The significance of the UK-US agreement: A 10% tariff is Trump's bottom line, and adjustments to auto tariffs may become a template

The UK and the US have reached a trade agreement, but the 10% baseline tariff remains in place. This agreement may serve as a benchmark for US trade negotiations with other countries, and adjustments to automotive tariffs could become a template for tariff negotiations with other nations.

According to a report by Xinhua News Agency, on the 8th local time, the UK and the US have reached a consensus on the terms of the tariff trade agreement. However, the US's previously imposed 10% so-called "reciprocal tariff" has not been canceled.

Reports indicate that despite the announcement of the trade agreement, UK exports to the US will still face a minimum 10% tariff, significantly higher than the less than 2% level in 2023.

Evercore ISI analyst Sarah Bianchi stated, "The 10% baseline tariff will continue to exist. If the UK cannot reduce it to zero, then it is almost impossible for other countries to do so."

Additionally, reports suggest that the UK-US trade agreement will reduce the additional 25% tariff on UK car imports to the US to a maximum of 10%, with a cap of 100,000 cars per year. This could serve as a template for tariff negotiations with the EU, Japan, South Korea, and other countries.

Jeff Stein, chief economic reporter for The Washington Post, stated on social media platform X that the biggest news from the US-UK agreement may be the US showing some flexibility on tariffs in specific industries. It is hard to imagine how Japan and South Korea could accept an agreement that still insists on a full 25% tariff, but the UK agreement suggests they might be able to accept exemptions.

Allies Also Cannot Escape the 10% Baseline Tariff

As the oldest and most steadfast ally of the US, the UK has also not "escaped" the 10% baseline tariff. Analysts believe that the UK should have been an ideal candidate for preferential trade conditions: not only does it have a trade deficit with the US, but it also purchases a large amount of US-made products and invests heavily in defense, and the UK Prime Minister has a good personal relationship with Trump.

It is noteworthy that a year ago, such a tariff decision would have been seen as a signal of "serious problems" in the bilateral relationship, but now both sides describe it as a "good outcome." This phenomenon highlights a significant shift in the global trade landscape.

Analysts believe that trade agreements with the US will no longer be judged by how much barriers are reduced, but rather by how much barriers are increased. If the situation for other countries is worse, this could ultimately be seen as a victory for the UK. However, higher tariffs increase costs and reduce efficiency, making things worse for everyone. In this sense, there are no economic winners.

Additionally, the stock market's rise following the UK-US trade agreement is not because investors believe this agreement is beneficial for US economic growth, but because they think it increases the likelihood of further agreements being reachedRegarding the 10% baseline tariff imposed by the United States on its ally, the United Kingdom, Charles Gasparino, a senior reporter for Fox Business Channel and columnist for the New York Post, pointed out:

Now you know why Powell is not lowering interest rates. If the 10% tariff is included in the agreement with the UK, we are uncertain how to avoid some economic impacts, such as inflation, at least in the short term, because the UK is our friend, and we sell more goods to the UK than we do to other countries. That is to say, imposing a 10% tariff on the UK is much higher than the tariffs imposed on countries with which we have a trade deficit. This is the calculation about tariff investments you are hearing on Wall Street right now.

Auto Tariff Adjustments Become a Highlight

According to Global Times, based on documents released by the White House, the first 100,000 cars exported from the UK to the US each year will be taxed at an additional tariff rate of 10%, while any excess will be taxed at an additional tariff rate of 25%. According to the UK government, the tariffs on steel and aluminum imports from the UK to the US have also been reduced to 0%, down from a previous rate of 25%.

CFR senior researcher Brad Setser believes this is crucial for future negotiations, as the 10% tariff on cars and zero tariff on steel are targets for all other car and steel-producing countries (EU/Japan/South Korea).

This quota roughly matches the volume of car exports from the UK to the US. According to the Society of Motor Manufacturers and Traders (SMMT), the UK is expected to export about 102,000 cars to the US in 2024.

