15
Examination of witnesses
Sam Lowe and Daniel Mullaney.
Q53 The Chair: The session will be streamed live on the Parliament website and a transcript will be taken. We will send you both copies of it afterwards for small corrections, if necessary. Sam, perhaps you could briefly introduce yourself, and then we will go into questions.
Sam Lowe: Thank you for having me. I am a partner at Flint Global, where I run its trade and market access practice.
Q54 Baroness Fraser of Craigmaddie: Thank you, Mr Lowe, and thank you for bearing with us. I would like to ask you a general question to begin with about where the UK is most vulnerable to the current tariffs, both in terms of sector and in terms of parts of the UK. What is your opinion on the fact that pharmaceutical and medical products are not subject to tariffs at the moment? Is that going to be a sustainable position? Similarly, is there any danger of tariffs on goods, given that a lot of what we do is services? What are the implications of the current situation for the service sector?
Sam Lowe: Part of the public narrative around Donald Trump’s actions seems to focus occasionally on the idea that the UK has got off fairly lightly, given that the reciprocal tariff rate applied to the UK is 10%, whereas, for other countries, if and when it is brought fully into force, it could be much higher—for example, 20% for the EU and around 34% for Switzerland. If you get into east Asia, it is much higher again.
That commentary slightly misses the composition of UK exports to the US, and the fact that the sectoral tariffs that complement the reciprocal tariffs, particularly on automotives, steel, and possibly on pharmaceuticals, are much higher. My back-of-the-envelope calculation—which, I should say, is based on 2023 numbers and some assumptions—is that the applied weighted tariff on the US, accounting for the fact that there is a 25% tariff on cars, steel and possibly pharmaceuticals, is around 14%, which is slightly higher than the 10% that gets reported.
Those two sectors that I mentioned—autos and pharmaceuticals—if and when those tariffs are applied, are a large component of UK exports to the US. Steel is quite a lot smaller, at £400 million or so on 2023 numbers, but there are regional implications of the tariffs in those instances.
To your question on whether the tariffs could extend into other sectors outside of the goods space, we have to account for the fact that, over the weekend, the President proposed a 100% tariff on foreign films. I am not necessarily sure that that was entirely thought through, given that the statement was quickly backtracked and they said they were going to discuss it, but the sentiment is real.
There is a real concern in the US that has been there for a while and, if Dan is able to speak at some point, I am sure that he can reference this. I can think of a proposed legal case back in 2007 and, in certain states, there is the view that foreign countries are pulling American film production outside of the US by using tax breaks and grants, which some people want the President to combat. While the 100% tariff might be hard to implement in practice, there are other measures that the US could take and that could penalise the UK in that sector.
I would also make the point on services that, in terms of the reciprocal tariff equation, while the President has focused solely on the goods trade deficit, he very regularly talks about foreign regulations that impact American services firms. He has spoken about the UK’s digital services tax. We have also had EU competition rules, as well as free speech legislation, all of which impacts America’s services sector.
Baroness Fraser of Craigmaddie: Can I just push you on where the UK, in your opinion, is most vulnerable, either in sectors or in regions?
Sam Lowe: To be succinct, on the tariff side, as of now, it is automotive exports, and then possibly pharmaceuticals, if those tariffs are applied. Outside of those sectors, where you have the 10% tariff applied, there is an impact on food and drink exports to the US. We export, for example, a lot of whisky.
In that context, there is a slight question mark as to the extent of the impact, because, if we are in a situation in which those products face a 10% tariff but their competitors from other countries such as Japan, for example, face a higher tariff, those exports lose competitiveness versus US production, but would retain some competitiveness versus those exports from other third countries. Because those discussions have not yet played out fully, and we do not know what the final country-specific tariff is in a lot of instances, it is a bit more difficult to estimate the impact, although, of course, it is negative.
Q55 Lord Alderdice: I am wondering a bit about the impact of tariffs on Northern Ireland, particularly given its special status under the Windsor Framework. Could say a little about your thoughts on that?
Sam Lowe: The question is where to begin with this one, but, if we start from the fundamental assumption that exports from Northern Ireland should be treated by the US as being from the UK—and therefore, in terms of country-specific tariffs, subject to a 10% tariff—that is your starting basis.
