John W. Diamond, “Tariffs, Trade Deals, and the Cost of Uncertainty,” Rice University’s Baker Institute for Public Policy, May 28, 2025, https://doi.org/10.25613/0T8C-Z865.
In May 2025, the United States announced trade frameworks with both the U.K. and China. The agreement with the U.K. is a bad deal, while the deal with China marks a notable improvement over the post-liberation day tariffs. While U.S. policy to counteract China’s anti-competitive practices is important, the question is: Are tariffs the best tool for this purpose? Additionally, the U.S. trade agreement with China still reduces trade relative to the policies in place as of January 2025. Even so, stocks rallied after the sparse details of both trade deals were announced.
Why is a bad deal better than no deal, especially when tariffs reduce economic growth in both the short and long run? The answer is that the negative impact of a limited but stable tariff policy is preferable to the uncertainty caused by an erratic and unpredictable trade conflict. Thus, reducing the level of uncertainty — at least for now — allows market participants to act with more information.
The terms of the U.S.-U.K. trade deal impose a relatively small but negative impact on the U.S., given existing trade flows and tariff rates. The two countries have nearly balanced trade in terms of goods, and the U.K. accounts for roughly 3% of total U.S. trade. Before the Trump administration’s tariff announcements on April 2, the trade-weighted tariff rate on U.S. exports was near 0%, with the U.K. imposing an average 0.5% tariff on U.S. goods.
By comparison, the U.S. was imposing an average 3.4% tariff on U.K. goods. This tariff data contradicts the administration’s claim that the U.K. tariff rate stood at 5.1% when the new U.S. tariffs were announced. While the U.K. deal is a net negative from a U.S. economic perspective, it does offer some clarity on future trade policy.
The primary economic takeaway from the U.S.-U.K. deal is that it offers limited economic upside for U.S. businesses and is likely a net negative when all factors are considered. While the White House claims the deal opens $5 billion in new market access, that figure reflects the total market value of exports, not actual profits.
The benefit to American firms is expected to be far smaller, roughly equaling the profit — and possibly additional wages paid by firms to the extent there is slack in the labor market — derived from selling goods abroad rather than the total value of goods sold.
Meanwhile, President Donald Trump claims the deal raises $6 billion in new “external revenue” by imposing a 10% tariff on U.K. goods imported into the U.S. However, most of this $6 billion in additional revenue will come from direct costs to U.S. consumers. In the end, the tariff will raise prices, reduce choices available to U.S. consumers, and increase input costs for U.S. businesses.
This trade deal is expected to set a precedent for future agreements. Because the U.S. ran a small trade surplus in goods with the U.K. in 2024, the deal effectively establishes a 10% minimum tariff floor for other countries. Any country that exports more to the U.S. than it imports from the U.S. — meaning the U.S. runs a trade deficit — will likely face higher tariffs, increasing the risk of trade tensions in future agreements.
Amid the ongoing trade disputes, the Trump administration’s recent threat of a 50% tariff on the EU, currently on pause until July 9, is another example of how trade tensions can roil markets.
Both the U.S.-U.K. and China trade deals reduce uncertainty compared to the tariff announcements on liberation day. Trade-related uncertainty harms firms by hindering decision-making at every level. Without clarity on tariffs or trade rules, companies delay investments, stall hiring, and reconsider supply chain commitments.
Global firms rely on clear trade terms to plan production, pricing, and logistics — uncertainty disrupts all of this. It also raises the cost of capital, as lenders and investors demand a higher risk premium when the future looks murky. For many businesses, this is why even a bad trade deal is better than no deal.
While trade and economic uncertainty has significant negative effects, the broader concern is that U.S. policy has increasingly veered toward a more protectionist stance. This policy shift is likely to impose real costs not only on the American economy but also on its trading partners. As barriers rise and uncertainty grows, both sides can expect slower growth, higher prices, and strained economic ties. This may partially explain why the yield on the 10-year U.S. Treasury bond has continued to increase following the announcement of both deals.
In addition, evidence that tariffs are increasing uncertainty is clear from the most recent economic data. For example, the latest GDP report showed that real GDP fell by 0.3% in the first quarter of 2025. Economic forecasts had predicted a 0.4% increase for the quarter, following a 2.4% gain in the final quarter of 2024. The expected decline in real GDP growth from the fourth quarter of last year — from 2.4% to 0.4% — was primarily due to increased uncertainty caused by the Trump administration’s tariffs.
The larger-than expected decline — from 0.4% to -0.3% — stemmed from a significant shift in the timing of imports, as businesses stockpiled inventory to avoid higher future costs. As a result, a corresponding drop in imports is likely to appear in the next GDP report. These adjustments create data variations that can skew real GDP forecasts and other economic statistics, heightening uncertainty for business decision-making.
The same GDP report indicated that inflationary pressures intensified in the first quarter of 2025, with the personal consumption expenditure price index increasing by 3.6%. At the same time, a decline in the Conference Board’s leading economic indicators points to a softening economy. The past two U.S. employment reports have also shown slowing job growth, suggesting that while the labor market remains resilient, it is beginning to lose momentum. These mixed signals are prompting the Federal Reserve to adopt a cautious, wait-and-see approach — making it increasingly difficult for businesses to anticipate the timing of the Fed’s response.
In the face of these challenges, one trend remains clear: Economic uncertainty is rising. That is why, in today’s climate, even a bad trade deal represents a better outcome than no deal at all. By reducing volatility and providing clearer policy signals, modest agreements can help stabilize expectations and support more confident decision-making among firms, investors, and consumers.
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