(April 12): When US President Donald Trump announced he was pausing his onslaught of tariffs that had wreaked havoc on global markets, UK Prime Minister Keir Starmer’s aides were reminded of the fate of a near predecessor.

In 2022, former prime minister Liz Truss tried to tear up the rulebook for Britain’s economy with an enormous package of unfunded tax cuts — only to be forced into a humiliating U-turn by the bond market. 

For British officials who had seen this movie before, the same story was unfolding in the White House on a much greater scale as US Treasuries tanked and Trump came under huge pressure to change tack. The officials requested anonymity discussing internal government thinking.

The UK was swept up in the turmoil too, with long-dated gilts in particular taking a hammering, sending 30-year yields to their highest since 1998, with potential consequences for the government’s spending plans should conditions persist. As one government aide put it: the bond market is boss. 

Nine months into power, the realisation is dawning on Starmer that much of his premiership will be defined by how he responds to the shock-waves emanating from Washington. In a speech this week, the prime minister warned Britons of an “era of instability”. 

“This is not a passing phase,” he said. “Just as we have seen with our national security and defence, now with our commerce and trade, this is a changing and completely new world, an era where old assumptions, long taken for granted, simply no longer apply.”

That new reality is on show in Parliament on Saturday, after it was recalled from an Easter break to discuss wresting control of British Steel from its Chinese owner — a last-ditch attempt by Starmer to save Britain’s only remaining virgin steelmaker from collapse. The UK steel industry was struggling even before Trump announced tariffs of 25% on the metal. In an emergency sitting, lawmakers will vote on extraordinary measures to keep the furnaces running, which may leave taxpayers on the hook for costs.

In Downing Street, Trump’s tariff reversal on Wednesday was seen as at least a partial vindication of Starmer’s approach of keeping a “cool head” when it comes to dealing with the president. As markets plummeted, the British government took a wait-and-see approach, feeling it was increasingly likely that the White House would have to temper its tariffs, just as Truss had to cancel the tax plans that put her at the mercy of bond investors.

It’s the same strategy they have adopted with handling Trump on the Russia-Ukraine war, as they try to nudge the US administration into losing patience with Russian President Vladimir Putin for rejecting a ceasefire. 

Still, any relief in government was short-lived. Even with Trump pulling back from the highest tariffs outside China — lowering levies elsewhere to 10%, the president has effectively ended US trade with the Asian nation, something which will have profound and lasting effects on the world and Britain, a UK official said.

Figures released on Friday showed Britain’s gross domestic product had surged by 0.5% in February, far better than economists’ expectations, but government officials conceded that any optimism they had about the UK economy turning a corner had been thrown into doubt by global turmoil.

When asked if Starmer might be able to negotiate down the 10% tariffs on Britain, the 25% levies on cars and steel, or expected tariffs on pharmaceuticals, another official said the UK government simply had no idea, but would keep trying to secure a deal.

Dealing with Trump is chaotic, lurching from day-to-day, the person said. The president could just as easily end up in a more favourable place as a disastrous one, they added, arguing all Britain can do is try to encourage him into the least bad position whether it came to trade or Ukraine.

At home, Starmer is determined to convince Britons he is doing more than just hoping for the best. “This government will not just sit back and hope,” he told workers at a Jaguar Land Rover car factory on Monday. “Attempting to manage crises without fundamental change just leads to managed decline.” 

Saturday’s parliamentary recall is the first attempt to try to demonstrate that, before he accelerates plans aimed at unlocking economic growth over the coming weeks. The prime minister also aims to strike a defence and security pact with the European Union (EU) in May, and Chancellor of the Exchequer Rachel Reeves is pushing for more ambitious trading arrangements with the bloc, as well as access for British defense companies to an EU arms fund.

Quicker reforms to government operations and further deregulation efforts are also in the works. Ministers are weighing options to protect car companies hit by US tariffs, though are left in an uncomfortable position of trying to lower trade barriers with allies while also considering measures like subsidies and quotas to defend the domestic industry.

As they have throughout Starmer’s premiership, Labour lawmakers and some in government are privately calling for him to match his rhetoric about going “further and faster” to deliver major changes with more striking policies. There is frustration among some in the party at the Reeves’ self-imposed fiscal straitjacket of vowing never to raise income tax, national insurance or value-added tax, nor to break her budgetary rule that tax receipts must pay for day-to-day spending.

In the Treasury, officials argue that soaring gilt yields this week have bolstered their argument that the UK cannot loosen its fiscal rules to borrow more. Reeves said on Wednesday she would not trigger an emergency mechanism allowing her to temporarily suspend her fiscal rules. Number 10 aides were also at pains to insist those rules would not be changed.

The jury is out among many in Labour as to whether Starmer and Reeves can fulfill their promise to renew the country and steer it through a turbulent world while sticking to their economic plans. For now, those at the top are insistent they cannot provoke the bond market and risk ending up like Truss, or after this week, Trump.

Uploaded by Tham Yek Lee