What happens in the US economy doesn’t always stay there, particularly when it comes to the UK.
With this in mind, a delicate balance of pragmatism and strategic positioning needs to define the UK’s approach to economic relations with the US under the incoming 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 UK’s exports and imports, and a third of foreign direct investment into the country. British companies sold £188 billion ($234 billion) of goods and services to America in the year through June 2024, and trade in the opposite direction amounted to £116 billion. FDI from the US totaled around £700 billion 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 UK highly sensitive to US policy changes. It also means that the UK 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 UK 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 UK’s economic and financial resilience.
Britain enters this new phase with the US 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 UK mired in a low-productivity world.
