The UK and US Ink a Deal (to Maybe Make a Deal Later)

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The US and UK sort of reached a trade deal Thursday, and we think it sort of eases trade barriers.^[i] But in our view, it fully shows why tariffs remain an economic problem for America and a US recession (period of contracting economic output) isn’t off the table even if US President Donald Trump’s administration unveils dozens of deals by the time reciprocal tariff delays end in July. Mind you, we still don’t think this economic risk is sneaking up on stocks, so we don’t consider it reason to be bearish, but we think it is important for investors to view potential negatives head-on, with clear eyes.

In our view, the UK got off relatively light on Liberation Day. Though it runs a trade surplus with the US, it avoided reciprocal tariffs (higher rates targeted at countries with large trade surpluses), being subject only to the 10% blanket tariff, the 25% charge on steel and aluminium and 27.5% duties on autos and parts (the baseline charge plus President Trump’s extra 25% levy).^[ii] But given cars are the UK’s single-largest goods export to the US in value terms, it caused some angst—hence, Prime Minister Keir Starmer’s determination to reach a deal with the Trump administration.^[iii]

That deal happened early yesterday morning, kind of. It isn’t a fully hashed-out trade deal with specific terms and fine points, like the deal with India agreed earlier in the week is. It is a one-year agreement aiming to bridge the gap to a full trade deal they will now begin negotiating.^[iv] To us, it reads like a heads of terms, a letter of intent enumerating the broad points they pledge to agree to. You might think of it as a deal to make a deal later. And to our eyes, those broad points don’t include much.

For instance: Starmer and Trump spent several weeks alluding to the UK potentially rolling back its digital services tax, which hits large US Tech and Tech-like companies’ revenues.^[v] Both sides seemed to view this as key to a broad deal. But Thursday’s agreement leaves it intact, with all its teeth.^[vi] Starmer alluded to modifying the tax to expand UK market access for US digital services as part of the eventual trade deal, but that is still to-be-determined.^[vii]

Similarly, the UK didn’t win an exemption from Trump’s 10% blanket tariff.^[viii] This is not a free-trade deal. American consumers may be able to avoid the 10% charge because—for now at least—de minimis rules enable Americans to import parcels worth $800 or less tariff-free so long as China isn’t the country of origin.^[ix] But US businesses sourcing final goods or components from the UK are technically still subject to the 10% on big wholesale orders with very few exemptions.^[x]

Right off the bat, then, the two biggest trade barriers between the two Uniteds remain in place.

Nor does the deal address pharmaceuticals, which are a major UK export to the US and which Trump has alluded to future tariffs on.^[xi]

Instead, the deal:

• Lowers the US’s extra tariff on UK cars and car parts to 10%, with an annual quota of 100,000 vehicles, a smidge less than the US imported from Britain last year
• Removes all US tariffs on UK steel and aluminium
• Removes all US tariffs on UK aircraft engines and parts
• Commits the UK to buying about £10 billion worth of planes from Boeing
• Removes UK tariffs on US beef, with an annual quota of 13,000 metric tons (whilst maintaining restrictions on hormone-treated meat)
• Removes UK tariffs on US ethanol
• Raises US import quotas of UK beef
• Pledges to fast-track goods through customs
• Pledges “preferential treatment” for the UK in future product-specific tariffs

This list is short. Thin. Scant. A placard shown during the press conference claims it drops US tariffs on UK goods from 10% to 3.4% and UK tariffs on American products from 5.1% to 1.8%. We tried to make these maths work, based on the tariff rates and the Office for National Statistics’ 2024 trade tallies for the products in question, and we couldn’t get there. It also seems like moving the goal posts, considering those higher US tariff rates weren’t in place, say, a year ago. In our view, this shows—like all such exhibitions from politicians, regardless of country, party, personality or creed—the agreement is theatre in a way. It is The Art of the Deal in the sense it follows the playbook of setting a lofty rate and coming in somewhat lower, but still higher than before. But the thing is, America loses most of all from tariffs, in our view.

We don’t see huge potential benefits for either side. It means Americans won’t face higher tariffs on their Aston Martins, Jaguars, Land Rovers or Mini Coopers—most of which doesn’t benefit the average Jane. It means Rolls Royce gets preferential access to the US market for aircraft engines, which we figure markets priced in about half a second. It means the ailing Scunthorpe steel plant gets a tiny lifeline after last month’s de facto bailout.^[xii] But in the big picture, it amounts to easier tariffs on less than £15 billion worth of UK goods exports to the US, which is about one-fourth of total UK goods sent to the US last year.^[xiii] Which is even more insignificant when you consider UK services exports to the US more than double goods exports.[xiv] So we doubt it is massive stimulus for Britain or massive relief for the US.

In our view, this speaks to the wider problem. For the last month, the Trump administration has jawboned about deals and tariffs being preludes to deals. We now have an example, and it seems clear the universal 10% tariff is mostly an immovable object. Countries may win modest carveouts, like British steel and jet engines, but full cancellation looks unlikely. This also happens to be the tariff that is easiest to collect and enforce, requiring no content nor country of origin checks at the border, making it a frustrating sales tax all US consumers and businesses have to pay on imports (though also making it susceptible to legal challenges).^[xv]

Nor do we think this deal gives insight into how likely other deals are for aTrump. This was low-hanging fruit, in our view, as the US and UK share ample common ground and few competing interests. We don’t think it is a blueprint for the more contentious talks, like those with the EU and China. The UK just isn’t an inherently protectionist nation. It responded to Liberation Day by cutting tariffs on dozens of products.^[xvi] Historically speaking, the EU, China and others have been more mercantilist. As a result, we don’t think yesterday lowered the uncertainty lingering over US businesses.

This is why a US recession isn’t off the table, in our view. To be clear, we think stocks have quite likely priced that potential outcome to a very great degree, given how recession forecasts now feature in many publications we follow. So when we say recession is possible, we aren’t saying we are bearish. But a clear-eyed economic view is always vital, in our view. For what it is worth, tariffs might not show directly in headline US gross domestic product (GDP, a government-produced measure of economic output), since the lost commerce (detracting from GDP) could be offset by the lost import (adding to GDP). In our view, this is an artefact of GDP’s weird maths that will likely make Q2 US GDP complicated to parse. But our research finds uncertainty tends to motivate investors to sit tight, waiting to see what the rules will be. We find most people don’t take risk when they can’t estimate the payoff. Higher risk aversion can reduce investment, which would show in GDP. We aren’t unique in forecasting this, but we think it would be wrong to dismiss.

To be clear, we still think stocks are likely to do well this year. We view the springtime drop as a correction—a sharp, painful -10% to -20% shock temporarily interrupting a bull market—and not a deeper, longer bear market decline sinking well below -20% for a significant spell.^[xvii] But we see this as a stark reminder that tariffs tend to hurt the imposer much more than the target, which we think has a lot to do with the US being one of the world’s worst-performing stock markets lately.^[xviii] Today, we think UK businesses can move on, largely knowing what a lot of the rules will be. US businesses can’t, in our view, because the UK is only a small piece of total US trade.^[xix] The uncertainty is simply greater stateside, which we think creates higher upside potential elsewhere.