There is a slight question mark as to how the US treats these products in practice, because there could be, on a technical level, suspicion of circumvention—for example, Irish goods being repackaged in Northern Ireland and exported to the US, in order to dodge a possibly higher tariff, if the 20% tariff is applied to the EU. That could lead to some practical difficulties for exporters in Northern Ireland, whereby their products are treated as being from the EU, despite that not being the case.
There is also then the broader question as to how the US views Northern Ireland in this general context, because Northern Ireland is obliged, under the Windsor Framework, to apply EU trade defence measures. If the EU retaliates against the US, which it has not done yet, and applies tariffs on Harley-Davidsons, for example, and the UK does not, those tariffs would apply in Northern Ireland, albeit importers could then get those duties refunded if they can demonstrate that the product has stayed in Northern Ireland.
I know that there is a question about the efficacy of the rebate scheme in Northern Ireland, because, if it does not work, from a US perspective, their exports to Northern Ireland are being treated as if they are entering the EU. That could lead to differential treatment of Northern Ireland in future, although this, I should stress, is me being speculative.
Q56 Baroness Blackstone: As a follow-up to the earlier question, I know that it is extremely difficult to speculate about the future, but were the 10% tariff to remain in place for the UK, what would the longer-term impact be? Would we be shifting away from those exports where this is going to apply and trying to export elsewhere? How would the UK react to a longer-term certainty of a 10% tariff?
Sam Lowe: This is one of those questions where it slightly depends on how other countries are treated. If we are in a world in which the average tariff applied to the UK is lower, whereby you have the 10% baseline and then potentially some sort of deal between the UK and the US that, at least for specific volumes of exports, reduces the tariff on the exports of cars or the like, UK firms exporting to the US would lose some competitiveness. In terms of the UK’s appeal as a foreign destination to export to the US, it could be relatively advantageous to do so if you are unable to produce in the US, because exporting from the EU would be worse.
The answer to your question is that it is negative. On a sector-specific basis, it really depends on the product. If you are selling a product that you can buy only from the UK, and it has a big market share in the US because it is very popular, it might just be the case that they have to pay more for it. If it is a product that is easily substitutable, especially if it can be replaced domestically within the US, you would expect there to be a bigger negative impact on the UK’s market share.
Baroness Blackstone: Can you illustrate what they might be?
Sam Lowe: Let us take cars, for example. We sell, for the most part, fairly high-value cars to the US, but we do have competitors in that market segment, some of which produce within the US. That is an example where it is possible that we maintain our market share, but there is a good reason that the UK is trying to get this tariff lowered.
Q57 Baroness Crawley: This is a question about the UK and the EU, and the impact on the UK-US relationship. We have all heard Ministers talking about no compromise within this proposed US-UK trade agreement on food standards. Chlorinated chicken or hormone-treated beef seem to be red lines. Will the reset that the UK is having with the EU impact the UK’s ability to have a substantial trade agreement with the US? Can you see a point where the US would agree to an agreement that does not include agricultural products?
Sam Lowe: My starting basis is that, in the first instance at least, I am not expecting a substantial UK-US agreement. I am expecting something much more partial that, if it emerges, possibly addresses, although unlikely, the recent reciprocal car, steel and pharmaceutical tariffs. It might be much narrower. We are not talking about a free trade agreement akin to what we announced yesterday with India, for example, even though that is not necessarily the most comprehensive agreement.
In terms of the trade-offs, you identified the key one, which is the veterinary agreement with the EU, whereby the assumption is that, if the UK wants to reduce regulatory barriers to trade with the EU—such as border control posts, physical inspections, and identity and document checks—the UK will probably have to align its domestic sanitary and phytosanitary legislation in perpetuity with the European Union. This would mean that the UK is unable to address US concerns around the UK’s food safety regime, which currently mirrors the EU’s and restricts the imports of a lot of US food.
That is one of the examples of where there is a binary choice, but the current Government seem to have taken a view on that, which is that they do not want to change those food safety rules to accommodate the US. There is a question as to how hard the US pushes on that, but that is the Government’s current position.
