The UK and China have pursued diametrically opposite responses to Donald Trump’s bullying on trade, yet both have struck trade deals with the US president in the past week. Whose strategy has been more effective? And what are the lessons for others, notably the EU?
The US has a huge goods-trade deficit with China and a small surplus with the UK. Since Trump hates such deficits, his “liberation day” tariffs on April 2 duly hit China (34%) much harder than the UK (10%).
After that, the UK government bent over backwards to flatter the US president, whereas China’s was tersely tough. The UK didn’t retaliate; China repeatedly did, with tit-for-tat tariffs soaring to 125%. And while the UK rushed to try to negotiate with Trump, China waited patiently for him to make the first move.
On May 8, the UK government celebrated being the first to agree a post-liberation-day trade deal with Trump. Four days later, the US and China agreed a 90-day truce that involves both sides slashing their tariffs by 115% pending further negotiations.
The upshot is that even though the UK is ostensibly a US ally and has broadly balanced bilateral trade, it now faces the same 10% “reciprocal” tariff on most of its exports to the US as China, a US rival with a huge surplus that maintains its retaliatory 10% tariff on US exports.
Although the UK has also obtained partial carve-outs from Trump’s sectoral levies on cars and steel, these still leave it worse off than before his tariff onslaught. Those concessions, moreover, are non-binding and conditional on the UK “promptly meet[ing] US requirements” on supply chain security and the “ownership of relevant production facilities”: code for cutting out China. This week Beijing expressed its outrage at these anti-China provisions in an FT interview.
In short, the UK’s appeasement has achieved very little, at a potentially significant cost, while China’s firmness has forced Trump to back down.
Perhaps most importantly, whereas Keir Starmer’s desperation for a deal invites Trump to come back with further demands, Xi Jinping’s steely resolve will make the US president think twice about launching a likely losing battle again.
Since Trump’s trade policies are an ever-changing, chaotic mess, it is generally a mistake to impute logic and strategy to them. But while Trump acts on impulse, he also responds to incentives. So the EU and other governments can draw lessons from the patterns of his actions, as can businesspeople and investors.
This piece highlights three important lessons:
power is more effective than pleasantries;
patience pays off;
protectionism and uncertainty are set to persist.
Lesson 1: power is more effective than pleasantries
The UK is developing an unfortunate habit of doing trade deals that leave it worse off. Although Boris Johnson’s bare-bones Brexit agreement was better than exiting the EU without a deal, it still left Britons poorer than before. Keir Starmer’s sketchy trade deal with Trump likewise spares the UK some immediate pain, but still leaves it with worse access to the US market than previously, as Trump’s summary of their deal below highlights.
While Trump misleadingly called the US-UK deal “full and comprehensive”, it’s actually just the preliminary outline of a very limited trade deal that enshrines Trump’s punitive tariffs on the UK while offering it partial exemptions to them, at a cost. The key points are as follows.
No reduction of the 10% “reciprocal” tariff. Most UK exporters to the US thus gain nothing from this outline deal, and remain worse off than three months ago.
Cars. At the start of the year, the US tariff on cars was 2.5%. Trump upped it to 27.5%. That is now reduced to 10% on the first 100,000 UK-made vehicles imported into the US each year. While this covers almost all existing UK car exports, it stifles any growth prospects for the likes of Jaguar Land Rover.
Steel and aluminium. Trump has slapped a 25% duty on these metals and some products made from them. The UK claims these have been reduced to zero; the outline deal merely says the US will offer the UK a lower-rate import quota once the UK has satisfied a number of conditions, notably on the “security of supply chains” and the “nature of ownership of relevant production facilities”.
Pharmaceuticals. Trump is planning to slap punitive tariffs on foreign-made medicines; the UK is merely offered the possibility of negotiating “preferential treatment”, subject to meeting similar supply-chain and ownership conditions.
Beef and ethanol. These are the only examples of actual liberalisation: each country offers the other a small tariff-free beef quota, and the UK will offer the US a tariff-free ethanol import quota.
At best, then, the deal is a temporary damage-limitation exercise. It offers the UK no protection against future Trump tariffs and gives him further leverage, by making the US concessions contingent on UK policy being consistent with “shared [ie, US] national security priorities”.
Depending on how stringently those provisions are interpreted and enforced, they could be very significant. British Steel, for instance, is Chinese-owned, albeit now insolvent and due to be nationalised by the UK government. UK pharmaceuticals companies also often source from China (as, indeed, do US ones).
Clearly, the UK’s desperation undermined any gains it might have expected from Trump’s goodwill.
After all, the UK had several reasons to hope it might negotiate a relatively good deal. On the personal front, Trump’s mother was Scottish, and he has business interests in Britain, namely his golf courses. The UK also appealed to his vanity by offering him a second state visit, including access to King Charles and all the pomp and pageantry that Trump loves.
On the policy front, the UK doesn’t have a goods-trade surplus with the US and didn’t provoke Trump by retaliating against his punitive tariffs.
On the geopolitical front, Trump is keen to undermine the EU, whose collective negotiating leverage, regulatory power and trade surplus he resents, so the UK might have hoped for a Brexit dividend.
