18
International Agreements Committee
Corrected oral evidence: General terms for the UK-US Economic Prosperity Deal
Tuesday 8 July 2025
2 pm
Members present: Lord Goldsmith (The Chair); Lord Anderson of Swansea; Lord Fox; Lord German; Lord Hannay of Chiswick; Lord Howell of Guildford; Baroness Lawlor; Lord Marland; Lord McDonald of Salford; Lord Stevenson of Balmacara; Baroness Verma.
Evidence Session No. 8 Heard in Public Questions 19 - 27
Witnesses
I: Professor Kathleen Claussen, Anne Fleming Research Professor & Professor of Law, Georgetown University Law Center; Professor David Bailey, Professor of Business Economics, University of Birmingham; Professor Emily Lydgate, Professor of Law, University of Sussex and Co-Director, UK Trade Policy Observatory.
USE OF THE TRANSCRIPT
Examination of witnesses
Professor Kathleen Claussen, Professor David Bailey and Professor Emily Lydgate.
Q19 The Chair: Welcome to this evidence session of the International Agreements Committee of the House of Lords on UK-US trade, in particular the general terms published in relation to the economic prosperity deal. This meeting is being broadcast via the parliamentary website. A transcript will be taken and published on the committee’s page. Each witness—I welcome you warmly to the session—will have the opportunity to make corrections to that transcript, where necessary. Perhaps you would each like to introduce yourselves, so everyone knows who you are, and then I will get on with the first question. We can do that in whatever order. Professor Claussen, maybe you should start.
Professor Kathleen Claussen: I am a professor of law at Georgetown University in Washington DC. Thank you.
Professor Emily Lydgate: I am a professor of law at the University of Sussex and co-director of the UK Trade Policy Observatory.
Professor David Bailey: I am professor at the Birmingham Business School and a senior fellow at UK in a Changing Europe.
Q20 The Chair: Thank you. Having identified the subject matter of this particular meeting, first, how have recent developments in US trade policy operated and shaped the external trade policy environment facing the United Kingdom? What is your assessment of the UK’s decision to pursue this agreement in that context? Professor Claussen, could you give us your thoughts on that?
Professor Kathleen Claussen: I am happy to speak to the ways that the US tariff measures have shaped that environment. The fact that there are several tariff measures at work here makes this moment already noteworthy. We have negotiating partners working in a multidimensional environment and it goes without saying—I think it is clear for anyone watching the news—that the focus of the White House shifts among them. It is difficult to know which of them will be the basis for action or the central dimension on any given day. There are multiple players involved across the executive branch as well.
Let us take just one of these tariff measures: the IEEPA or International Emergency Economic Powers Act tariffs. These are the so-called worldwide tariffs. They have received a lot of attention, especially in the last 24 hours, for three reasons: their scope and magnitude; they are the province exclusively of the President; and they have been challenged in the US courts. These three elements—scope and magnitude, the President’s authority in this space, and the challenge in the courts—have shaped the legal and negotiating environment for all our trading partners. They have led to a race to the negotiating table and, in addition to some White House uncertainty, some trading partners seeking to adjust their position based on what the courts may or may not say, in some future time that we do not yet know.
As an aside, I submit that that litigation is somewhat of a distraction. There are so many ways that the Trump Administration could impose tariffs, even if the Supreme Court were to invalidate these ones. Nevertheless, of course many partners are concerned with the litigation and how the Supreme Court might act.
I have two final points on how these particular measures, the worldwide tariffs so to speak, have shaped the environment. First, they are premised on the concept of a trade deficit. Perhaps that will come up and shape the negotiations that ensue. But let us not lose sight of the broader impact of the President’s approach here, which is that trade is just one of many issues at the table. It may be that the tariffs have brought trading partners to the table but, once there, much more is being discussed.
Lastly, I go back to one of my earlier points: there is no guarantee that the demands will remain the same over time. Especially in IEEPA, these International Emergency Economic Powers Act tariffs, the President holds all the cards. There is no investigation by an agency and no due process or procedure that can be identified in the law. The President sets the terms of both the content and his reaction to it. That makes it very difficult and complicated for trading partners to engage.
The Chair: Thank you. A number of members of the committee want to ask questions. If I may, I will get initial comments before that from Professor Bailey and Professor Lydgate so that we have, as it were, their introductory statements first. Professor Bailey, could you focus on steel and autos in this context, please? It is the same question: what is the impact and how far does the deal go in addressing the concerns?
Professor David Bailey: Thank you. The worst-case scenario of a 27.5% tariff on automotives would be pretty catastrophic for the UK industry. The IPPR suggests that 25,000 jobs could be at risk; I think the figure is much more than that, taking into account the low-volume crisis that exists in the industry. Avoiding that worst case has been hugely important. Getting a quick and dirty deal done is hugely important for the industry, even though a lot of uncertainty remains that will raise issues for it.
