FILE - President-elect Donald Trump speaks at AmericaFest on Sunday, Dec. 22, 2024, in Phoenix. (AP Photo/Rick Scuteri, File)
WHAT happens in the United States economy doesn’t always stay there, particularly when it comes to the United Kingdom.
With this in mind, a delicate balance of pragmatism and strategic positioning needs to define the United Kingdom’s approach to economic relations with the United States under the incoming Donald Trump administration.
Britain can’t afford to mismanage this relationship given its own economic and financial challenges.
Its government must be agile, aiming not only to defend the domestic economy but also to position itself to take advantage of any opportunities that emerge; and there will be many.
America is a vital partner. It accounts for nearly 20% of the United Kingdom’s exports and imports, and a third of foreign direct investment (FDI) into the country.
British companies sold £188bil (US$234bil) of goods and services to America in the year through June 2024, and trade in the opposite direction amounted to £116bil.
FDI from the United States totalled around £700bil in 2022, and America is a major destination for UK investors, including sectors such as artificial intelligence and life sciences that will power tomorrow’s engines of growth.
This extensive trade and investment relationship makes the United Kingdom highly sensitive to US policy changes.
It also means that the United Kingdom is in an inherently weak negotiating position.
It doesn’t rank among the top buyers of American exports, which include Canada, Mexico, China and Japan.
Also, foreign trade is a lot less critical to a US economy that has ample domestic resources and more alternatives.
All this puts the United Kingdom government in a tricky position at a time when the incoming US administration seems inclined toward an economic strategy that combines inward-looking policies with pressuring trading partners.
It is even more worrisome given the erosion in the United Kingdom’s economic and financial resilience.
Wobbly economy
Britain enters this new phase with the United States with a wobbly economy and a less-than-reassuring outlook.
Its domestic policy flexibility is limited.
The use of fiscal tools to stimulate the economy, such as tax cuts or higher spending on public services and investment, is constrained by a sizeable budget deficit, higher borrowing costs and a large stock of debt. Monetary tools, including interest rate cuts, must consider the risk of sticky inflation.
Meanwhile, the implementation of much-needed structural reforms is yet to reach critical mass, leaving the United Kingdom mired in a low-productivity world.
It is unlikely that the private sector, while able, will compensate for these weaknesses. After an encouraging start, the new government has stumbled, undermining corporate and household confidence.
Neither businesses nor consumers seem willing or able to drive the faltering economy.
Lacking resilience, the United Kingdom needs to be agile in how it handles its relationship with the United States.
Indeed, it has no choice but to think hard about the type of trade and investment concessions that will allow President-elect Trump to declare some early wins in his quest to realign the country’s foreign economic relations.
Mending ties
It is best that this is pursued through informal channels before Trump assumes office on Jan 20.
In a similar vein, the Labour government should be less vocal in denying that there is a choice to be made between Europe and the United States.
This is one of those situations where less is more, and where a redirect is best: Say less about Europe and, instead, steer the narrative to a more obvious choice for the UK – that of the United States over China.
Being agile isn’t just a defensive move, it also positions the United Kingdom well in a situation where US tensions with China continue and difficult negotiations with the European Union await.
Some of America’s trade and investment could be channeled to Britain.
With France and Germany facing political uncertainties, the United Kingdom can join with the United States to lead an economic “coalition of the willing,” offsetting the “axis of convenience” that risks expanding beyond China, Iran, North Korea and Russia.
While avoiding tensions is primarily in the interests of the United States and United Kingdom, it could also have broader implications at a delicate time for the global economy.
American economic exceptionalism has been a reliable engine of global growth in the post-Covid years.
Avoiding turbulence in one long-standing partnership as the Trump administration revisits America’s trade arrangements could limit some of the headwinds to that dynamic. — Bloomberg
Mohamed A. El-Erian is a Bloomberg Opinion columnist. The views expressed here are the writer’s own
