CNBC’s UK Exchange newsletter: A diplomacy tightrope for Britain’s Starmer after Trump’s tirades

This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.

The dispatch

British diplomats have long prided themselves on the so-called “special relationship” with the United States.

The phrase was coined by Winston Churchill, Britain’s inspirational wartime leader, when in March 1946 he famously described how an “iron curtain” had descended across Europe.

His speech was delivered at Westminster College in Fulton, Missouri, home state of the then-U.S. president Harry Truman, who was shown a copy in advance.

Warning of the threat to democracy posed by the Soviet Union, Churchill said: “Neither the sure prevention of war, nor the continuous rise of world organization will be gained without what I have called the fraternal association of the English-speaking peoples.

“This means a special relationship between the British Commonwealth and Empire and the United States.”

Plenty of other countries pride themselves on their own special relationship with the U.S., including Israel and Canada, both of which have previously used the term.

France is often described as America’s “oldest ally” and former President Joe Biden used this phrase when, in December 2022, he hosted French President Emmanuel Macron at the White House for the first state visit of his administration.

But no “special relationship” is as formal as that between the U.S and Britain, which builds on the close security and intelligence links forged during the Cold War, to the extent that the pair enjoy a nuclear co-operation agreement and a deeply integrated defense industrial complex.

Ironically, while countless U.S. presidents have used the term, none have invoked it as often as President Donald Trump.

In September last year the White House even published a fact sheet headed “The Special Relationship” which declared: “The bond between the United States and the United Kingdom is like no other anywhere in the world, and we will always be friends.”

All of which left Prime Minister Keir Starmer walking a tightrope as he responded to Trump’s threat to impose further tariffs on eight European countries — including the U.K. — from next month unless they support his desire to buy Greenland.

Unlike French President Emmanuel Macron, who has urged the EU to deploy its “anti-coercion instrument” against the U.S. — something that seems inconceivable but nevertheless reflects the position in which the bloc finds itself — Starmer indicated he did not favor retaliatory tariffs should Trump press ahead with his proposed levies and insisted “a tariff war is in no-one’s interest.”

And, while making clear that “any decision about the future status of Greenland belongs to the people of Greenland and Denmark alone,” Starmer was also careful in his speech on Monday to emphasize the benefits of Britain’s close partnership with the U.S. and the values the two countries share.

“We do have to remember at all times that it is in our national interest that we continue to work with the Americans when it comes to defense, to security and to intelligence,” Starmer added.

It was a skilled piece of diplomacy even if it will add to the perception, among critics at home, that “never here Keir” devotes more time to foreign affairs than to domestic matters.

It was also bold. Many in Starmer’s Labour Party would love the prime minister to take a tougher, more Macron-like, line against Trump. So too would much of the British public.

As the actress Vanessa Williams sang the American national anthem on Sunday evening at London’s O2 Arena, before an NBA game between the Memphis Grizzlies and Orlando Magic, a man who shouted “leave Greenland alone” was applauded by a crowd that could be regarded as well-disposed towards U.S. culture.

The sceptics also include some in the Foreign Office (the U.K. equivalent of the U.S. State Department) who dislike intensely the way Starmer has flattered Trump by, for example, inviting him for an unprecedented second state visit.

Most in the department, though, recognise the value of Starmer maintaining a close relationship with someone who, while extraordinarily unpredictable, will at least pick up the phone and speak to him.

That argument, though, risks being tested to destruction after Trump’s social media posts early yesterday in which he accused Britain of “an act of great stupidity and total weakness” in ceding the Chagos Islands (an archipelago in the Indian Ocean that has been a British territory since 1814) to Mauritius. This was despite Trump himself saying, when the announcement was made in February last year, he had “a feeling it’s going to work out very well.”

The relationship between the two men will also be tested after Britain yesterday approved a new Chinese “mega-embassy” on the outskirts of the City of London despite reported concerns from the White House over the site’s close proximity to sensitive data cables nearby connecting the Square Mile’s financial services industry.

