The UK’s trade deal

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Pushkin

There's no shame in admitting these days that in relation to trade tariffs or frankly anything else in finance and economics, you have no idea what on earth is going on.

The tariffs on imports to the US are on, then they're full fat, then they're off, then there's deals kicking around.

It's a mess.

Now, when I want to sound clever and authoritative on this stuff, there's only one thing for it.

I get up from my desk, walk along the corridor and pick the brains of Alan Beatty, the FT's very own massive trade nerd.

I've been nerding out on this stuff since way before it was cool.

Today on the show, guess what?

We have Alan Beattie.

Alan as a service.

Listeners, he's going to tell us all what we need to know so that you too can at the very least pretend you understand what's going on.

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

I'm Katie Martin, a markets economist here at FT Towers in London, where it's suddenly unbelievably cold again.

What the hell?

Alan is here with me in the studio.

Alan, welcome, welcome back.

You've done this before.

You still came back.

I have.

I'd never been on it before, and now I've been on it two times in three months.

I'm now being stopped in the street, asked for autographs, all sorts of stuff.

This is everything I always dreamed of.

Now, I know what you're going to say.

You're going to say, nobody knows anything, aren't you?

That is my trademark saying.

And let me just tell you why nobody knows anything.

When I say nobody knows anything, it's just not people watching don't know anything.

The people in charge don't know what they're doing either.

Or at least they have a whole bunch of different motives.

They have pretty much one instrument to do it with, which is tariffs.

And the result is chaos.

So there is no massive fundamental plan anyone who says fundamentally what he's doing is this at heart what he's doing is this

it cannot be right because he doesn't really know either so we've got like this kind of kaleidoscope hall of mirrors that just are reflecting nonsense back onto each other pretty much constantly but we're going to try and make some sense of it so i'm going to propose we don't start at the beginning here because Mr.

Donald J.

Trump has been banging on about trade tariffs since the 1980s when even you and I were still quite small.

So let's start at the end, which is at the weekend in Geneva, the US and China held some trade talks that resulted in a massive drop in the level of tariffs on trade with China, to the extent that you can.

Tell us what is going on here.

What did the US extract as a concession from China to take the tariffs down from, what is it, 145-ish%

to 30-ish%?

It basically said, we all cut our tariffs, you cut yours.

So, you know, China had retaliated.

The US, I think, was a bit more scared by retaliation or the market reaction than it thought.

And so they said, fine, you know, we will cut ours and you cut yours.

So essentially, it returned it to the status quo before.

So instead of being insanely, ludicrously high, they were merely insanely high.

Right.

That's an important thing to remember, right?

So the markets are celebrating this like pull back to 30-ish percent tariffs on China as if this is like, you know, party time.

And, you know, like the boring, miserable people like me and you and also lots of fund managers are saying, okay, but 30%

on China and a 10% baseline on the rest of the world and loads of other things here and there for steel and God knows what else still leaves the US with the highest taxes on imports since the mid 40s, am I right?

Depending on who you measure it, yes, I mean certainly for a long, long time.

Far be it for for me to try and guess what the markets are thinking.

If I could do that, I would have arrived here in a jet.

But as far as I can tell, they're just sort of thinking the complete madness has gone.

We're not going to have

an administration that's actually trying to decouple the US from China.

Right.

Because, you know, if you have...

And part of these ideas are sort of embedded in different people.

So you have Peter Navarro, who's in the White House, the out-and-out trade warrior.

He really thinks that the US should not run deficits, full stop.

He really thinks, if necessary, the US should just not be trading with China, full stop.

So I presume what's happened, and I agree with you, it's kind of remarkable how optimistic people are given where we are, is that they think, okay, we're now just in a different regime.

We're now in a regime of trying to manage trade, of trying to protect particular sectors in the economy.

We're not in a completely mad system of trying to break the world economy apart.

Right.

What do you think motivated again,

as you say, that the the Trump administration seems to have a million different motivations at once.

Not all of them make sense on the same piece of paper.

But what do you think motivated him to take this massive step back against China?

I suspect it was just there was a big hole where the imports should come.

There were going to be empty shelves.

The ships just weren't coming across the Pacific.

The markets don't like this anyway.

And of course, earlier on, the fact that he stepped back from the huge tariffs that he announced on April the 2nd and stepped back a week later was to do with the markets.

So although people say Trump 2 is different from Trump 1, he's not obsessively looking at the markets.