Outside of food safety, at a technical level, it is hard to find other examples of where there is this purely binary choice, given what the Government have set out as their ambitions for the reset. For example, in terms of a linkage of an emissions trading scheme between the UK and the EU, there does not appear to be a binary choice between achieving that and accommodating the US.
As an aside, it is possible that, at some point, Donald Trump notices the EU’s carbon border adjustment mechanism and the UK’s proposed carbon border adjustment mechanism—which are linked to ECS linkage but not a component part of that discussion—and is annoyed by it and raises it as something that he does not like.
On the other issues that have been discussed, I am not best qualified to speak about how defence and security co-operation might interact between the UK-EU and UK-US relationships, so that one is probably for others. It is worth noting that, of course, there is a political dimension to this. It is all well and good me saying that, at a technical level, there is no need to choose. However, if there is a scenario in which the UK is being treated much better than the EU, that could create some political tension. Even within the EU, if you look at the differential relationships between member states and the US, that dynamic exists—for example, if you think that Italy has a better relationship with the US than France does.
Baroness Crawley: Could you see a trade agreement that is without agricultural products?
Sam Lowe: I am just going off public reporting here, so I am not breaking any confidences. The UK has offered to reduce some of its agricultural tariffs as part of a deal with the US to mitigate the more recent tariff measures. In that sense, food would be accounted for, but it appears to be holding firm on the regulatory side. It is, therefore, a question for the US as to whether that is enough to agree some accommodations.
I would make the point that any agreement with the President at this moment in time is not necessarily for ever. As per the Financial Times reporting yesterday, while it seems that there has been some movement on autos and steel, one of the bits that is holding up the current discussion is the question of what to do about pharmaceuticals. My view is that that is possibly being held back by the US, because it means that they can come back for another bite later on.
Q58 Lord Grocott: As a quick follow-up, you have told us already that you do not expect a full-blown free trade agreement any time soon. Just speculating, if such an agreement were to be achieved, what sectors of the UK economy would be particularly vulnerable? We talk about the advantages, but there are disadvantages as well.
Sam Lowe: In terms of import competition—this is not something that I expect would happen—if the UK were to fully liberalise its agricultural sector, by which I mean the removal of tariffs across a wide range of products, and tweaks its approach to its sanitary and phytosanitary regime so as to allow these products from the US to enter from a regulatory perspective, that would put some pressure on the farmers who produce those products here. As I said, I do not necessarily expect that to happen, because we can all see why that might be politically contentious.
Otherwise, it is important to say that the UK and US economies are fairly compatible. The UK is already very open to US trade and investment. One of the reasons that the UK has sort of been let off the hook on the reciprocal tariff is that we already have fairly balanced trade, so, while you would see marginal improvements for certain companies in both directions, the impact would not necessarily be particularly large at the aggregate level. The previous Government’s modelling of the potential benefits of the deal plays that out.
Q59 Lord Darroch of Kew: Thank you for all of this; it is fascinating. I would like some clarification, just so that I properly understand what you are saying. You talked about there being a binary choice on food safety. The summit between the Prime Minister and Ursula von der Leyen is on 19 May. If we do a phytosanitary deal coming out of that summit, we cannot change the food safety rules to allow imports of chlorinated chicken or hormone-treated beef. Is that the only thing, in terms of the whole agricultural area, where there would be a binary choice for the Government? Could the UK Government decide to lower tariffs on a whole range of non-chlorinated or non-hormone-treated American produce with no implications, other than the political ones, in terms of doing a phytosanitary agreement? Is it just food safety?
Sam Lowe: I should clarify that, when I say that I expect a sanitary and phytosanitary agreement between the UK and the EU to involve some regulatory dynamic alignment in perpetuity, that is an assumption on my part, based on what the EU has consistently said and on precedent in terms of what is necessary to remove the barriers that the UK wants removed. It is, of course, possible that you could have an agreement that does not bind the UK to the EU’s sanitary and phytosanitary regime, and does not necessarily achieve the same degree of reintegration and benefits, but would leave the UK freer to make changes to its regime vis-à-vis the US. That is a possibility.
