The photo of U.S. President Donald Trump and British Prime Minister Theresa May briefly holding hands as they strolled along the White House colonnade a week ago absolutely delighted the Brexiteers. Here was proof that Ms. May had already transformed Mr. Trump into an ally at a time when Britain needs all the friends it can get as it bids an unfond farewell to the European Union.
The White House spinners were quick to put another interpretation on the hand-holding episode. They suggested that Mr. Trump suffers from bathmophobia – fear of stairs or slopes – and that he had clutched Ms. May's hand to stave off anxiety as they negotiated the (shallow) decline along the colonnade. While the explanation seemed unlikely, Ms. May would be wise to take it to heart, for Mr. Trump may prove a fickle friend, if he is even a friend at all.
The propaganda promoted by the Brexiteers – the Britons who voted to exit the EU in last June's referendum – is that Britain will open itself to the world with a series of bilateral trade deals once it has cut itself free from the EU. Since it appears that Mr. Trump has warmed to Britain (as he has to Russia and Israel and almost no one else), a sweeping free-trade deal with the United States will be negotiated posthaste. Take that, EU! No need for us Britons to be tethered to a continental corpse when access to the mightiest economy is handed to us on a golden platter.
Not so fast. Mr. Trump is a deal maker and deal makers often work in binary logic – I win only if he or she loses, and vice-versa.
In the highly unlikely event that a British-American trade deal is negotiated before Britain formally leaves the EU, in 2019, Ms. May should be wary of whatever she's asked to sign. Mr. Trump's negotiators would clearly have the upper hand because Britain needs the United States more than the United States needs Britain. Mr. Trump is also fickle, prone to exaggeration and lies and entirely unpredictable. Would he profess his love for Britain and Ms. May only to toss them both under the bus? That scenario can't be ruled out.
Already, there are signs that Mr. Trump and Ms. May are diverging on the philosophical front. Ms. May has said repeatedly that she wants a strong, united EU even if she wants out of it. Indeed, the EU's disintegration into nation states, and the economic, banking and political upheaval that would go with it, would be disastrous for Britain. After the dust settles, Britain would need to negotiate individual trade deals with 27 EU countries; that could take decades.
But Mr. Trump seems to relish the prospect of the EU's disintegration. He has praised Brexit, predicted the breakup of the EU and called NATO, the EU's amoured guardian angel since the 1950s, "obsolete." Peter Navarro, the head of Mr. Trump's new National Trade Council, in effect called Germany a currency manipulator by allegedly using its influence to push down the value of the euro, all the better to flood the export market with German products.
To top it off, Mr. Trump is, reportedly, likely to nominate arch-EU skeptic Ted Malloch, a businessman and author, to the post of U.S. ambassador to the EU. In a recent BBC interview, Mr. Malloch was asked why he would be willing to move to Brussels. "I had in a previous career a diplomatic post where I helped bring down the Soviet Union. So maybe there is another union that needs a little taming," he said.
But the real looming split between Ms. May and Mr. Trump is not over whether EU should politely commit suicide. It's over protectionism. Ms. May wants Britain at the centre of global free trade even if she wants to clamp down on immigration. Mr. Trump is protectionist, a builder of walls, a shredder of free trade agreements – he pulled the United States out of the Trans-Pacific Partnership – and a contemplator of tariffs and the so-called border-adjustment tax. The latter could prove painful to the British economy.
The border adjustment tax is not a tariff. It's a destination tax and would levy taxes on profits earned where the products are sold, not where the companies who make those profits are based. In essence, it would allow the tax-free export of U.S. products, encouraging all American companies to export more and import less. The losers would be the countries with large trade surpluses with the United States, and Britain would be near the top of that list.
A Deutsche Bank report published this week said that, assuming a 20-per-cent border-adjustment tax, "the bilateral trade relationship that would be most distorted is with the U.K., which would move from an immaterial $1-billion [trade] surplus to a $19-billion deficit" with the United States.
The border-adjustment tax may not happen. But Deutsche Bank thinks there is a good chance that it will – a tax revolution in the making.
So far, Ms. May has had a pretty easy ride. The British economy, in spite of the anti-Brexiteers' predictions, is the star performer among the Group of Seven economies. Mr. Trump seems open to a trade deal and she has the outline of a Brexit plan.
But the ride is about to get ugly. The EU will call the shots on any new trade agreement Britain and it's in no mood to cut Britain a sweet deal, and the protectionist Mr. Trump cannot be counted on to come to the rescue. A border-adjustment tax could severely damage Britain's export prospects to the United States. If the EU and Mr. Trump's "America First" strategy conspire against her, Britain will be isolated and sinking.
Eric Reguly