The UK-US trade deal: what will be the effects?

The ‘economic prosperity deal’ reduces tariffs for around a quarter of the UK’s goods exports to the United States, including cars and steel. But products not covered by the agreement – as well as services exports, for example, from the financial sector – will still be exposed to taxes on trade.

The UK-US trade deal agreed in May 2025 reduces US tariffs on UK exports of cars, steel, aluminium, beef and aerospace products such as engines and plane parts. In return, UK tariffs are reduced on US exports of beef and ethanol. The idea is to reduce costs for firms exporting their goods across the Atlantic – costs that were set to soar following President Trump’s decision to implement sweeping tariffs on almost all of America’s trading partners.

The UK-US deal is important for the sectors covered, as well as the regions where they are located. For example, half of the 37,000 jobs in the UK steel industry are in Wales and Yorkshire and the Humber.

Evidence from free trade agreements (FTAs) shows that trade deals can reduce prices, increase consumer choice and boost economic performance. But the UK-US deal does not have the scope or legally binding status of an FTA. The deal captures around a quarter of UK goods exports to the United States and does not cover services. So, some localised wins are likely, but a large-scale boost to the UK economy seems doubtful.

What is a tariff?

To understand the potential economic impact of the UK-US deal, we need to go back to basics. Tariffs are a tax charged on imports. Most are charged as a percentage of a product’s price. For example, UK car imports have a 10% tariff, so a car that costs £10,000 incurs a £1,000 tariff. By increasing the price of imported cars, the tariff encourages people to buy cars made in the UK.

Tariffs also generate tax revenues for the government. In the UK, tariffs raised £4.9 billion in tax in 2024/25, continuing a trend of higher revenues following the UK’s departure from the European Union (EU).

Turning to the recent examples, in April, the Trump administration announced a set of ‘Liberation Day’ tariffs. These were wide-ranging. They included an additional 10% baseline charge on imports from nearly all countries, higher discretionary rates – generally applied on countries with which the United States has the largest trade deficits – and higher rates for specific products such as cars and steel.

These measures stack up. Taking UK steel as an example, the 10% baseline tariff was combined with a 25% sector-specific tariff to reach a total of 35%. For many other countries, the sector-specific steel tariff was increased further to 50%. These are big increases, halting a long-term trend of global tariff reductions.

Who pays tariffs?

Tariffs are usually described as being ‘on country A’ or ‘on commodity B’. But tariffs are paid by importing businesses to their national tax authority.

Research on tariffs introduced during the first Trump presidency, on imports from China, shows that most of the cost was passed on within the United States. Indeed, the study suggests that a 20% tariff leads to an 18.5% increase in the price of imports. These increases must either be absorbed by the importing firm (decreasing profits) or shouldered by local consumers (increasing prices).

This contradicts the narrative coming from Washington that foreign countries ‘must pay’ to address trade imbalances. It also generates upward pressure on prices, at a time when tackling inflation has been a priority for the US government. The tariffs introduced by the current Trump administration are starting to feed through into US inflation data, with consumer prices rising by 2.7% in the year to June.

Why are trade deals important?

Trade deals reduce or remove tariffs, encouraging more trade between the countries involved. Most evidence on the benefits from trade deals comes from FTAs that provide wide-ranging tariff reductions. Research shows that bilateral trade roughly doubles between countries in FTAs after ten years. This can lead to increases in competition, innovation, productivity, employment, wages and output.

Estimates of the benefits from trade liberalisation in the United States after World War II are up to $10,000 per household per year. Conversely, every percentage point reduction in trade openness reduces national income by around 0.5-0.7%. In the UK, that’s worth £14-20 billion per year (equivalent to the annual budget for the police).

Consumers also benefit from trade deals through lower prices and greater choice. Evidence from FTAs made by the European Commission over 20 years shows that the quality of the UK’s imports from FTA partners increased by 26% and the quality-adjusted price reduced by 19%. Overall price levels across the UK economy fell by 0.5% as a result.

At the same time, lowering tariffs exposes some sectors to competition from abroad, which can lead to lower wages and/or job losses. These costs are concentrated in the sectors affected, whereas the benefits of trade are often spread across the economy.