On the point of tariffs, UK tariff reduction should not have any impact on the UK-EU reset. If you think about agreements that the UK has done recently, we have heavily liberalised parts of our food sector in relation to Australia and New Zealand, and that does not have any impact. I do not want to go into a full-on deep dive on rules of origin, but when you export those products from Australia into the UK, you cannot re‑export them into the EU as a UK product. When they go to the EU, they are considered as being from Australia, and the EU tariff would apply. We are not a backdoor for low-tariff goods, so long as the customs enforcement is all working as it should.
Q60 The Chair: Daniel, you have been extraordinarily patient, particularly given how early we have got you out of bed. Thank you so much. Would you like to briefly introduce yourself? I do not know how much you have heard of what has been going on so far, but, if you are equipped to do so, would you like to make any additional remarks to the various questions?
Daniel Mullaney: I was able to listen to a bunch of the discussion, and it was really very interesting. I am a senior fellow at the Atlantic Council. Until 2023, I was assistant US trade representative for Europe and the Middle East at the agency that negotiates trade agreements on behalf of the United States. I was the chief negotiator for the US-UK comprehensive negotiation that happened in 2020, and the chief negotiator for the US-EU TTIP negotiation.
Of what I was able to hear, one of the aspects that Sam is absolutely right on is the question of the UK having a deal with the EU and with the US. In theory, with respect to normal free trade agreements, you do not have a binary choice between further integration with one partner versus another. The nature of free trade agreements is that you are opening yourself up to increased trade and integration with multiple parties, so it is theoretically possible and, in fact, the norm in free trade agreement negotiations for countries to be dual-facing—in other words, able to accept goods from multiple parties and to have an agreement that allows you to ship goods to multiple parties.
On the question of dynamic alignment, if that means that, say, in the food safety area, the UK adopts, in essence, the same barriers to US goods that the EU has, that is a choice to be made. It is really only a choice in the context of a country that had been a member of the EU and, therefore, has adopted the EU acquis. That is not the normal circumstance for FTAs.
It is worth noting that, in the initial tariff announcements, the UK, as Sam said, got off relatively better than others with 10%. The barriers with respect to the UK that were cited in some of the public documents had to do with some of those legacy barriers, if I can call them, that were put in place on US agricultural products from the EU.
That was my reflection on what I heard this morning. I totally agree with Sam that, in terms of the US and the EU being able to make a deal together, the economies are fairly compatible in the sense that neither of us are low-cost, deregulated jurisdictions. We are similar in the sense that we have economies that are heavily focused on high-tech and digital, which offers some opportunities for an arrangement.
My own observation from working on US-UK relations over the years is that, across Administrations and across US Government agencies, including the Administration and Congress, there is generally a consistent positive attitude towards having greater integration with the UK, including in the context of specific agreements.
Q61 The Chair: If I can take us back a bit, our current inquiry seeks to look beyond the current Administration, to the extent that that is possible. Mr Mullaney, what are the key trends in US trade policy that are likely to persist, irrespective of changes in the US Administration? Do you expect the US to be driving or resisting multilateral economic co-operation in the coming years, especially beyond the next four years?
Daniel Mullaney: The enduring trends that are not specific to this Administration are probably three. One is that the discussion on international trade is no longer one that focuses just on pure liberalised trade—in other words, just increasing the pie and allowing it to be divided, however it will. There is going to be an enduring desire for guardrails and for trade policy to dictate how the benefits are distributed, and a focus on the effects of trade agreements on communities and workers.
The second enduring trend is that there is a perception that the current WTO rules and other norms are not completely up to a lot of the current challenges, including the threats from non-market economy policies and practices, climate change and the digital revolution, so we may need to look at and talk with partners about new rules.
The third enduring trend is the scepticism about how non-market economy policies and practices fit into the world trade system, and their impact on the set of WTO rules that we have all been operating under for several decades. Those are the enduring trends.
On the question that you asked about involvement in multilateral organisations and co-operation, that is the thing that can shift over time. The enduring aspect is that the United States will always see it to be useful to work strongly with allies on common objectives such as non-market economy policies and practices, and others. The difference may lie in the emphasis on how important it is to work with allies. All Administrations see that value.