He's he's prepared to absorb some pain.

I think something in his judgment was

actually cutting Americans off from their stuff, even though he was talking about, you know, all the children have to go down to two dolls and so forth.

Yeah, five pencils each, kids.

Five pencils and two dollars.

I think at some level he just thought that's actually not sustainable.

I need to move back.

Yeah.

So he is very clearly in deal-making mode, right?

Because this isn't the only deal that he struck.

He also struck a deal with the UK I use the term deal fairly loosely when I was literally the day that this came out this is true I was sitting in a law firm in London with this guy and I said what's the legal status of this deal and he was sort of sitting at a conference table and there was this screwed up napkin on the table he just pointed at the napkin and said this this is the legal status of the deal so the deal with the uk literally says on the first page of the legal docs this is not a legally binding deal deal.

So, yeah, you know, as so often with Donald Trump, a lot of what he's doing with tariffs is not legal anyway.

It's supposed to be done through Congress.

He's just asserting things, he's using all sorts of emergency powers and so on.

And so, this has no legal binding status whatsoever, but then a lot of what he does doesn't have much of a legal status either.

So, the deal with the UK,

again, deal in little bunny ear speech marks, seems to have been pulled together extremely quickly.

I'm not sure who it was that was reporting that Keir Starmer, UK Prime Minister, didn't know that a deal was coming until the night before when he was at a football match or something.

Like,

they really cobbled this thing together at high speed, and I'm not clear why.

Are you clear why?

No, I think as I understand it, again, this is from other people's reporting.

Trump himself just said, I feel like doing a deal today.

And so then it got done.

And obviously, if Trump isn't in a deal-making mode, you move extremely quickly before he changes his mind.

So I think

that explains the speed at which it got done and the fact that it concentrated really only on a small number of things.

So

the deal means so the 10% baseline applies to all countries at all times.

There is no moving below that point, right?

That's what they say at the moment.

Yes, I mean, you know, but other countries think they're not happy with that.

But that's what they have fundamentally said that we're not going to negotiate over that.

But what the UK got is lower rates on cars and steel.

Yeah, so these were separate tariffs.

They're called Section 232 after the pass of the US tax code, US law.

And they were special sectoral things designed, obviously, to protect the US steel and car section.

They've been in there a long time.

Now, the UK is not a massive steel exporter, but it is a steel exporter, and steel is politically very important.

It's not a huge car exporter, and only, I think, about a fifth of its cars go to the US.

However, Jaguar Land Rover is one of them.

That's big and symbolic.

Very British.

Very British.

I was actually up in Coventry, where traditionally these things are are made recently.

And you forget the extent to which this is a car city and these are just

even though it's not owned by a British company anymore.

So that was really what they were kind of very narrowly focused on for PR as much as overall economic impact.

And that's what they got.

As I was saying at the top of this discussion, you're a big trade nerd.

So where does this fit into broader trade negotiations?

It looks like Trump is bobbing around looking for deals.

Yeah, I mean, this was basically an escape.

This was basically an escape.

Get out, you know, presumably try and exploit the fact that Trump is relatively well disposed to the UK.

The UK doesn't have a big surplus with the US.

He's been invited to meet with King Charles, and he likes that.

So quickly, get in first, get your deal, and get out.

For the UK, though.

There is a school of thought that the UK should not be holding any sorts of discussions with this administration.

Firstly, because agreements are not really necessarily worth the paper they're written on, but also

shouldn't we have linked arms with our friends and neighbours in the EU rather than taking whatever agreement it is from the US?

Are we being bad global citizens by signing this thing?

I'm afraid so.

The thing that

is worrying, that worried a lot of people, is the UK, in return for this, gave actually not so massive concessions on access to the UK market for beef and ethanol.

It caused everyone in Britain to look at each other and go, what do we do with ethanol?

What's ethanol?

What's it for?

So I don't think that was, you know, ethanol is quite a big deal in the US because it's a, you know, it's a big industry and so on.

But I don't think that had very much resonance in the UK at all.

The point here is that it gave these things unilaterally and it gave access to the US that it hadn't given to everyone else in the World Trade Organization.

That

violates the principle that's known as most favoured nation, where you have to treat everybody equally.

And

supposedly, the only exception to that is if you sign a full preferential trade deal, which covers substantially all the trade, quote unquote.

And this was clearly not that.

In fact, it wasn't any kind of binding trade deal at all.