But tariffs are usually an expensive way to protect domestic jobs. Research on US tariffs in place in 1990 found that annual consumer costs ranged from $100,000 to over $1 million for each American job saved. More recently, washing machine tariffs introduced during the first Trump administration are estimated to have created 1,800 jobs, but at an annual cost to consumers of $815,000 per job.

As well as being expensive, protecting jobs through tariffs can distort economic activity away from the sectors in which a country is more productive (what economists call its areas of comparative advantage). This can act as a drag on long-term economic growth.

What are the potential effects of the UK-US trade deal?

The UK-US economic prosperity deal reduces tariffs for a specific list of products. As noted, it makes provisions for UK exports of cars, steel, aluminium, beef, and aerospace products. There is also a commitment to work on an agreement for pharmaceutical exports.

In return, there are provisions for US exports of beef and ethanol. In most cases, the agreement is up to a quota, above which a higher tariff rate applies. For example, UK car exports to the United States have a reduced tariff of 10% for the first 100,000 cars, but revert to a higher tariff above that level.

The UK-US deal is not an FTA. FTAs are comprehensive, whereas this deal covers specific goods. FTAs are legally binding, whereas this deal could be called off by either country providing written notice. And FTAs do not raise trade barriers with third parties, whereas this deal includes wording about security of supply chains that trade experts have said appears to be targeted at China.

So, the economic benefits will not be as wide-ranging as those described from FTAs in the previous section. America receives 15% of the UK’s total goods exports. The value of these exports by sector is shown in Figure 1. The products captured in the deal represent around a quarter of UK goods exports to the United States. But put into context, that is only around 3% of the UK’s global goods exports.

There are also some striking omissions. For example, there is no place in the deal for chemicals – the UK’s second largest category of goods exports to the United States. There is also no agreement on services, despite this being the UK’s great export strength. The UK exported £126 billion of services to the United States in 2023 (27% of all UK services exports).

Figure 1. UK goods exports to the United States in selected categories, 2023 (US dollars)

Source: Harvard Atlas of Economic Complexity using United Nations Statistical Division data (COMTRADE).
Note: The exports assumed to be affected are steel and aluminium production, motor vehicle manufacturing, aircraft manufacturing and beef. Beef exports are not visible on the chart as these were less than 1% of UK agricultural exports to the United States in 2023.

The UK-US deal is nonetheless significant for the sectors involved as well as the people and areas that rely on them. It also comes on top of the UK having already fared better than many other countries in the scale of the Liberation Day tariffs.

The sectors included in the deal are geographically concentrated (see Figure 2). Around half of the 37,000 jobs supported by the UK steel industry are in Wales and Yorkshire and the Humber.

The past decline of UK industries such as coal, steel and shipbuilding provides lessons from history. These declines had lasting effects on people’s wellbeing, contributing to higher rates of long-term sickness, declining life expectancy and surges in regional economic inactivity. So, the trade deal will be welcomed given recent headwinds for sectors like UK steel.

On the flipside, the agreement for UK imports of US beef and ethanol could reduce costs for businesses using these in their supply chains and put downward pressure on prices for consumers. But UK producers in these sectors have raised concerns about jobs being at risk from more US competition.

Figure 2: UK manufacturing jobs by sector, 2023

Source: Office for National Statistics

Is it a good deal?

Overall, the UK-US deal represents a positive step in bilateral economic relations. It provides a reprieve against a backdrop of greater protectionism from the United States and could help to set a precedent for future trade cooperation between the two countries.

The reductions in tariffs are important for the sectors covered by the deal and the regions where they are concentrated. Even so, large wider economic effects seem unlikely as the sectors in the deal represent a relatively small proportion of overall UK trade. The deal also needs to be seen in the context of a wider set of trade agreements, such as recent announcements with India and Europe – a good run on which the UK can build.

Where can I find out more?

Trade: tariffs: Explainer on tariffs from the Institute for Government.
How have EU's trade agreements impacted consumers? Article by the Centre for Economic Performance (CEP) on the effects of free trade agreements made by the EU.
The impact of trade and tariffs on the United States: Article from the Tax Foundation on the economic effects of tariffs in the United States.
How the Trump tariffs affect UK firms: CEP article on potential price responses of UK firms to US tariffs.
Stroking a bear to get half a sandwich: Article from the UK Trade Policy Observatory on the UK-US trade deal.
What are the economic implications of the UK-EU reset deal? Economics Observatory article.