The current Administration and the previous Trump Administration were more inclined to say, “It is really important that we work with allies, and it is a good idea to work with allies, but, if the allies are not like-minded on particular issues, we are happy to go it alone”. That is the kind of thing that may shift slightly over Administrations. The core value, which is that it is better to work with allies on our common objectives than not, is also an enduring trend.
Sam Lowe: My assumption is that the aggregate US tariff at the end of this Administration will be higher than at the beginning. That is important. It will endure to an extent. It does depend on the nature of the next presidency in so far as, if you look at what happened when Biden came in, he retained many of the tariffs, but did remove them in the context of, say, the steel tariffs on allies while ramping up the tariffs on China. We are in a world in which the US having higher tariffs is here to stay, and I do not see that being rolled back to any significant extent at the aggregate level.
On the other enduring trend, we are going to continue to see intense pressure on allies to join with the US—Dan referred to a “non-market economy”, but I will be slightly more explicit: I mean China—to combat Chinese development and overcapacity, and the national security threats associated with it.
Q62 Baroness Coussins: Thinking about the impact of all this on the medium and long term, what policies on tariffs in general, and on UK-US trade in particular, would you expect to hear coming from the Democrats in the run-up to the midterm elections, if it is possible to speculate at all?
Daniel Mullaney: Sam is correct that the evolution is more in favour of the use of tariffs. That was a constant theme in the Biden Administration as well, but it is a bit of a question of where the presumptions lie. I would expect the continuing messaging to be that tariffs can be a useful tool to pursue certain objectives, such as protecting and increasing US manufacturing. The message from the Democratic side would probably be that those tools need to be used in a less blunt and more surgical fashion, which was a bit the approach of the Biden Administration, in contrast to the Trump Administration.
Sam Lowe: I agree with that.
Q63 Lord Soames of Fletching: Is there any residual authority, through great institutions such as the World Trade Organization, that has any bearing on any of these negotiations or the conventions by which they are undertaken?
Daniel Mullaney: The reference point for us all, and for many years, has been the WTO rules. There are certainly provisions in the WTO agreements for renegotiating or resetting tariff commitments. Those things are not set in stone, and there is a process for revising some of the tariffs. The question is whether the Administration wants to use those procedures.
The second aspect, as I mentioned, is that there is a bit of a conviction that some of the current WTO rules, at least as they have been interpreted, may not be up to modern challenges. There may be a focus in bilateral discussions on looking at how the current rules might be reinterpreted or adjusted to meet some of these current challenges.
Sam Lowe: I observe that the US currently does not feel bound by its WTO obligations—or at least the President does not—in terms of how it is approaching other countries. It still seeks to root its trade actions within the domestic legal architecture, whereby you might question the national security justification for applying tariffs to cars, but a process has been followed in how that has been delineated. Of course, national security is still an area where you have quite a lot of flexibility to act.
There is still a question as to whether, and how, WTO obligations constrain the ability of other countries to react to the US. For example, if these mini-deals that are being negotiated with the US result in tariff liberalisation, whereby the UK agrees to remove agricultural tariffs, at a surface level—based on the UK’s WTO obligations to treat everyone equally, and the fact that that agreement probably will not be a free trade agreement that covers substantially all trade, which is the exemption to that clause—the UK’s tariff liberalisation probably should be applied universally. If we reduce tariffs to accommodate the US President’s requests, we should probably do that for everyone.
There is a question as to whether we will, and this question does not exist just for the UK. I have articulated it for the UK, but it is for the EU, Japan and others. Under the first Trump Administration, there were examples of countries—or blocs, because the EU did this—bending these rules slightly. Japan did a mini-deal with the US that led to some tariff liberalisation that was applied exclusively to the US, and argued that it was a precursor to a bigger deal and did substantially cover all trade. Maybe you can play around at the edges.
This question is important, because, as it stands, the US is being treated as an anomaly, and everyone else is still paying lip service to the WTO and to its international obligations. If the US forces countries to break those obligations, there is then a question of whether that is just treated as being a one-off in relation to the US, or leads to a further unravelling of, for example, the most favoured nation principle.
The Chair: Lord Darroch, has Lord Soames shot your fox?