For example, in automotives a quota of 100,000 will effectively limit exports to the US going forwards. I think it also operates on a first-come, first-served basis, so there will be questions about whether bigger players such as Jaguar Land Rover gobble that up and whether smaller players will get access. There will need to be monitoring by the Department for Business and Trade of how that impacts on the industry. I have particular concerns about some automotive plants in the UK which operate well below capacity. Mini, for example, could be severely affected if it cannot access the quota. There is uncertainty as well in the sense that this gives a lot of power to US Customs in its interpretation of whether UK exports qualify.
More broadly, there is this issue of economic security. I think that will become more and more important. In other areas of US policy, such as on investment in the US, economic security was initially defined solely in terms of military and defence. Over time, it expanded to infrastructure, telecommunications and all sorts of different areas. Depending on the concerns of Trump—we heard from your previous witness that those can change over time—that economic security issue could be used in future. That has added uncertainty for business.
The Chair: Thank you. Professor Lydgate, do you think the UK has struck the right balance in this deal? Tell us a little about your views on that issue.
Professor Emily Lydgate: I have three quick points. First, the deal that the UK and US struck, the EPD, has not protected the UK against the IEEPA reciprocal tariffs that Kathleen discussed. If we go back to the famous 2 April chart that Trump held up, the UK was due to have a reciprocal tariff of 10% and it still has one of 10%. On the positive side, that is the best rate going. But that is not because of a deal that the UK has struck; it is because the UK did not have a trade deficit with the US.
However, the UK has achieved a reduction—and commitments to further reductions—in some of the sectoral national security Section 232 tariffs. Here, if we set aside the 10% IEEPA tariff and look at the obligations that are legally binding now, it is pretty balanced. Basically, the US has exempted the UK from its sectoral tariffs on cars, covering pretty much all its exports, such as Rolls-Royce engines, and the UK agrees to buy some US planes and gives the US an ethanol tariff. They are both giving each other cheaper market access for beef. That sounds pretty balanced. These are being implemented on both sides, or they have agreed to do so imminently—I will not dig into the details there.
Finally, there is a lot more still in the nine non-binding parts of the EPD, which could be problematic for the UK’s wider trade relationships, in particular with China and the EU. I will not elaborate now because I believe we may come on to these issues in due course.
The Chair: We will indeed. I will quickly bring in Lord Hannay and Lord Howell, and then go back to the general question.
Lord Hannay of Chiswick: Professor Claussen has told us, I think, in what way the exercise of the powers that the President has used since “liberation day”, as he called it, was legal under US domestic law. How compatible was it with the United States’ international obligations, entered into through the GATT and the World Trade Organization, which would seem to be at total variance with unilateral decisions of this sort?
Professor Kathleen Claussen: I am happy to answer that; other witnesses may wish to chime in on this. If I may, I will take a step back by asking how much we think that might matter. It may matter a lot to the United Kingdom because it is a strong supporter of the World Trade Organization and the importance of the GATT provisions. But what are the consequences of the terms to which these parties have committed perhaps not being compatible? To be sure, we are not talking about the general terms themselves because they do not take the form of a trade treaty. We are talking about implementation, and we have started to see some of that.
What is the impact of the implementation of the general terms? Will another Government or trading partner bring a dispute settlement proceeding at the World Trade Organization on the premise that these are incompatible with the most favoured nation rule of the GATT? We will probably not see a dispute at the World Trade Organization because all Governments are similarly situated here and seek to negotiate a similar step away, shall we say, from the MFN rule. That is my bottom line with respect to incompatibility with the most favoured nation rule. All Governments are seeking to find their way with the United States, perhaps putting those WTO rules to one side in this context.
Lord Hannay of Chiswick: So it is illegal under international law but nobody will trouble about that.
The Chair: Not everyone will have found that audible, but you seemed to indicate yes, Professor Claussen.
Lord Hannay of Chiswick: If that is what you are saying, it has some very serious implications for those who sign treaties with the United States of America.
Lord Howell of Guildford: Following Lord Hannay, I have two quick questions, the first mainly for Professor Claussen. Everything we have heard this afternoon and everything we read in the papers indicates that the President of the United States seems now to have kingly powers—they are labelled “emergency” but you can call anything an emergency—to disrupt present trade patterns. They are certainly doing that. As we shall learn in further questions, this is disrupting them considerably. Can you give us a take on why this has come about? For America, of all places, to give these powers to a new king seems very strange to us Brits. How can this be and will it last, or are we all living in a very temporary, ephemeral situation?
Professor Kathleen Claussen: The way this came to be was through a series of delegations that Congress undertook in the Cold War period. We are looking here at not just the IEEPA law that I mentioned earlier. Professor Lydgate also referred to Section 232, part of another trade law. A very legal answer to this question is to let you know that Congress gave these great wide-reaching authorities, this delegation of the Congress’s power, to the executive branch during the Cold War period, perhaps with a different focus in mind. One could easily say that.