Last but not least, Trump was wooed with a well-timed bonus: British Airways announced it would spend $13 billion (£10 billion) on Boeing airplanes, which it was doubtless planning to do anyway.
Yet the UK’s scope for success was limited by its lack of leverage. The US matters much more to the UK as an export market than the UK does to the US as a source of imports. The US is the UK’s biggest individual goods-export market (although the EU collectively matters much more), whereas the UK is only the 11th biggest source of goods imports for the US. And since the UK didn’t impose retaliatory tariffs, it couldn’t offer to reduce them as part of the deal.
Still, the UK could have decided to tough it out. In my earlier essay on how governments should respond to Trump’s tariffs, I argued that governments should not rush to negotiate with Trump bilaterally, and should try to coordinate their response with like-minded partners.
But with its stagnant economy, strained public finances and unpopular government, the UK’s tariff-pain threshold is particularly low, especially since cars and steel are politically sensitive sectors. Unsurprisingly, then, Trump exploited that desperation for a deal – and is likely to do so again.
China, on the other hand, has come up trumps. As I argued in my recent essay, although trade wars are lose-lose, Xi has a much stronger hand than Trump, and unsurprisingly he has played it better than the buffoon in the White House. He matched Trump’s tariff escalation, and despite all his bluster Trump repeatedly backed down. Trump became desperate for a deal, and China eventually agreed to talk.
The upshot is that the dramatic 115% tariff de-escalation agreed in Geneva on Monday has cost China nothing. Moreover, Beijing has signalled strength and Trump weakness, which augurs well for China in their future negotiations, not just over trade but also over Taiwan and other geopolitical issues.
The bottom line is simple: for all that the UK tried to woo Trump, it is China’s strong-arm tactics that have delivered the goods.
Lesson 2: patience pays off
The UK deal has important lessons for other governments that are keen to negotiate with Trump individually. Japan and South Korea, for instance, are also longstanding US allies that are wary of antagonising Trump. Both are major car and steel exporters to the US. And since they have trade surpluses with the US, they also have the threat of higher “reciprocal” tariffs hanging over them: 24% in the case of Japan, 25% for South Korea.
Despite those vulnerabilities, Japan and Korea would be well-advised to be patient in their negotiations. Whereas the UK’s desperation delivered a bad deal, China showed that playing hard to get pays off. Like China, moreover, they export products that Americans want – Toyota is the second most popular car maker in the US market, for instance – and won’t want to pay more for.
Since Trump seems keen to trumpet his trade deals as personal triumphs, they can try to buy him off with headline-grabbing pledges to purchase more US goods and invest more in the US. But given that US demand is unreliable, and that they both export roughly as much to China as they do to the US, they will want to avoid conceding the UK-style anti-China provisions that Trump is likely to demand.
The EU is pursuing a middle way between the UK’s conciliatory approach and China’s more confrontational one. It has threatened (but postponed) targeted retaliation, while offering a zero-for-zero industrial tariff deal, which Trump has rejected.
The EU has a weaker hand than China, not least because European countries rely on Trump to defend them against Vladimir Putin’s Russia. But it has a much stronger hand than the UK, which having cut itself off from the EU market through Brexit, was loath to sacrifice the US market too. And it is a seasoned trade negotiator that knows that patience, not desperation, pays off.
Indeed, as a union of 27 member states, the EU is structurally slow to act. That lack of nimbleness has its downsides, but in this case it helps: the EU will inevitably take its time to negotiate with Trump, enabling it to learn from other governments’ mistakes and to hold out for better terms.
During the first Trump term, European Commission President Jean-Claude Juncker bought off the US president with a pledge to buy more American soybeans – even though this is not within the Commission’s purview.
This time, the EU may offer to buy more US liquefied natural gas (LNG), which it arguably needs to do anyway, since it is finally due to stop buying from Russia in 2027. Frontline states such as Poland may also come in with big orders for US defence equipment.
Lesson 3: protectionism and uncertainty are set to persist
US stockmarkets are rallying as if liberation day had never happened. But that is unduly optimistic. Yes, it is good news that Trump has stepped back from the brink on all-out trade war with the rest of the world. First the bond market, then China made him back down.
But Trump’s protectionist onslaught is hardly over. The 10% additional tariff increasingly looks like an irreducible barrier for friend and foe alike. New sectoral tariffs, of 25% if cars and steel are a guide, are also in the pipeline on pharmaceuticals, semiconductors, copper, lumber, aircraft and whatever else Trump may decide to target one day. And all the tariff reversals Trump has made so far are temporary: he can up them again, at the end of the 90-day pause for negotiations, or just on a whim. Even the UK has no certainty: its deal with Trump explicitly states that it is “not legally binding”!
The upshot is that US protectionism is here to stay, as is the toxic uncertainty that Trump’s mercurial policy declarations cause.
In my essay on how governments should respond to Trump’s declaration of trade war, I argued that they had a choice between striving to restore their access to the US market at all costs, or starting to diversify away from the US regardless.
Trump’s reversals may make it seem more attractive to try to maintain reliance on the US market. But the only way to reduce US tariff uncertainty is to develop alternative sources of demand, foreign and domestic.