Q64 Lord Darroch of Kew: It was a close shot but did not kill. This is really a question about how much damage is being done, and it is in two parts. First, can you make an assessment of the immediate impact of the Trump tariffs? I know that a lot of the reciprocal tariffs have been suspended, but there is still a 10% baseline tariff for cars and steel, and all the rest of it. Can you already see an impact on the global economy? It is not specifically about the UK, but about the global economy.
Secondly, if these tariffs persist, if the Americans do not do quick trade deals with the EU and China, which are the big ones, and if your assessment, Sam, is right that, by the end of this presidential term, tariffs will most likely be higher than they are at the moment—
Sam Lowe: I meant at the beginning of the term, sorry, not necessarily at the moment.
Lord Darroch of Kew: If that is right, what is the long-term effect of this if we are now into an era when, basically, tariffs will be spread across products globally?
Daniel Mullaney: First of all, the tariffs that have been laid out are styled as tools for achieving other objectives, including, for the US, the trade deficit, protecting US manufacturing and pushing back against unfair trade practices. If you take the stated reasons as the real ones, that provides an opportunity for other trading partners to reach arrangements that achieve those objectives, but with fewer tariffs.
There is a scenario in which various arrangements are made that achieve the objectives without the tariffs, but the recent US experience, with broader tariffs being imposed, is that tariffs do inflict a certain amount of self-harm on the United States. It is clear from the various reports that have come out of the WTO and others that significant tariffs do have a negative effect on global growth and on the growth of trade. Given that the tariffs are styled as tools for achieving objectives, there are opportunities for achieving the objectives without the high level of tariffs that we have seen.
Sam Lowe: In terms of global impact, if you look at any estimates, it is negative. There are some questions as to the impacts on specific countries. For example, if you read the press, because it is quite US-focused, there is lots of talk about the tariffs being inflationary. That is, of course, true in a US context, but the result of the tariffs elsewhere could be deflation, because you will probably have trade diversion, whereas you have cheap Chinese goods that are otherwise going to enter the US being deflected elsewhere and pushing down prices, for example, in Europe. That is why there is some concern about this in many countries and talk about safeguard duties. We have had this conversation in a small way in the UK in relation to steel. It could also filter into other areas such as automotives.
My question about global impact is, “If that is the case, how do those countries then respond?” There is a scenario in which other countries then impose their own tariffs, which we saw happen in the first Trump Administration with the introduction of steel safeguards following the US 25% tariff on steel in the EU, the UK and others, and those have endured. If that happens more widely, the global impact will be bigger, in a negative sense, than if it were not to. We just have not seen this play out fully yet.
The other thing that we have not seen play out with the global economy is the impact of the other proposed Trump measures. He has also proposed big tax cuts in the US and spoken about large-scale deregulation. This may have a stimulative effect in the US in the short term, even if it creates long-term fiscal issues, because no one really believes that you can offset income tax with tariff revenue.
There are competing dynamics in play, which is a really long-winded way of saying that I assume that it will be negative, but I am not quite sure yet the extent to which it will be negative.
Q65 Lord Bruce of Bennachie: We know that trade is in balance between the UK and the EU, roughly speaking, yet they are wanting to say, “We do not want to take your steel. We do not want to take your cars. We do not want to take your films. We do not want to take your pharmaceuticals”. What is our response to that in terms of, “What will you take?” Why should we take a one-way ticket that says, “We are going to restrict your trade and offer you nothing in return”?
Related to that, how much effort is it really worth the UK expending to try to secure a deal with somebody who will change his mind between tea-time and coffee-time, as opposed to organisations where you know that it may take a while to get a deal, but, once you have one, it is reliable and in place? Is this not a huge distraction of effort? Indeed, have we got enough people and talent to negotiate so extensively on so many fronts at the same time?
Sam Lowe: On the people front, as a legacy of Brexit, we have an absurdly large number of officials with some experience of negotiating throughout the UK system. We created two departments at the time to work on it. The Brexit department and the Department for International Trade have now been merged, but you also had the shadowing functions in Defra, the Cabinet Office and the like. We do have enough people. There is a question as to whether they are being co-ordinated and utilised properly, but they exist.