In many respects, it is up to Congress to change those provisions to rein in some of the authorities that it previously gave away. Again, in our constitution, it is Congress that has the power to regulate commerce with foreign nations, so Congress is best positioned to adjust those authorities. In any event, we will hear from the courts eventually. Two courts have already spoken to this but I have no doubt that we will hear from the Supreme Court in due course. Even then, there are many delegations of this type, again owing to the vision of Congress at that time to give a power to the executive branch in circumstances where security demanded it.
The Chair: Professor Claussen, before we go on to the next question, I want to be clear about this. You talked about the delegation by Congress. Is that not one of the issues at stake in the legal cases you mentioned?
Professor Kathleen Claussen: Correct. One issue at stake is, for example, does the wording of IEEPA actually permit him to impose tariffs? Does “regulate . . . importation” include the ability to put tariffs on products? That will come up. My earlier point was simply that, even if the Supreme Court were to address that or another question present in the litigation and say, “Actually, no, the President does not have the power under that law to impose tariffs because the words don’t permit it”, there are many authorities from the 1970s, 1960s and earlier that would allow the President to take great tariff actions. It is the breadth of those authorities, taken together, that Congress needs to address to stop a President who intends to use tariffs as his primary negotiating tool.
Lord Howell of Guildford: But will this go on and on? We have already had the Court of International Trade challenge his right to even make these changes. There is also the district court for Washington, the capital of the United States. Presumably, endless state courts will now join in. Are we looking ahead to an endless procession of court challenges, whether or not Congress—which is dominated by one party that so far supports the President—decides to come in and restore some of the checks and balances we thought the whole thing was based on?
Professor Kathleen Claussen: Your final point is critically important. At this time, we do not see any movement from Congress, unsurprisingly, to take that sort of action. Of course, you are right that two courts—the Court of International Trade and a federal court in Washington, DC—have made pronouncements. Those are both on appeal. That is why I expect that the Supreme Court will eventually, after it goes to the appellate court, also pronounce on that particular issue.
Even if the Supreme Court were to do so, there are other laws the President could use to try to achieve the same. Does it go on and on? There, your crystal ball is perhaps better than mine. The authorities are there to allow the President to do this from many different angles—again, unless Congress were to act.
The Chair: We will now turn to Lord McDonald, though I am now musing on why, if there are other ways of doing it, the President has not used them to date.
Q21 Lord McDonald of Salford: Thank you, Chair. It sounds as though we are waiting for the mid-term elections. I direct my two questions to Professors Lydgate and Bailey. First, what do you see as the main benefits and limitations of the general terms for the EPD?
Professor Emily Lydgate: From a UK perspective, I think we can go back to Keir Starmer’s announcement of the deal, which emphasised jobs. In those particular sectors, at Jaguar Land Rover, there are jobs that will be saved. Also, there is the effort to continue working constructively with the US. There is a bipartisan consensus in the UK that the US is an important security and economic partner. There is definitely damage limitation.
There are several limitations. One is the limited ability of this agreement to combat uncertainty. As we have discussed, this is not a trade agreement in a traditional sense which is ratified, binding and passes into law. It was essentially conducted under duress to respond to threats. In a sense, these are unilateral concessions from the UK to try to maintain the status quo as much as possible. The problem is, as Professor Claussen said, that there are moving goalposts in terms of what the Trump Administration seek. It is the uncertainty that is most damaging to businesses because that takes away their ability to plan.
Another related issue is that the commitments that businesses can bank on in terms of particular tariff limitations are, sectorally, very narrow. It is not a broad or deep agreement. Finally, we still have the 10% reciprocal tariff so are still in a worse place than we were before this all started.
The Chair: Witnesses from whom we heard last week emphasised the point you just made: that it is the uncertainty which is most damaging.
Lord McDonald of Salford: I have a follow-up question which may be for Professor Lydgate or Professor Bailey. Thank you for that assessment, but could the British Government have considered any alternative approaches to ensure that the most exposed sectors were not adversely affected? Was this the only choice offered by the US President and therefore we had no other option?
The Chair: Professor Lydgate, I think Lord McDonald directed that at you, if you are willing to take the question.
Professor Emily Lydgate: Sure. In some sense, it depends on what objective is in the forefront of the Government’s strategy. If the objective is to maintain alignment with the Trump Administration as much as possible, we are arguably their closest trade ally right now so I think that that objective was achieved. I cannot think of another way you would achieve that, particularly with the sectoral benefits. It was probably the best way to achieve the damage mitigation objective. I cannot think of another one; maybe other witnesses can. I guess the question is more about the trade-off between that and other objectives. Again, I think we will probably come on to that.
The Chair: Professor Bailey, do you have anything to add to this?