So there was a sense that the UK has sort of let the side down.

If the US is able to bully countries into giving them non-most favoured nation access,

then the whole system falls apart.

I mean, what the defenders of the deal will tell you is like, come on, it wasn't very big.

It's not that important.

One or two countries have sort of done something quite similar in the past.

You know, the UK is a relatively small trader.

This by and of itself is not going to pull the global trading system apart.

Yeah, yeah.

The other thing is that the messaging is a bit difficult, a bit different from one side to the other, right?

So the US is talking about how the UK has agreed to open up its food markets to US produce, and the UK is saying,

we're still not going to eat your chlorinated chicken, guys.

So there's a bit of

the two sides don't quite match up, right?

Yes, indeed, but it depends who's going to get hold of this from the US point of view.

So the aforementioned Peter Navarro, who apparently had nothing to do with this deal, came out the next day and started talking about chemical washed chicken.

By the way, I'm conditioned to call it chemical washed chicken.

If you call it chlorine-washed, you get people on the phone from the US Trade Representative's office painfully explaining to me that they actually use something called parasetic acid, which is basically vinegar, etc., etc.

They are very sensitive.

I love parasitic acid.

Sounds great.

I look forward very much to getting their phone calls and emails to them.

So the issue here is: who do you let run US trade policy?

If it's, you know, the American Farm Bureau, who are very aggressive, export-oriented farmers, then yes, they'll make a big deal about it.

If they're prepared to let that go and focus on other things, then you don't.

And the thing about the UK deal is it's just open because there's no legal basis to it anyway.

It's open.

I mean, the other

thing in it, which is entirely open, is they vaguely agreed that they're going to to gang up on China.

But it doesn't really say how they're going to gang up on China.

And China's not happy about that, right?

China is very much not happy about that, and has very publicly said, we do not like this part of the deal.

Now, again, whether the US actually tries to bounce the UK into doing that, what the point is at which the UK says we can't go that far, who knows?

But this is all left open because it's such an open deal.

You are not making me less confused, Alan Beattie.

But tell me.

So we've got this China agreement.

We've got the UK agreement.

What does that tell us about what the talks are likely to look like between the US and the EU?

Because the EU are like super ninjas at trade talks.

They massively know what they're doing with trade.

So the US is coming up against a kind of army of mega nerds who have put even you into the shade.

What's this going to look like?

What on earth can the EU offer as a concession to the US to come up with some sort of agreement?

So this is probably going to be one of the longer lasting ones, not least because the EU is digging its heels in and saying, on principle, we don't agree with this, we don't agree with that.

They're saying we're not going to accept there being the 10% baseline tariff that we discussed before.

And the EU way of things, they use transparency as a weapon, so they've got this massive list of US things they're going to retaliate against, and they're sure they're going to retaliate before.

You know, there are a ton of things they could do.

I mean, they could drop their food rules as well, right, and accept parasitic acid-washed chicken, but they're emphatically not going to because there would be a massive crisis.

I literally can't see parasitic-washed chicken flying.

No, it's just, I can't imagine marketing it.

It would be quite hard to find it.

What's the French for parisetic?

Now, what they could do, what they've done in the past, and this is also what China have done to the US, is make a bunch of basically bogus promises: we're going to buy US exports.

And they say, we'll buy this and we'll buy that and they're hoping that will buy him off.

But part of the EU thing is when they start to retaliate they need to get all the member states on side and it's you know it's a slow iterative process.

So you won't quite know how much stomach they have for the fight and for escalating until it starts.

I just think it's going to be interesting to see the incredibly methodical, serious, trade talk pro-Europeans in a room with whoever it is that the US puts forward.

Maybe it's Peter Nobarro, maybe it's Scott Besson, the Treasury Secretary, who knows?

Indeed, and if there's any weakness that EU has, I think it's that they are assuming they're dealing with a more rational interlocutor.

I mean, one thing I know that people have said is they've assembled this list of retaliation and it's done the traditional way people do retaliation, which is you choose products which are going to hurt politically.

And in the US, that means you go after particular products from particular states.

They always used to go after Bourbon because that was Kentucky, because that was Mitch McConnell who was selling

it for a long time.

And I think this time they said they're going to go after soybeans because that's Mike Johnson who's from Louisiana and soybeans from Louisiana.

The problem with this I think is I'm not sure Trump really cares what anyone in Congress thinks.