On the approach of the Government, my view is that, while Donald Trump has publicly and explicitly said that he quite likes the UK, and that he feels warmly towards us—he is going to open his golf course at some point—the caveat is that this has not delivered any benefit as of yet. The lower 10% reciprocal tariff is solely a function of the equation, not because he likes us, but you have to assume that it could be worse. Countries that he does not like ultimately get treated worse in the context of the bilateral negotiations and the like that are ongoing, so it makes sense for the Government to put some effort into continuing those conversations and having a go at trying to find a resolution, because there could be some relative upside there.
We are not necessarily going back to where we were before his election, but we could be slightly better than now. Although the Government’s approach does not necessarily play well publicly, it is as expected and it would be difficult for them to do anything else. If they were to be outwardly hostile, that could have resulted in some more significant threats.
Lord Bruce of Bennachie: I was not suggesting hostility, but it is a question of how much effort it is worth. More to the point, are there specific things that we should be looking for other than to trying to soften the blow? The film industry and the pharmaceutical sector are important, as are oil and gas, which we are importing more and more from the United States as we run our own reserves down.
The point that I am really trying to press—I wonder whether we could get an answer from the other side—is about what there is that we can secure, not just in terms of damage limitation but positively. Are we able to say, “We can have a relationship here that recognises where you are coming from, as long as you are prepared to recognise a little bit of where we are coming from”. Otherwise, it does look as if we have to be very nice, even when they are being not very nice, and that is all there is. There has to be something a bit more substantive. That is really my point. What would you suggest? Mr Mullaney, what could we do?
Daniel Mullaney: It is important that, if you have a trade deal such as this, it is one that has to work for both sides. It is true that probably some partners will fare less well than others. The UK is also in a very good position, not necessarily just because the President likes the UK, but because many of the main challenges and objectives behind the tariffs do not really apply to the UK, including the issue of a goods trade deficit.
Clearly, in any deal between the United States and the UK, the UK should be looking at what it wants out of the deal. At that point, the devil is in the detail in terms of the negotiation between the US and the UK. One potential advantage is that the UK is in a bit of a central position between the United States and the European Union, and has an ability to increase trade and investment integration with both the EU and the US. If the UK is able to do that simultaneously, that would be a plus.
The things that the UK would want out of a deal, in terms of access to the US market or other objectives, are the kinds of things that the UK should put on the table in any discussion with the US. I agree with Sam, having worked closely with the UK side in negotiations, that the resources and the expertise are at a very high level in the UK. It is worth recalling that we had about six rounds of negotiation between the UK and the US during the first Trump Administration. Progress was very good, and there were a lot of like-minded aspects and a lot of benefits on both sides of that negotiation, even though it did not finish up, in part because of the following election.
Sam Lowe: To specifically answer your question, in terms of this initial phase of negotiation, I do not expect the UK to get anything in terms of additional market access to the US. A good arrangement would be one that addressed the steel, aluminium, auto and pharmaceutical tariffs, and saw either a full removal—which I do not necessarily expect—or a reduction in those duties. Depending on what the UK has offered up in return, given that you do have to look at that side as well, that would be of benefit.
It is notable that the UK’s public line on the agreement changed over the last two weeks. It went from saying, “We are going to prioritise a quick deal” to, “We are going to prioritise a good deal”. That was due to the original pushback from the US that it was even going to negotiate on autos and steel at all. Strangely, the UK negotiation was made more difficult by the fact that we already have the 10% baseline. Most other countries are negotiating against their reciprocal rates. The EU is trying to ensure that the 20% does not get switched on, and Switzerland is trying to do the same for the 34%. The UK is seemingly getting 10% regardless, so all we have to focus on is steel, pharmaceuticals and autos.
Depending on what we have offered in return, if we get some movement on that, I would view that as positive. There will then probably be some talk about building it out into something more substantive in future, although I expect that that could take a while.
Daniel Mullaney: I agree with Sam, but it is also worth pointing out that, in the case of steel and aluminium, the United States, under the last Administration, engaged in a detailed negotiation aimed at determining how to reach an arrangement that eliminated the tariffs but achieved the objectives of protecting against non-market economy and non-sustainable steel and aluminium. When getting together to negotiate an arrangement in lieu of tariffs, even for those sectoral tariffs related to national security, there is a history behind that that might be usefully drawn on.