Professor David Bailey: No, I would agree very much with that. This is probably the only game in town, given the pressure that Trump had applied to international trading partners. As far as I am aware—the others might correct me—this is the only deal that has been done. The importance of that for UK jobs cannot be underestimated. Of course the limitations are, as we just heard, that it is non-binding and incomplete. Who knows what President Trump will do and think next? We do not know where it will stop. While it reduces uncertainty where there is a narrow, sectoral tariff reduction, there is still considerable uncertainty for firms about whether they will be able to access the tariff. The uncertainty issue is critical in terms of investment going forwards and the competitiveness of UK industry.
Lord Anderson of Swansea: These kinds of problems have exposed the limits of the powers of Congress in respect of commerce. Would there be any substantial difference if the Democrats were to win in the mid-term elections for Congress? Would they press harder and, if they were to succeed, what would be the effect on the deals which we and others have?
Professor Kathleen Claussen: Was that question for me? I can speak to it.
The Chair: Please do.
Professor Kathleen Claussen: Of course, we do not know whether the Democrats will take the House. If they did, what would that lead to? There is no question that the UK and any trading partner would be on a stronger footing if they were entering into congressional executive agreements, where Congress approved and then sought to implement the terms of the deal. To be sure, it is worth noting that we have no binding agreement, so we are working from the President’s executive order as a means of implementing some terms that look more like a term sheet for a transaction. If the Democrats were to take control, what would that mean?
Actually, there is bipartisan support. There are members of the Republican Party who feel very strongly that Congress should be involved in this. There is quite a bit of agreement between Democrats and Republicans on the Hill concerning their role as a legislative body in this process. Perhaps Democrats would push more strongly; we have seen Democrats do so. At this point, most Republicans are unwilling to challenge the President, for the reason that the question suggested, even if they agree with Democrats on this point. What could things look like differently? It may lead to some difference, but, again, I think the Republican position is to not challenge the President on these issues. That would make it difficult for Democrats to get enough support to make changes to the law.
Q22 Baroness Verma: Good afternoon. What is your view of the UK Government’s approach to trade with the US in the context of the recently launched UK trade strategy and industrial strategy? I think we should start with Professor Bailey.
Professor David Bailey: Thank you. I will concentrate on the industrial strategy because the other witnesses will be stronger on the trade element. We now have an industrial strategy, which is great. We did not have one and were kind of standing on the sidelines, watching the rest of the world get on with it, so that is very welcome. But while the trade and prosperity deal with the US is welcome, it leaves a lot of uncertainty for sectors going forwards. On steel and aluminium, a deal has yet to be done because of certain issues which we can come back to later. I mentioned how access to the quota for UK automotive firms will be a major issue, particularly for the likes of Mini. I think the Government must start thinking about how this deal will impact on different sectors and firms.
Of course, advanced manufacturing was one of the sectors identified in the trade strategy. There is the issue of whether we can have greater congruence between the two. To give you a couple of examples, at the moment the US approaches imports by looking at where the last substantial transformation takes place. In terms of automotive, that is probably okay at the moment. But if we shift in future to making electrical vehicles and are still reliant on Chinese technology for that, I think the US will have a problem. There is an issue then about trying to build out our supply chain more quickly, in particular our battery supply chain, to get more local content into cars and not fall foul of US policy in this area. Separately, I sit on the UK’s battery taskforce.
The other big issue as we shift towards electric vehicles is that if we are reliant on Chinese technology, the US may be unhappy in terms of surveillance issues and the ability to capture data. There are some big issues for the UK going forward in the industrial strategy if we are to avoid concerns from Trump about the influence of China.
Lord Stevenson of Balmacara: Following up on that last question, as you say, we now have an industrial strategy and did not have one before, but it does not really fit with what we know about the EPD. Have you any thoughts about how that will go? Professor Bailey started to say a little on that but perhaps Professor Lydgate could take it on.
Professor Emily Lydgate: I would defer to Professor Bailey on industrial strategy but I can supplement on the trade strategy side.
Lord Stevenson of Balmacara: Carry on, yes. They are both important.
Professor Emily Lydgate: The issues with the trade strategy are analogous in the sense that the UK lists its most important trading partners, which are also really the great powers in trade: the EU, US and China. Basically, it says it will have a pragmatic approach. We want to do business with all of them, more or less. The manifestation of that, of course, is that the UK has done trade deals with the EU and US within a couple of weeks of each other. I think the implementation of these agreements, which are more or less agreements in principle, will entail some trade-offs in the UK’s relationships with these three partners.
To give you an example from the EPD, there would be trade-offs between accommodating the US asks on conformity assessment bodies, digital trade and SPS, and being able to align with the EU in these areas. Also, the US’s prospective supply chain security requirements really target China. The fallout of that could be potentially quite significant for the UK in its trade and relationship with China.
Another big question is the major emphasis in the trade strategy on “overhauling” the UK’s approach to trade remedies, basically to give it more of a toolkit to retaliate against unfair trade practices, including new legislation. We do not have many details on that but my question is: why, if the UK is adopting this pragmatic and conciliatory approach towards doing business with everyone, is it also preparing the ground for enhanced trade retaliation? I would call for more details about what the UK Government have in mind and why.
