When the US’s 25% import duties on steel kicked in last week, the UK received no reprieve. That’s despite Keir Starmer seeming to have touched Donald Trump’s heart at their February meeting, sparking hopes the UK will be spared from the worst of the White House’s tariff rampage. After all, ever since Winston Churchill first uttered the phrase the two countries have professed a ‘special relationship.’
I’ve seen this special relationship first-hand. I was once a British trade official based in New York. That was during the Brexit years and part of my job was chatting with folks on Wall Street. I once asked an American financier how the UK could improve their relationship with the US. His response? “You can’t.”
He wasn’t being rude. He meant that transatlantic trade and investment markets already worked well. And he was right. Capital markets in particular are as close to the neoclassical dream as you can get. But recently I’ve been thinking about his remark, because in the second age of Trump, there are warning signs the British ought not ignore.
Cross Purposes
During Trump’s conversations with Starmer, goods trade — not financial markets — has been on their minds. The president’s suggestion the UK could avoid tariffs if they can strike a trade deal might raise British hopes. Downing Street appears to be following this path, announcing it will be “pragmatic” in the face of steel tariffs by “negotiating a wider economic agreement with the US to eliminate” tariffs. But we must consider the following.
The first Trump White House expressed interest in a US-UK free trade agreement (FTA). This would have helped the Brits — not just for economic reasons, but also the ‘walk away’ leverage it would have given us as we negotiated Brexit with the EU. The Brits, having rushed to trigger Article 50, did not have an exit plan.
However, the British populace was wary of a transatlantic FTA. They feared US products, particularly foodstuffs. (I don’t know why — I’ve been eating chlorine-washed American chicken for 10 years now and I feel amazing.) And in the end, Trump decided he didn’t want an FTA after all.
During any new FTA talks, the UK will have the help of the world’s best diplomats serving in the US. I know devoted and smart teams in the British Consulate and Embassy. But despite his overtures to the UK, and tariff U-turns, Trump is breaking things fast. I saw for myself treasury secretary Scott Bessent speak at the Economic Club of New York recently. He was dead clear: the US will proceed with its tariffs plan, whatever the cost to allies may be. And even if he wants to dangle an FTA for the British to avert tariffs, it would need to be approved by Congress which is no sure thing.
The Real Threat
Nonetheless, the British must realise that tariffs are a distraction. The Trump administration’s real threat to the UK is the damage he might inflict on the global financial system. London should watch carefully for whether the US goes as far as introducing capital controls, explicitly or otherwise. There are already signs. The White House’s investment agenda promises to further tighten the screws on US investment in China. Will there come a day when it makes investing in China illegal? If so — and combined with a tariff tirade — we can kiss the international dollar standard goodbye.
A less important greenback would mean less demand for US debt. If that led to a liquidity event in the Treasury market and a US default, there would be financial market chaos and fragmentation of today’s US-led international financial system fragments.
This would disrupt the lifeblood of the US-UK special relationship — our mutual exposure to each other’s financial systems — with the fallout compounded by the UK economy’s reliance on financial services. Consider this irony. The City’s financiers know how to hedge a bet. But the UK itself does not. Instead, it has made a multi-decade, almost unhedged wager on US-led capital markets and financial services. If international capital mobility fails, the UK fails too.
Here’s the bottom line. If Trump sticks to his plans which disrupt every global market there is, there is only one smart play for the British. It’s not a US-UK FTA. It’s not flying solo in a fragmented world. It’s rejoining the EU on any terms the UK can get. That probably means the euro too.
It’s not clear if the British can improve their relationship with the US, particularly under the current White House. The obvious British move is clear: rejoin the EU, and quickly.
Ed Price –is an fDi columnist and non-resident senior visiting fellow at New York University’s Center for Global Affairs
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