The likely clean sweep of the presidency, the Senate and the House by the Republican party should prompt the UK government to propose re-opening trade negotiations and dust off the work that was done in 2020 before it was interrupted by the election.
On the basis of what was said during the campaign being translated into policy, we can expect a slew of measures around tax, trade and regulation all designed to bring economic activity, investment and both manufacturing and service industry jobs back to the USA.
On corporation tax, the federal rate of 21% looks likely to be maintained or maybe even lowered to 15% and there has been discussion of some form of differentiation based on where economic activity takes place; in other words, lower rates if you produce at home. On regulation, we expect to see a more business friendly approach from all regulators being mandated from the center including reduced climate and labor regulation and a relaxing of opposition to large scale mergers and acquisitions. And on trade, which has shot to the top of the agenda in the UK and EU, there has been clear signaling from the next administration that they will use tariffs to further encourage companies who want to sell to America to base their production there.
At BAB we have been an ardent and instinctive supporter of free trade, but we must acknowledge that the mandate given to the Republicans is unambiguous. The UK, with a broadly neutral trade balance with the USA, no significant wage differential (although the gap is widening) low tariff barriers and no history of systemic government subsidy for export industries, is not really the central target compared to China and other countries in south and east Asia (and the EU), but there is real risk that it gets included in a general policy unless it is specifically exempted by a negotiated agreement.
Our view is that just such an agreement is possible and should be a central objective for the UK government during 2025. The core of the agreement could be based on a conventional trade treaty, removing or lowering tariffs and increasing market access, but should also look to include provisions to ensure open and unfettered trade in services and the digital economy which is where the UK increasingly excels. There are also concepts to be found in The Atlantic Declaration of 2023, largely focused on future facing industries like space, AI, technology, defence and low carbon energy that could be included to cement the transatlantic approach to how these industries will be regulated.
Of course, the political challenges for the UK government in seeking such an agreement are not insignificant. It is hard to imagine, for example, the US accepting an agreement which doesn’t include increased market access for agricultural products for example; just take a look at the Congressional House map to see where Republican representatives are from to understand the importance of farming. There is likely also to be pressure from the US for the UK to take a more hawkish approach to Chinese imports, to re-think the Carbon Border Adjustment Mechanism (CBAM) and to accelerate the promised increase in defense spending as an example to other Nato members.
How all of this will sit with the UK government is hard to unpick. On the one hand, the language has been about a partnership with business, encouraging inward investment and striving to achieve the fastest growth rates in the G7 which is all very positive. And yet, the recent budget, which increased taxes on jobs, will make operating in the UK more expensive and runs the risk of disincentivizing investment. Our own view at BAB is that the UK will continue to be an important place to do business for US investors, but there will be an increased wariness about the direction of travel. And for UK companies, the incentives to increase their investment in US based operations will be persuasive.
Of course, the ministerial team at the Department for Business and at the Treasury are fully aware of the challenge and will be looking to make the inward investment case to the US business community, which we will energetically support. At the same time, if they haven’t already, they should be looking through the notes from the previous trade negotiation and working out a strategy.