Lord Hannay of Chiswick: Has your eye fallen—this is to any of the three of you—on that part of the new British trade strategy which said that we will join the interim dispute settlement arrangements which have been worked out by a vast majority of the members of the World Trade Organization but which we have not yet joined? We are now going to join. Does that mean that there will be a dispute settlement procedure operating between virtually all the countries in the world except the United States, which would be outside it, and of course blocking the working of the World Trade Organization’s own dispute settlement procedure?
The Chair: Does anybody want to venture an answer to that question?
Lord Hannay of Chiswick: Do not rush.
Professor Emily Lydgate: I think Kathleen would be equally if not more qualified but I am happy to come in here. I think there are 23 or 24 members—I will have to double-check the figure—but it is not virtually all. It includes the EU and China, so in terms of the value of global trade covered it is the majority. Many of these trade partners have called on the UK to join the so-called MPIA for a long time and wonder why it has not. There was some suggestion that it might not have because it thought that would alienate the US. That has not happened. It will allow the UK to participate in the dispute settlement system more functionally; it will not be able to appeal decisions into the void, which is what has been happening because there was no appeal mechanism. There is now an appeal mechanism, which will enable it to work more closely on disputes with those trade partners. I do not think it will supplant or invalidate the WTO dispute reform process, aside from the fact that not all members participate in that.
Q23 Baroness Lawlor: Particularly to Professor Claussen, how do you see the potential implications of the preferential terms granted to the US for the UK’s wider trading relationships? You are an international economic trade lawyer and very familiar with the international set-up. How would you advise the UK Government were you to give informal advice on the implications of these preferential sectoral trade deals with the US on wider trade relations?
Professor Kathleen Claussen: I will begin but, again, my colleagues may have further thoughts on that important question. As already highlighted, several subject areas did not make it into the general terms. Again, we made the point that the general terms are a non-binding term sheet of sorts. We do not have a trade deal; we keep referring to this in the abstract as a deal but we have no binding deal and no way to enforce those terms.
First, we should look at the subject areas that did not make it into the general terms or, then, into the implementation—as it has been called—of the terms. Those could prove to be vulnerabilities for the United Kingdom if the US President were to set his sights on them. We talked earlier about how, as a technical matter, this arrangement would have a stronger footing if it were a congressional-executive agreement, although of course we do not know what terms would pass congressional scrutiny if it were to come to that in the United States.
As Professor Lydgate suggested earlier, there is something to be said for being out of the limelight in this moment and to claim success, as the Prime Minister has, on what may be some low-hanging fruit or wins while the United States is occupied with other trading partners. Looking at the international economic law landscape, as your question suggests, being first out of the gate and out of that limelight may be seen as the most positive position among the trade partners with which the United States engages at the moment. I hope that was responsive, but if others wish to come in I am happy to answer further questions.
Baroness Lawlor: This has come up already and I am sorry I was late; I had the dentist in Cambridge. Do Professor Bailey or Professor Lydgate envisage that other partners could be likely to do this? I take the point that they are very keen to try to get their deals with the US and may have taken their eyes off the potential of taking up the preferential trade terms in this disputatious way. I think it has been mentioned that Brazil might be rather cross about the bioethanol preferential arrangement, and there are others.
Professor Kathleen Claussen: Let me begin but I invite comments from others. Every trading partner is in this difficult position of watching what everyone else is doing and trying to bring the best package or offer forward. We heard a number of times from members of the US Cabinet that trading partners are coming with different offers, not all which—again I emphasise this—relate to trade. Some come with defence packages, some with other goodies to enhance their offers. It is a complex foreign policy conversation that exceeds the bounds of trade but would include the things you mention. They watch what other trading partners do, so, in that sense, perhaps the UK is at a disadvantage for having gone first. It does not have the ability to look at what others are offering and play off that. I still think that, at the end of the day, being out of the focus in this challenging time is perhaps an advantage. That is not to diminish the importance of what you said about others being cross with what was offered here, so they may seek to do something differently.
The Chair: “Do something differently”, meaning what? Offer a different deal or take some measures of an antagonistic nature?
Professor Kathleen Claussen: Either. I think we have heard both of those comments being made before by trading partners. I was concentrating more on the former: there are trading partners coming in saying, “The UK did this, now we have heard Vietnam has done that and China is looking at this”. Of course, we have very little information about each of these. We do not have trade deals being notified in the traditional sense. To the extent that we can see what is happening in the other negotiations, I think other trading partners are trying to key off of that and say, “Okay, what can we offer that is better or worse? Where does that position our industry? How are we going to react to that?” All of that is part of the conversation.