This is a positive development for UK car manufacturers, especially Jaguar Land Rover (JLR). JLR produces most of its vehicles in the UK and exports them to the US. Facing high tariffs, JLR initially announced a suspension of shipments to the US in April but resumed shipments earlier this week.

Reportedly, US Secretary of Commerce Howard Lutnick signaled to other countries at a press conference that day:

"We have reached an auto agreement with the UK. If you do not produce in the US, you will be subject to a 25% auto tariff. Trump agreed that they could export 100,000 cars to the US, paying only a 10% tariff, which protects their auto industry."

Lutnick added, "If your supply chain is secure and protected in terms of national security, you can work with us on cars."

Peter Harrell, a researcher at the Carnegie Endowment, pointed out on social media that this indicates Trump is willing to negotiate tariff quotas on his Section 232 tariffs, just as he did during his first termHowever, this may be more difficult for Germany or South Korea, as they export a much larger number of cars.

This is Trump's new trade policy!

Jeff Stein also stated: "This is a significant step towards managed trade, where we will tell you how much you can import. This is a complete denial of free trade. We have abandoned what trade people call 'rules-based' trade — we set a single number like 2% or something else — and shifted to managed trade, where we prioritize protecting domestic production."

Peter Harrell believes that the UK-US agreement showcases Trump's trade policy. The full text is as follows:

Today's UK-US agreement reveals Trump's trade policy:

1. A 10% tariff (for most) will continue. Trump imposed a 10% tariff on most UK imports last month, and most UK imports will still face a 10% tariff. Trump stated in response to questions that no country's tariff would be lower than 10%, and many countries' tariffs would be higher.

2. Trump is more willing than I expected to grant lower tariffs or zero-tariff quotas on certain Section 232 "products." He approved a quota of 100,000 British cars per year at a 10% tariff, instead of the 25% he set. (Note: It is unclear whether this quota applies to the 10% tariff or the 12.5% tariff (i.e., Trump's set 10% + 2.5% most-favored-nation tariff), or whether the 10% tariff includes the 2.5% tariff.)

This is an important precedent. It indicates that Trump is willing to negotiate tariff quotas on his Section 232 tariffs, just as he did during his first term. That said, I am sure Trump will closely monitor the overall size of the quotas: it is relatively easy for the UK to obtain tariff quotas because it exported only 102,000 cars last year. This may be more difficult for Germany or South Korea, as they export a much larger number of cars.

1. As part of the "New Steel and Aluminum Trade Alliance" (US statement), the UK will receive a 0% steel and aluminum tariff quota (UK statement) in exchange for its cooperation on external barriers to steel and aluminum (US press conference). This is a significant exception to Trump's current steel and aluminum tariffs — although consistent with the quotas from Trump's first term — and suggests that the US may be formulating a larger global arrangement for these metals.

2. Trump has secured better market access for US agriculture, although specific details have not been disclosed. The US government claims this is a $5 billion opportunity. The UK clarified that it will maintain food safety standards, while Trump talked about how "Bobby" (US Secretary of Health and Human Services Kennedy) is cleaning up American food. I bet this will actually lead to the UK opening its market to organic and non-organic "natural" foods from the US, but excluding, for example, US beef treated with growth hormones

3. The UK has stated that there will be no substantial changes to its digital regulation. It is worth noting whether these issues will become more important in future negotiations between the US and countries like the EU.

4. Key details are still subject to negotiation—this is just a "preliminary" agreement. Currently, the specifics of the agreement, such as detailed provisions regarding agriculture, are still being finalized. In addition, both the US and the UK have indicated that they will negotiate further agreements that may involve other issues. I speculate that this will include crucial issues for the UK, such as the upcoming US drug tariffs.

5. Movie tariffs are on the way, but James Bond need not worry. Trump reiterated during a Q&A that he is planning movie tariffs, but then pointed out that the late Sean Connery was his friend, who helped deal with licensing issues in Scotland, so James Bond need not worry about tariffs.