US-UK Reach Limited Tariff Deal; Bank of England Cuts Rates to 4.25% Amid Trade Tensions

The US and UK have agreed on a limited trade deal reducing some tariffs on British exports, but the 10% blanket tariff from Trump's administration remains. Announced Thursday, this is the first agreement since Trump's April protectionist measures. Concurrently, the Bank of England cut its interest rate by 25 basis points to 4.25%, citing global economic uncertainty from trade tensions. The deal focuses on specific sectors, with potential tariff reductions for UK carmakers and steel exports, but excludes agricultural products. The BoE's rate cut reflects concerns over global trade disruptions impacting economic growth.

A Narrow Trade Pact, Not a Free Trade Agreement

President Trump announced the agreement on his Truth Social platform, calling it a “full and comprehensive” deal that would “cement the relationship between the United States and the United Kingdom for many years to come.” However, officials and analysts have characterized the deal as limited in scope, focusing on specific sectors rather than a broad free trade agreement.

The UK continues to face a 10% baseline tariff on all goods exported to the US, a measure introduced on April 9 as part of Trump’s “reciprocal” tariff policy. In addition, British steel, aluminum, and automotive exports remain subject to a 25% sector-specific levy. These tariffs have significantly impacted key UK industries, with cars alone accounting for £8.3 billion in exports to the US in the year leading up to November 2024.

While the new agreement is expected to ease some of these burdens, it does not eliminate the 10% blanket tariff. Instead, the deal reportedly includes reductions or exemptions on the 25% tariffs for certain goods, potentially through a quota system. For example, UK carmakers may be allowed to export a limited number of vehicles to the US at reduced or zero tariffs, with higher rates applying beyond that quota.

Steel and aluminum exports, valued at approximately £700 million annually, are also expected to benefit from similar relief measures. However, the details remain unclear, and industry leaders have warned that without broader tariff reductions, the UK’s manufacturing sector could continue to suffer.

Pharmaceuticals and Digital Services Still Under Discussion

Pharmaceuticals, the UK’s second-largest export to the US at £6.6 billion annually, remain a key area of negotiation. While most countries, including the US, traditionally impose minimal tariffs on finished drugs, there is concern that future policy shifts could introduce new barriers. The current deal does not appear to include definitive terms on pharmaceutical trade.

Another unresolved issue is the UK’s 2% digital services tax on large US tech firms. Reports suggest that the UK may consider reducing or eliminating this tax in exchange for further tariff relief, though no formal agreement has been announced.

Agricultural Products Excluded from the Deal

Agricultural trade, a frequent sticking point in US-UK negotiations, was notably excluded from the agreement. The UK has maintained its ban on imports of chlorinated chicken and hormone-treated beef, aligning with EU food safety standards. Chancellor Rachel Reeves has reiterated that these products will not be part of any trade deal, despite US pressure to include them.

Political Context and Diplomatic Strategy

The agreement follows nearly five years of negotiations and is seen as a diplomatic win for UK Prime Minister Keir Starmer, who has cultivated a close relationship with President Trump. Starmer’s outreach included a personal letter from King Charles III inviting Trump for a second state visit to the UK.

Despite the limited scope of the deal, the UK’s position as the first country to reach a post-tariff agreement with the US underscores the enduring “special relationship” between the two nations. British officials have emphasized that the agreement is a step toward reducing trade friction and restoring economic confidence.

Bank of England Cuts Rates to 4.25%

In a separate but related development, the Bank of England announced a 25 basis-point cut to its main interest rate, bringing it down to 4.25%. The decision, made during the Monetary Policy Committee’s May meeting, reflects growing concerns over the global economic outlook amid ongoing trade tensions.

BoE Governor Andrew Bailey cited easing inflationary pressures and heightened uncertainty from US trade policy as key factors behind the move. “The past few weeks have shown how unpredictable the global economy can be,” Bailey said. “That’s why we need to stick to a gradual and careful approach to further rate cuts.”

The rate cut is the fourth since August 2024, when the BoE began reducing borrowing costs from a 16-year high of 5.25%. Inflation in the UK stood at 2.6% in March, down from 2.8% the previous month, providing the central bank with room to maneuver.

Global Trade Tensions Weigh on Economic Outlook

The BoE’s decision comes amid broader concerns about the impact of Trump’s tariff policies on global growth. While the 10% baseline tariff on UK goods remains, the central bank noted that the majority of the projected economic damage stems from the broader effects of global trade disruptions rather than direct tariffs on British exports.

The International Monetary Fund recently downgraded its 2025 growth forecast for the UK from 1.6% to 1.1%, citing trade-related risks. Financial markets have responded with increased volatility, and expectations for further rate cuts have grown. Analysts now anticipate that UK interest rates could fall to 3.5% by the end of the year.

Diverging Monetary Policies

The BoE’s rate cut contrasts with the US Federal Reserve’s decision to hold rates steady this week. Fed Chair Jerome Powell cited uncertainty over the economic impact of Trump’s tariffs as a reason for caution. Meanwhile, the European Central Bank also cut rates last month, highlighting a growing divergence in global monetary policy responses to trade-related shocks.

References

• Trump to announce trade deal with UK on Thursday, reports say
• Bank of England cuts interest rate by 25 bps amid global trade uncertainty - Times of India
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