He's making trade policy from the hip using these emergency powers and completely ignoring anyone, anything that anyone wants to do.

On his nice new plane, from his nice new plane.

So is he really going to sit there going, oh no, the soybean farmers of Louisiana are slightly angry.

I had better stop my trade war.

It's just, that seems to me slightly improbable.

So I'm not convinced the EU is

on the right track if it's trying to use the old playbook on that.

One last thing is

at the moment, unless I'm very much mistaken, the Liberation Day tariffs on those famous flip chart type things on the Rose Garden, they are just paused, right?

They're not cancelled, they're paused.

What happens at the end of that pause period?

Does anybody know?

So, you know, they're paused for 90 days.

The idea was that all of these deals will be done by then, right?

So there's a 90-day period to get all of these deals done.

If they get to the end of 90 days and some of them are not done, then obviously the US has a choice about whether it's going to snap back and put the so-called reciprocal, and I won't call them so-called reciprocal,

tariffs back.

From what we were saying before about the markets, it would assume that the markets aren't expecting the US to do that or they would be a lot more upset than they are.

So, you know, it remains to be seen what gets down between now and then.

If I had to guess, I would say there will be a whole string of deals of different kinds.

Some of them will be meetings of equals or close equals like the EU and US.

Some will be you know a much smaller weaker partner trying to escape like the UK.

And one thing that appears not to be the case, unfortunately, is you don't appear to see a bunch of countries banding together and saying we're going to negotiate collectively.

That's not happening.

Well, so listeners, I don't necessarily think we've got you to the point where you fully understand what's going on, but I think we have got you to the point where you understand why no one else knows what's going on either.

So that is the sort of service you get from the Unhedged podcast.

You are welcome.

We will be back in a sec with Long Short.

The history and evolution of the Australian superannuation funds.

It's interesting in so many ways.

They actually mandate savings into retirement plans, and they've become some of the biggest global investors in private markets now.

And their their members have seen tremendous growth of their portfolios.

Hear the full conversation on PJM's podcast, speaking of alternatives.

Alrighty, now it's time for long short, that part of the show where we go long, a thing we love, or short, a thing we hate.

Alan, you remembered to bring a long short.

What you got?

I did.

I'm going to go long supply chains.

Because

there's a lot of talk about, oh, during COVID, supply chains all screwed up.

Everything was a mess.

It it didn't really work, which I kind of think is unfair.

What actually happened was there was a big drop-off in trade and then a massive surge back in trade and durables.

And the West Coast ports in the US were completely overwhelmed.

They were handling record amounts of cargo, but they were totally overwhelmed.

And that's where you got that congestion from.

You know, when that died down, then the world trading system reasserted itself.

Supply chains reorganized themselves, but they didn't collapse.

We didn't have the end of globalization.

And so, you know, we've now got this huge shortage of stuff coming across the Pacific because of the tariffs.

So, the ports are empty, but I'm pretty sure once it starts, if and when it starts coming again, you know, the supply chains will be okay at handling it and things will be fine.

Well, not fine, but it won't be the end of globalization.

Alan Beatty, never,

never challenge the supremacy of globalization in front of Alan Beatty because he will take you down.

I am long rain dances.

Alan, I'm sure you have noticed, along with farmers, growers, gardeners and cyclists, it is just not raining in the UK.

It just totally hasn't for it's just not raining.

No, I cut the grass the other day and then it just was brown within two days.

It looked like a sort of the African savanna.

It was, you know.

My garden is crying out for a good soaking.

Apparently, the story in the FT today, driest start to any year in decades.

Running 29% below long-term averages in England and Wales.

What the hell?

Is this some sort of like Russian space mirrors pointing the rain clouds away from us or something?

No, no, but use it quickly because you're ban on using hose pipes.

It's clearly going to come in, isn't it?

Yes.

Well, I've got my water bots

and I cannot lie.

I believe you.

I believe you.

American listeners, I have an editor shouting into my ear right now saying, what the hell is a water bot?

Apparently, you don't call them that.

But it's like when you have like the gutters on your house drain the rainwater off of your roof and into a big container we call them butts i've just occurred to me why americans wouldn't call them water butts yes me too

all right listeners we are going to be back in your ears on tuesday in the meantime make sure you stock up on your non-chlorinated chicken and lovely ethanol infused beverages because we will be back then

unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from Topa 40.

Just go to ft.com/slash unhedged offer.

I'm Katie Martin.

Thanks for listening.