Lord Howell of Guildford: Following the Chair’s remark about doing something differently, Professor Bailey said something earlier that worries me deeply. He mentioned the niceness of having an industrial strategy, but how on earth can we begin to formulate a strategy, which is an international thing dependent on the behaviour of others, when we are dealing here with a sort of ephemeral, fast-changing, very uncertain and constantly legally challenged approach that relies on tariffs, which most economists think is a lot of nonsense anyway? Surely, if we want strategy to take shape, we should look in other directions—as we are, to some extent. We should be looking to Asia, where colossal consumer markets are emerging. Some 70% of world growth is scheduled to be in Asian markets over the next 25 years. Is that not where strategy begins? Perhaps we would get a better arrangement with America if we show that we can survive with what we have got, or a great deal less. The new markets will be elsewhere and the weak ones will be in America.
Professor David Bailey: I think that modern industrial strategy is not a top-down approach of picking winners. It is about partnership with industry and business. It is discovering tacit knowledge together. It is identifying opportunities and challenges. I would argue that a modern industrial strategy is entirely in line with what you suggest. For example, it might well be that some automotive firms, which will no longer be able to access the US in the way they did before because of how the quota works, will have to diversify. They may well have to diversify to more rapidly growing markets around the world.
A couple of weeks ago, I was down at Morgan, a little producer of sports cars. Some 30% of its product goes to the US. Whether it will be able to access the quota and do that in the future is a big issue for it. Longer term, they may well need to diversify. I think it will require support to get into new export markets around the world and thinking about what Morgan’s products will be going forward. I do not see that as incompatible. Respectfully, I suggest you have a rather outdated view of what industrial strategy is in the modern age. It is about working with business, identifying challenges and opportunities, and coming up with ways to deal with them. One other welcome part of the industrial strategy is a recognition that our energy costs in the UK are way too high and that we need to do something to get those down to be able to compete internationally.
The Chair: Thank you. Lord Marland will now pick up a point that has been talked about already to some extent, in asking about the nature of agreements that have been made.
Lord Marland: As you say, Chair, the question I was going to ask has been pretty well covered, unless anyone wants to add more to the durability and binding nature of these commitments. Maybe you might just reinforce that. When we took evidence recently, one thing that came up was the logjam on the US side for getting their agreements through, which must be a critical issue. I was with executives from Boeing this morning who said they are really pleased with the deal from a UK point of view but fearful that it would take so long for the US Government to ratify it. Perhaps you could give us some more airing on that.
Professor Kathleen Claussen: Again, this goes back to the early point that we do not have a binding agreement here. None of the terms as laid out in the general terms is expressly binding on either party. I think Lord Marland’s question is about what happens next. We must ask about the executive order that followed in June. We have not said so fully here, but it is worth mentioning that that order creates tariff rate quotas and adjusts tariffs on certain products from the UK. U.S. Customs further implemented these changes and continues to adjust them. The President’s authority to make those changes in his executive order could still be challenged under US law. So far, we do not have legal actions to make that claim. Again, in the absence of any judicial action, the President’s order is as durable as the President wishes it to be. As the question suggests, many other orders are flying around that I think it is fair to say Customs is having difficulty in implementing them as quickly as they come. That is the primary point, to answer the question. Again, this is all in the absence of congressional intervention. We covered that well, I think.
Lastly, I add that Congress retroactively approved a deal once, in the case of Taiwan a couple of years ago. There is no expectation at this time that there would be a similar move here. If there were, that would then put some of these terms into legislation, which would kick off yet another process. The question, and that concern raised by industry, is well founded.
Q24 Lord Fox: I have a couple of questions, one directed at Professor Claussen and then one for the two UK-based people. Professor Claussen, you mentioned the uncertainty issue. Looking forward, how do you see the role of data beginning to play out in discussions? How important or not was the UK’s position around the digital services tax?
Professor Kathleen Claussen: Let me tackle the second question first; I am happy to address the first in writing, if that would be useful. The digital services tax is one of those things that did not make it in and could prove to be a vulnerability for the United Kingdom if the President were to set his sights on it. We have seen that play out with Canada in recent days. We will need to wait and see if it comes up again. For now, one could say it is safely not there but that does not mean it has gone away completely.
Lord Fox: Thank you. For those in the UK, we talk about the uncertainty all the time. It is all very well having government strategies and all sorts of agreed strategies, but when you talk to business and leaders, how much does that uncertainty underpin any sense of how business goes forward? What does business need that we can realistically get for it to operate with a bit more certainty?
Professor David Bailey: That is a great question. Uncertainty is a killer for investment. Essentially, businesses cannot plan. They do not know what price they will have to charge into the US market or what the scale of the market will be for them. That will impact on investment in the UK unless we can address it. In terms of what companies want, particularly in aluminium and steel they clearly want a deal to get tariffs down. That is hugely important in those sectors. In areas where a deal has been done, they want as much flexibility as possible so that they can meet the quota and sell into the United States. That is hugely important. Essentially, what they do not want is huge unpredictability, particularly from the US side. President Trump’s concerns and ideas may change, and, given the non-binding nature of this agreement, it could all be up in the air again. That is an absolute killer for investment in the UK going forwards.
