.

4:32Because of this, the UK also levies a 10 % tariffs on cars imported from anywhere outside of Europe, including from America. 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 U.K. will be hoping that despite these ties to the EU, Trump will nod to this special relationship and give the U.K. a break. The U.K. is very tightly linked to the U.S. through foreign direct investment. So before the U.K. left the European Union, it was in some sense the place where American companies poured their investment into the U.K., and then that was a launch pad for U.S.

5:09entry 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 of the severe punishments Europe will face. 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. 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.

5:54So 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. 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. 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 U.S. and the EU are a long way apart on the way tech companies should be regulated.

6:37And the EU already appears to be doubling down on its regulatory stance. Fortunately for the U.K., 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. 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? Meredith says Prime Minister Starmer needs to find something that he can sell Trump that will make everyone happy.

7:11She cites an example from the negotiations over the trade agreement with Mexico during Trump's last term. 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. She says Mexico was happy to codify something that already existed and Trump could then point to it and call it a win. Something similar seems to have transpired in Trump's recent tariff-avoidant negotiations with Canada and Mexico.

7:53Canada 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 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? That's a good question. Does Keira Starmer have any baubles? He might in his little pill bottle because one of the UK's biggest exports to the US is pharmaceuticals.

8:30Meredith says there might be something there for the UK to offer. In the UK, 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. 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.

9:11So making any kind of change to it would be a very big ask for Stormer. This episode was produced by Corey Bridges with engineering by Kweisi Lee. It was fact-checked by Cooper Katz-McKim. Kicking Cannon is our editor and The Indicator is a production of NPR.