US-UK trade deal squeezes China supply chains

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The UK has accepted strict US security “requirements” for its steel and pharmaceutical industries, in what diplomats see as template that Washington could use to exclude China from other countries’ strategic supply chains.

Thursday’s trade deal offered tariff relief to both industries, but only on the condition that Britain “work to promptly meet US requirements” on their supply chain security and the “ownership of relevant production facilities”.

UK officials said the provision applied to all third countries, but acknowledged that Trump had signalled that China was the intended target.

As industry groups sought to clarify the nature of the US requirements on supply chain security and ownership, trade experts argued that the deal indicated that the Trump administration was stepping up long-standing demands to restrict Chinese inputs to strategically important goods.

“Washington wants the UK and other countries to open up their books and ultimately move away from Chinese trade and investment, particularly in sensitive areas like steel,” said Allie Renison, a former UK trade department official.

The text of the five-page US-UK deal, which was hastily put together in seven weeks after Trump announced global import duties on April 2, specifies that tariff relief for British products will depend on so-called Section 232 investigations — probes to determine whether and how specific imports affect US national security.

It adds that the US’s plans to reduce tariffs for the UK are based on “shared national security priorities” as well as what it describes as the countries’ “balanced trading relationship”.

Sam Lowe, trade lead at consultancy Flint Global, said he expected “to see similar conditions replicated in other deals, particularly in export hubs in south-east Asia such as Vietnam and Cambodia”.

But senior EU trade officials said the conditions pertaining to China had potentially serious ramifications for their efforts to agree the bloc’s own deal with Washington.

Two officials involved in the negotiations with the Trump administration told the Financial Times that the bloc would struggle to replicate such economic security elements of the US-UK trade agreement.

“There is no unity on how to approach China,” one of the officials said of the EU’s 27 members.

Britain’s Labour government has rejected as “complete nonsense” accusations by the opposition Conservatives that this week’s deal, which also offers tariff relief for UK aluminium, hands Washington a “veto” over supply chains. 

“There is no such thing as a veto on Chinese investment in this trade deal, this is not what this trade deal is about,” Darren Jones, Treasury chief secretary, told Times Radio.

One British official said: “The US do not want, given that the UK will have much lower tariffs than the rest of the world, to become somewhere where countries or companies could circumvent their rules via UK exports to the US. Details of that will be worked through.”

Renison, now at consultancy SEC Newgate, said the US demands were in line with an accelerating trend, noting that the Biden administration had demanded to see the UK audit on a Chinese-owned steel company before lifting Trump’s previous steel tariffs.

She said Beijing was likely to retaliate in some form if the UK’s final agreement with the US — which will be subject to further negotiations — binds Britain into more comprehensive alignment with the US’s approach to trade with China.

UK industry groups said they were pushing the government for more information having been given no immediate indication of what the proposed US tariff reductions or supply chain demands might be. 

British pharma industry insiders said the final terms will depend on the outcome of the US investigation announced in April into the national security implications of pharmaceuticals imports. 

“Clearly, the US and UK are set for further negotiations following the conclusion of pharma Section 232,” said one.  

UK Steel, the industry lobby group, highlighted the lack of clarity in the five-page text, including the failure to refer to any reduction in tariffs to zero, as well as questions over the supply chain conditions and a suggestion that quotas would be applied.

“The terms of the deal highlight a number of hoops to jump through before the UK steel sector can see the benefits of this deal,” UK Steel said. “To fully assess the impact on our sector, we will need to fully understand the supply chain conditions that need to be met, how the quotas will be defined and when these will take effect.”