I have one final point, coming back to Lord Howell’s question. If, for example, in the UK we want to develop certain sectors and technologies in the trade agreement, in certain areas China is the world leader. It would make sense for us to co-operate with China and invite that investment in. That could potentially run up against problems with the US over national security concerns.
Professor Emily Lydgate: First, according to the IMF, there are 57 members of the MPIA—please correct the record as I underestimated significantly—covering 57.6% of international trade.
I think I agree with Professor Bailey on the uncertainty. The effect on businesses is that they internalise uncertainty as the new normal. I have certainly heard that message. Also, on what the Government can do, they could try to negotiate contracts more or less to provide certainty. They have started to do that: for example, they have agreements in principle with India and the EU. Making progress on those and engaging with CPTPP and EU discussions are good ways for the Government to try to open up other markets where there might be more certainty.
Baroness Verma: I want to come back to Professor Bailey on the point that Professor Lydgate just made: we therefore need to look at the rise of other economies to the benefit of the UK, at the risk of upsetting the Americans, because it is not a binding agreement, whereas we have binding agreements elsewhere. Surely our focus needs to be much more certainty for business in the UK, and to work with people giving us binding agreements. I was slightly worried about your terminology when you came back to Lord Howell and said, “We don’t need to focus on others”.
Professor David Bailey: No, I did not mean that at all. I was saying that an industrial strategy is not a top-down thing. It is about working with business to identify opportunities and challenges, and finding ways to deal with them. It might well be that we have to look to others. One interesting implication of what has happened with Trump’s tariffs, for example, is that the EU has put in place tariff barriers on Chinese electric vehicles. European manufacturers, including UK ones, are now so desperate to maintain access to China that the EU is looking at taking that away. So one implication of what Trump has done, I think, is to encourage the EU and China to get closer together in integrating their markets for electric vehicles. We may have to do that as well. Part of the reason for that is that China is a massive market; it is also the world leader in electric vehicles. I fully accept the point that we need to look at other markets and technologies. We might well need to invite Chinese investors into the UK.
Lord Anderson of Swansea: It is difficult to assess the potential effect of the measures on British industry because there is such a difference between industries. For example, potentially, the ethanol industry could be decimated unless there is some form of support. With other industries such as steel, we heard on our radio this morning that one US purchaser told the UK supplier that they were going elsewhere because of the uncertainty. Can you make any more general assumptions about the effect on UK industry, or does it all depend differentially on particular industries?
Professor David Bailey: Overall, the introduction of tariffs will have a negative impact. Even if we manage to carve out our own deal with the United States, the second-round effects impacting on global trade will be such that they also reduce UK exports to other countries. Overall, this will be negative. We may be slightly less worse off than some other countries in terms of our manufacturing base. That is seen as a kind of success. The impacts will differ across different sectors depending on the degree of access to the US that can be negotiated. In the automotive case, that is seen as a win, but the tariff still goes from 2.5% to 10% at a time when the industry is struggling. In steel and aluminium, there is scope, potentially, to do a deal but we are not there yet because of what the US is looking for and concerns over Chinese ownership. In other sectors, such as ethanol, as you rightly said, the impacts may be much more pronounced. They will be differential. That is an important point for the Department for Business in understanding these impacts on UK manufacturing and what might be needed going forwards.
The Chair: Looking at the clock, I see that we are coming up to our conclusion time. Lord Hannay, I think we have covered question 5.
Lord Hannay of Chiswick: No. Neither part of that question.
The Chair: Apparently not, so please ask it.
Q25 Lord Hannay of Chiswick: Could the three of you comment on the extent to which both the UK and US Governments’ approach to the negotiations we are talking about are compatible with the World Trade Organization’s most favoured nation rules? If you think they are compatible, perhaps you could describe how. If they are not, could you address whether there is any way that the general terms can basically be described as covering “substantially” all the trade between the UK and US, as required under, I think, Article 24 of the GATT of the WTO. I cannot remember what it is. Answers to those two questions would be very helpful.
Professor Emily Lydgate: I am happy to start off and hear any supplementary questions. The noble Lord already knows the rules, which is great. From a UK perspective, when a country agrees to reduce its tariffs for one country, it agrees to do so for all other countries in the WTO. There is an exception if those tariff reductions are part of an FTA that covers, substantially all trade. In other words, the WTO wants broad rather than sectoral tariff liberalisation. That allows FTAs to act as a building block of global free trade. The UK-US EPD contains sectoral tariff concessions to the US and not other countries. That appears to go against the most favoured nation principle.
