The US and UK Strike a Trade Deal, the First Sign of a Calming Trade War

The White House revealed the first trade deal since Liberation Day. Its deal with the United Kingdom specifies a 10% baseline tariff on all imports from the UK. The first 100,000 vehicles imported by each UK manufacturer will be exempt from additional tariffs. A total 25% tariff will be assessed on any additional vehicles imported after that threshold. The deal also targets certain industries, including aerospace. Following the announcement, British Airways said it would buy 32 Boeing 787-10s. Boeing (BA) finished the week up 5.1%.

The stock market reacted positively following the deal announcement. The S&P 500 closed the week up 0.4%, after being down 1.4% through Tuesday. Markets most likely reacted modestly to the trade deal because the US has a trade surplus with the UK. In its trade war, the White House has primarily targeted countries with which the US runs a trade deficit, citing unfair trade practices. Markets may need to see signs of a trade deal with China before rallying further. In March alone, China had a $100 billion surplus with the US.

As of Friday, Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer were set to meet over the weekend with Chinese officials. There is uncertainty as to which side-initiated talks, so the exact objective is not clearly known. Although Chinese exports to the US dropped 21% in April, the country’s exports to Association of Southeast Asian Nations (ASEAN) countries increased 21%. If that reflects China’s ability to easily find substitute buyers for its goods, the country may have more negotiating leverage than initially thought. This would counter President Trump’s claim that “everyone” wants to make a deal with the US.

Despite uncertainty between consumers and businesses, Q1 earnings haven’t shown the significant weakness many feared. Expectations for 2025 earnings growth have pulled back but are still strong at 7–8%.

On Wednesday, the Federal Reserve decided to keep its policy interest rate steady at a target range of 4.25–4.5%. Despite inflation’s continued path toward the Fed’s 2% target, the global trade war brings concerns about stagnating growth and higher inflation (“stagflation”). Stagflation can be a lose-lose situation, in that the Fed may have to choose which side of its dual mandate to prioritize, to the detriment of the other. When stagflation hit the US in the 1970s, the Federal Reserve was able to successfully tame inflation but likely put the economy in recession during the process. Because of an uncertain backdrop, the Fed cited a “wait-and-see” approach before moving interest rates.