In war zones, groups of armed youths will often set up barricades on highways, and demand payment from anyone seeking to pass. It’s bad for the economy: but good for their pockets.

That’s Donald Trump’s approach to trade. After pretty much shutting down access to the US market with last month’s Liberation Day tariffs, he asked countries what they’ll pay, in the form of tariffs or sweetened access to their markets, in order to pass. The first country to negotiate access was Britain, whose trade deal with the United States was announced on Thursday.

What resulted was both better and worse than the previous situation: better than a week ago, in that the two countries have stepped back from the brink of a trade war which would have left both of them worse off, but worse than a year ago. Then, as per the calculations of Paul Dales at Capital Economics, the effective US tariff rate stood at 1%; today, it’s up to 11% now — better than the post-Liberation Day rate of 13%, but still not great.

Britain won’t pay this, of course; American consumers will. It would be as if the gangs at the barricade demanded local residents pay them to let the goods they want to buy enter their turf, but it may reflect the Trump administration’s willingness to raise consumption taxes in order to cut income taxes, which is itself an interesting change.

But the overall effect of the deal on both economies will be pretty modest, given that they each have more significant alternatives in other trading partners. It will limit short-term damage, but at the risk of inhibiting long-term potential. US markets seem to reflect this emerging consensus, the stock market having climbed out of the abyss it fell into after Liberation Day but still down modestly for the year. In the meantime, bond yields continue to feel upward pressure, and the dollar is weaker. In short, investors are pricing in slower growth and higher inflation for the US. Not quite the economic collapse feared after Liberation Day, more a long funk.

So it’s hard to get excited about this deal, though in fairness to British Prime Minister Keir Starmer, it’s probably the best he could obtain in the circumstances. He stood his ground on British food standards and the digital tax, possibly leaving the door open to a bigger deal with the more-important (to Britain) European Union later on. So when asked if British-American trade relations were now better or worse than when Trump took office, Starmer could be forgiven for replying it was the wrong question to ask. “You should be asking ‘is it better than it was yesterday?’” Besides, coming in the same week he announced a deal with India, it signals his government is taking a pragmatic approach to trade, in favour of more openness.

As for the US position, the good news is that Donald Trump is showing a willingness to heed the markets and make compromises. But whether other countries choose to follow Britain’s lead is an open question. They may not show the same willingness to compromise as Britain has, and some of the elements of the US-UK deal may violate WTO rules, which could become a bone of contention in their own talks.

Before long, we may be back to talk of a trade war taking precedence over deal-making. So this agreement may be a template for an emerging new world trading order, or it may be a false dawn that gives way to a resumption of trade-war hostilities.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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