The UK and the US announced the first bilateral post-Reciprocal Tariffs deal on 8 May, named the ‘U.S.-UK Economic Prosperity Deal’ (henceforth the US-UK EPD). The document published yesterday draws out the contours of this EPD, alongside some concrete initial proposals for reciprocal preferential market access for selected goods. Notwithstanding the negotiations starting immediately, this arrangement can be called off at any time, simply by the two parties giving each other written notice. Besides its symbolic and diplomatic relevance, what is the value of this emerging deal for the UK?

This is not a Free Trade Agreement. At first glance, it looks like a quid-pro-quo “mini-deal” of limited economic relevance that the US strong-armed the UK into accepting under the threat of tariffs. The UK is getting some respite from Trump’s tariffs in the (important) car and the (strategic) steel and aluminium sectors, in exchange for lowering tariffs on some agricultural products such as ethanol and beef, the latter on a reciprocal basis. But a closer reading of the ‘General Terms document’ suggests that it is more than this, and a lot worse.

First, as stated on page 1 of the text, the arrangement that the US and the UK reached is not legally binding. Even legal ones seem to offer only slight protection from President Trump’s ire. A non-binding one offers virtually no assurance to exporters and investors.

One could object that non-binding deals are pretty common (see, for instance, the 10 Memoranda of Understanding the UK has with separate US states). However, the US-UK EPD has two additional, major flaws. On the one hand, it worryingly signals that the UK is ready to ignore the most fundamental WTO principle of non-discrimination, by making preferential concessions to the US on a limited number of products. On the other hand, in exchange for such non-compliant preferential concessions, the UK obtains equally ‘illegal’ concessions from the US, but under the condition of squeezing China out of its supply-chains. We discuss both aspects in turn.

WTO incompatibility

Trade mini-deals have increasingly proliferated and are increasingly occupying a larger share of the global trade policy landscape, mainly to shape states’ regulatory behaviours. One reason why such deals have not led to legal disputes so far is that they have become fairly popular negotiating tools and, since no one is free from sin, no one wishes to cast stones. Importantly, however, such deals have generally been negotiated quietly, whereas the US-UK EPD was announced triumphantly, demonstrating that the UK government is not going to let WTO principles stand in the way of their policies.

The preferential elements of the deal are direct challenges to the rules of the WTO. Non-discrimination is perhaps the most important feature of those rules, but there is a clear carve-out for regional integration arrangements in Article XXIV of the GATT. However, that has a fundamental condition, which is that the arrangement “eliminate” barriers on “substantially all trade” between the partners. Steel, aluminium, beef, ethanol, and automobiles, the key sectors mentioned in the deal, obviously do not collectively meet this requirement. Hence, the deal is very likely to be ruled discriminatory under WTO rules.

The not-particularly-subtle anti-China provisions

The deal also does something new. It links the incentive of preferential tariff treatment (if you are a glass-half-full sort of person) or threat of reciprocal tariffs (if you are not) with the UK’s commitment to meet US requirements for supply chain security of products to be exported to the US. Security of supply chains, and therefore the potential for negotiating preferential tariffs, will be established by meeting “US requirements on security of supply chains … and on the nature of ownership of relevant production facilities.” Security of supply chains appears to be a thinly veiled reference to China and Chinese involvement in supply chains.

How “security of the supply chains” finally comes to be defined or qualified – whether as a function of overcapacity, or as a function of national security threats allegedly posed by exports – will bear importance in the future. It lies entirely with the USA: the US can still remove market access if the UK is deemed to have failed to address US concerns. And the conditionality extends even into the future: any modified reciprocal tariff treatment is predicated on “priorities identified in future US section 232 investigations.” Essentially, for any UK-originating exports to the US, the UK will have to ensure that the security of supply chain requirements are met according to US criteria to negotiate lower tariffs. This will cause much uncertainty for the UK industry and businesses that have supply chains of, say, inputs from China, especially if US conceptions of their national security concerns evolve.

The US-UK EPD is presented as cutting steel and aluminium tariffs on US imports from the UK from 25% to 0%, although this is not openly stated in the text. Moreover, satisfying the security concerns will also be a condition to obtain preferential treatment on pharmaceuticals, as it will be for any exemptions from trade restrictions imposed by future investigations under the USA’s Section 232 on security concerns.

Finally, point C(iii) on pharmaceuticals also ends with a perplexing reference to the “UK’s endeavour to improve the overall environment for pharmaceutical companies operating in the UK”. Should this potentially be read as a signal that the NHS will be required to buy US drugs at favourable prices? Or does it imply that discriminatory trade policy is going to be underpinned by discriminatory industrial policy that would improve the overall environment, e.g. with tax credits, for US pharmaceutical companies in the UK?

To sum up

The UK has won limited improvements in access to the US market. In return, it has committed to tariff reductions and market access in a likely breach of international law, and with an erratic trade policymaking partner. It risks challenges from many trading nations and possible retaliation from China if it accepts (the so-far undefined – or at least unpublished) US conditions on supply chain security. Whatever else it does, this deal clearly signals that the UK does not value the multilateral trading system much.

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