Q66 Baroness Morris of Bolton: The Biden Administration were not that keen on a free trade negotiation with us. I know that the Department for International Trade did a lot of work with individual states. It talked to 12 of them and signed memorandums of understanding with eight, a lot of them on breaking down barriers to trade, which it saw as essential work to a future free trade agreement. Might this help pave the way to a broader federal FTA?
Daniel Mullaney: Thanks for that question. It could be helpful in a couple of respects. One is that there are some issues in which the states do have legal competence—things such as state-level government procurement or professional qualifications. Discussions at a state level can be useful. They do not rise to the level of a generalised, comprehensive free trade agreement, but, in certain areas, the states have the competence to agree to things.
The second and maybe more important thing is that the more work that is built up in the United States at the local level and the more support generated by state and local governments in favour of trade with the UK, the better the environment for achieving a larger deal at the federal level, so it is a useful exercise.
Sam Lowe: I agree particularly with the second point. I am a big subscriber to the vibes-based theory of trade, whereby, outside of the firm obligations that countries make, just the fact that you even have a free trade agreement makes companies aware of the fact that they could sell to that country. It possibly leads to some intangible benefits that are not necessarily pulled out of economic modelling, although it could be viewed retrospectively. To Dan’s point, that is important.
However, in the context in which you mentioned it, it was slightly displacement activity—“We cannot do a deal with the US federally, so we will just try to do some stuff with states and have a lot of announcements”. They are no substitute for a federal-level agreement, and having lots of them at the state level will not make President Trump suddenly say, “We should do one ourselves”. I am not sure that that link is explicitly there, but, to Dan’s point, there is that soft route where you build up support at a grass-roots level and it filters upwards.
Q67 Lord Houghton of Richmond: My question is very general: it is to try to better define the prominence or importance of the economic relationship in the overall relationship between the UK and America. The higher purpose, if you like, of the committee’s work on this is to try to establish the relationship’s direction of travel. Is it one that is becoming more one of convergence or divergence? We are slightly at a start point that still believes that there is a special relationship, but it is more obvious in certain areas such as culture and values, and maybe intelligence and defence.
If you were to put the economic relationship between the two countries—not in a four-year perspective or a Donald Trump perspective, but in a 100-year perspective—has there ever been a time when there was a relationship of special amicability, or has it always been driven by the pragmatism of the moment? Therefore, is this something that we should not try to pretend was ever part of anything special? I say this in the context of the fact that there is greater and greater media commentary over here that, if there ever has been a special relationship, it is certainly going through a process of quite accelerated erosion at the moment. Daniel, can I come to you for the most general of comments? I am not expecting a load of statistics to back up your response.
Daniel Mullaney: There is a strong sense in the United States and the Government of a special relationship, which drives a lot of the broader relations, including the economic ones. Without any trade agreement whatsoever, and including during the entire period of the UK’s membership of the EU, we have had very significant trade and investment integration between the United States and the UK. That goes beyond the pragmatism of the moment and speaks to special historical and cultural links, as well as political links and shared values such as transparency and good governance, which are not things that the United States shares with every country in the world.
Sam Lowe: To answer your question slightly tangentially but in a more forward-looking way, this is an inflection point in terms of Europe as a whole and its relationship with the US. I sit across our trade work in the UK, as well as in the EU, run out of our Brussels office. Whereas the US likes to talk about de-risking and decoupling from China, a big part of the EU conversation right now is de-risking and decoupling from the US—not universally, but in some critical areas such as defence and certain elements of technology, space and data.
There is a question for me as to whether the UK follows on with that. My suspicion is that perhaps we do not, or at least not to the same extent. This is one of those 10-year plans. You cannot de-risk from US defence overnight, but, if you really put your mind to it, you could, over a 10-year period, develop more European capabilities. Is that something that the UK wants to do? Lots of member states are talking about that quite intently and it is driving some of the conversations there.
In terms of the endurance of the special relationship, we are at a moment where we are having different questions than those that we have had in at least my time alive, although I admit that that could be longer.
The Chair: Thank you both very much indeed. Daniel, particular thanks to you for putting up with our IT problems. We are extremely grateful. It has been a very interesting session.