Of course, if we bring in the US, that is against the backdrop of a deafening roar of WTO violations, as Professor Claussen set out before. For example, the IEEPA reciprocal tariffs announced yesterday go against that most favoured nation rule in a much more profound and impactful way. That leads to the question that Professor Claussen also addressed: does it matter what the UK is or is not doing? Regardless of whether a dispute is brought, I would say that the concerns for the UK would be largely diplomatic. The UK has consistently stood up for the WTO and its rules. We rely on open multilateral trade. There is concern about the signalling but also the precedent. If all countries respond to the US in a similar way, it will make it much harder to say that this is just the US being a bad actor. That will potentially make it harder to restore the rule of law at the WTO in future and mean that the UK is suspected by some of its other major trade partners of prioritising Washington DC at the expense of other principles or priorities. A potential cost of the EPD is, to some extent, weakening the trust that the UK has with other trade partners. Really, aside from disgruntled statements from Brussels and Beijing, it is hard to quantify at this stage what that means.
Lord Hannay of Chiswick: Do all three of you agree on that?
Professor Kathleen Claussen: The only thing I would add is that the United States has in the past, as have some other trading partners, relied on exceptions that are present in the agreements to justify, so to speak, actions that may depart from the rules. We do not yet know what the Trump Administration 2.0’s approach will be to the WTO. I do not expect a huge shift. We do not even have an ambassador yet in Geneva. The nominee has previous experience at the Office of the US Trade Representative and knows the ropes. We will have to wait and see. If the Administration were consistent with past practice, we might see a reliance on those exceptions. In some small respects, we already have.
Professor David Bailey: I agree very much with what we just heard. I have nothing to add to that.
Lord Hannay of Chiswick: So it is a protection racket.
The Chair: Do not feel obliged to answer that. I want to go to Lord German, please.
Q26 Lord German: Thank you, Chair. We are heading into a discussion about the consequences for the United Kingdom in aligning on these economic security issues, both in terms of what Professor Lydgate called our diplomatic end and what is more clearly important: the economic consequences. Is there anything that anybody would like to add about the consequences for the UK in aligning more closely with the US on these economic security issues?
Professor David Bailey: The others can correct me if I am wrong on this but a lot of the economic security issues seem to be about China, though they do not spell it out. That raises some fundamental questions about our relationship with China. I would argue that we need Chinese investment in areas such as making batteries and electric vehicles. I would like to see Chinese car companies coming here and producing. I do not think the US will like that very much in terms of what Trump is doing, so there are some big issues going forwards.
Particularly on the steel side, one thing holding up the agreement is about Chinese ownership of Scunthorpe, even though the UK Government have taken control there. That will be an issue going forwards as well. Coming back to the point about none of this being binding, while we do not know what President Trump is ever going to do, would he expect us at some point to put in place tariffs on Chinese electric vehicles as the US and European Union have done? We do not know. That creates uncertainty for us at a time when China is really the world leader in certain technologies and we might want to work with them.
Q27 The Chair: There is one more question I want to ask though we have really come to the end of our time. Colleagues, can we please look at the digital services tax? How do you envisage negotiations on digital trade evolving and is it likely that any concessions will need to be made on both sides to agree a set of digital trade provisions?
Professor Kathleen Claussen: As I said earlier, I think that is a vulnerability for the UK. This connects in some respects to the prior question on economic security. I will answer briefly in making this link, so as not to diminish the time for others. In adding these other issues, like digital and economic security matters, one needs to ask whether we are subjecting topics to trade-offs in spaces that are not productive, and trading away issues that would not normally be part of a foreign commercial negotiation. As you make these topics part of the negotiation, you may be now in new territory. You are saying, “What should be in the trade bundle? Is it worth siloing or bundling these things together?” There is also a question of whether the parties have the same timeline for these goals or equal capacity to achieve them. Those are some of the cautions I would have for the committee in thinking about these arrangements and possible concessions.
Professor David Bailey: I echo that very much. What are we putting into the mix in trying to get a deal with the US, and how do we differentiate ourselves from others? On digital trade more broadly, not just the digital services tax, there are things we can do in trade facilitation. For example, it is disappointing that the Government are not pushing forward the single trade window. That is something we could look at reactivating to boost trade more generally and make it easier, digitising some of the bureaucracy and paperwork around it.
Lord Fox: Could you drop us a note to that effect? It is something that would be worth developing.
The Chair: The final word goes to Professor Lydgate.
Professor Emily Lydgate: I think the UK has played this quite well. It did not drop its digital services tax and there is now agreement, post G7, to work on this global minimum tax. If you asked the UK Government, they would say that their digital services tax was really just a stopgap measure in the absence of an international agreement. They brought the US back to the table and have been exempted from the threat of this Big Beautiful Bill imposing taxes on UK businesses. I do not know how this will play out and it is certainly not resolved, but so far the UK has managed to negotiate quite well.
The Chair: From the UK audience’s point of view, that is a good place at which to finish this interview with the three of you. I thank you all very much for giving your time and such helpful answers to the committee. As I said, you will get to see the transcript and the report in due course. Thank you all very much.