Key Takeaways for Southeast Asia from US-UK Trade Deal: It Will Be a Hard Slog

The US and the UK have reached the first in what the Trump administration is assuring will be a series of trade agreements between the US and countries subjected to US President Donald Trump’s so-called reciprocal tariffs.

The agreement grants the UK a reprieve from the 25 per cent US sectoral tariffs on steel, aluminium, and cars, but the 10 per cent baseline reciprocal tariff remains in place. The UK will grant enhanced market access to US farmers and ranchers and eliminate its 10 per cent tariff on ethanol. The agreement is far from a “done deal” and additional negotiations will be required.

The US-UK agreement will serve as a template, to at least some extent, for agreements with Southeast Asian (and other) countries. Leaders navigating negotiations with the US should learn what they can.

There are five key takeaways here. First, US relations with China will be complicated. The UK agreement confirms that the US intends to use these negotiations to cajole countries to join the US in applying various forms of pressure on China. US tariff cuts were made contingent upon the UK meeting strict security requirements for its steel and pharmaceutical industries, a move clearly understood to be targeted at China.

Predictably, China has reacted strongly, stating that “co-operation between states should not be conducted against or to the detriment of the interests of third parties”. Given the deep levels of economic integration between China and most countries in Southeast Asia, regional leaders should anticipate similar demands from the US to reduce critical trade with China. Agreeing to such demands would help provide relief with the reciprocal tariffs but would antagonise China and potentially open countries in the region to subtle and not-so-subtle forms of retribution from China.

Second, the devil will be in the details. It would be physically impossible for the US to conclude even just one full-blown trade agreement within the incredibly tight negotiating window (for all countries except China, the US has paused the reciprocal tariffs above the 10 per cent baseline for 90 days). Instead, the US will seek to reach an agreement merely on a set of broad and sometimes vaguely articulated commitments that will need to be negotiated further. Harking back to Trump’s days as a real estate developer, these “deals” will be more like “letters of intent” rather than fully spelled out, legally binding contracts. Trump has already demonstrated his willingness to disregard even comprehensive and formal free trade agreements (such as the US-Mexico-Canada Agreement). This means that any “deals” reached within the negotiating window should be regarded as indicative rather than definitive.

The agreement with the UK suggests that the best outcome from the negotiations will be avoiding a snapback to, in most cases, the higher reciprocal tariff rates rather than any elimination or reduction in the 10 per cent baseline tariff.

As follow-up discussions take place to fully flesh out the details, discrepancies in interpretations about what was actually agreed could arise and a further tightening of the screws will be possible, if not likely.

Third, Southeast Asian countries would have to tone down their expectations about the tariff rates they could eventually agree to with Washington. Trump’s initial reciprocal tariffs hit Southeast Asia hard. Vietnam faces tariff rates of 46 per cent, Thailand 36 per cent, and Indonesia 34 per cent. The smaller Southeast Asian economies are looking at even higher tariffs: 49 per cent for Cambodia, 48 per cent for Laos, and 44 per cent for Myanmar. Trump’s abrupt backtracking on his Liberation Day tariffs has reduced those levels to 10 per cent for the 90-day negotiating period.

The agreement with the UK suggests that the best outcome from the negotiations will be avoiding a snapback to, in most cases, the higher reciprocal tariff rates rather than any elimination or reduction in the 10 per cent baseline tariff. Depending on the outcome of negotiations, it is possible that some or all of the higher tariff rates could be restored. This will be the sword of Damocles that the US will hold over the heads of its negotiating partners. Southeast Asian countries will need to be mindful of not just the tariff rate they are able to secure, but also the tariff rates obtained by their neighbours that compete for the US export market share.

Fourth, there is the issue of the general principle of preferential treatment. Perhaps the most fundamental cornerstone of the World Trade Organization (WTO) is the principle of Most Favoured Nation, which essentially means that members must extend the same level of preferential treatment to all members. A country cannot cut tariffs for one member and not for the others. While there are exceptions for free trade agreements that cover “substantially all trade”, the US-UK deal (and any subsequent agreements) will not be even close to meeting this standard.  

The WTO director general has already called out the US and the UK for this unambiguous violation of WTO principles. Southeast Asian countries agreeing to similar terms with the US should prepare for the implications of violating this WTO cornerstone, including subjecting themselves to WTO dispute settlement procedures and potential retaliation from partners that suffer commercial harm as a result of the deal they will cut with the US.

Finally, there is an important difference between the UK and Southeast Asian countries. While there will be similarities between the UK deal and any agreements struck by Southeast Asian countries, there is a key difference: the US has a US$12 billion trade surplus with the UK, in sharp contrast to the trade surpluses enjoyed by many Southeast Asian countries. The prospect of a British airline buying US$10 billion of Boeing aircraft was hinted at, but this was not included in the agreed text, which was silent on purchase commitments.

In the end, Trump is focused only on one thing: the trade balance as a scorecard by which he judges whether the US is “winning or losing” in trade. Southeast Asian countries with large trade surpluses should expect intense pressure to reduce or eliminate their surpluses through specified purchases of US goods, and for these commitments to form the centrepiece of their agreements with the US. 

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