Limited options

Nonetheless, Starmer’s approach can also be seen as deeply pragmatic in that it recognized, given the difference in size between the two economies, that Britain — sitting outside the EU’s single market — is incapable of inflicting much damage on the U.S. with tariffs.

In fact, with U.K. goods exports to the U.S. in 2024 totalling $68.2 billion, it has a great deal to lose.

This particularly applies to Britain’s beloved carmaking sector, which sold £10 billion ($13.4 billion) worth of goods to the U.S. in the 12 months to the end of June last year, making it the biggest single British exporter aside from the pharmaceuticals industry, which is currently exempt from tariffs following a deal struck last month.

This agreement was hailed as a huge success at the time, not least for the way it unlocked potential investment in the U.K. by U.S. drugmakers such as Bristol Myers Squibb, but the extent to which Greenland-related tariffs could be imposed remain unclear.

Opinions vary as to whether fresh tariffs — on top of the 10% already applied to U.K. goods — could push the U.K. into a recession. The consultancy Capital Economics believes they would clip between 0.3%-0.75% from U.K. GDP which, if swiftly applied, could trigger a recession.

But others disagree. Simon French, chief economist and head of research at investment bank Panmure Liberum, tweeted: “A flat 10% levy on ~£60billion of goods is not significant enough to change the broad growth outlook for 2026.”

He suggested a more “logical strategic response from Europe” would be capital account retaliation.

European NATO countries own $2.8 trillion worth of U.S. Treasuries, including $889 billion in the U.K. alone. If Trump presses ahead with this latest threat, watch out for a possible revival of the “anything but America” trade seen after “Liberation Day” on April 2 last year.

Markets are already giving a glimpse of that.

Danish pension operator AkademikerPension said it is selling $100 million in U.S. Treasurys. Anders Schelde, the fund’s investing chief, said it was because of “poor [U.S.] governance finances” — but tensions with the U.S. “didn’t make it more difficult to take the decision.”

Meanwhile, investors on Tuesday fled from U.S. assets, selling off stocks, bonds and the dollar, and turned to safe-haven investments such as gold and silver.

If Europe continues the flight from American capital, it would certainly be more effective than self-harming retaliatory tariffs.

Top TV picks on CNBC

Chris Southworth, secretary general at the International Chamber of Commerce, UK, urges European countries to focus on diplomacy, as President Trump threatens additional tariffs over Greenland.

Danish foreign policy expert, Sten Rynning, warns Europe should be ready for a trade war with the U.S. over Greenland.

Jane Foley, head of FX Strategy at Rabobank, discusses the latest U.K. GDP figures for November, which were better than expected.

— Holly Ellyatt

Need to know

Trump launches a tirade against the UK. The so-called “special relationship” between the U.S. and U.K was left looking bruised on Tuesday after Trump posted a tirade against London’s decision to hand sovereignty of the Chagos Islands to Mauritius.

UK looks to work its magic on Trump to defuse Greenland tariff threat. In a press conference Monday, Starmer said that Britain greatly values its long-standing special relationship with the U.S., but that only Greenland and Denmark can decide the island’s future.

Is UK likely to ban social media for under-16s? Australia’s social media ban for children under the age of 16 has grabbed global attention, and governments worldwide are considering implementing similar policies, with the U.K. seen as likely to be next.

— Holly Ellyatt

Quote of the week

In the markets

U.K. stocks edged lower over the past week as Trump ramped up the rhetoric against European nations over their resistance to his stated aim of absorbing Greenland into the U.S.

The FTSE 100 fell 0.67% to 10,126.78 on Tuesday, down from 10,137.35 a week ago.

Meanwhile, as jobs data from the Office of National Statistics showed unemployment remained static at 5.1% in the three-month period to the end of November, the pound recovered against the U.S. dollar. Having slipped earlier in the week, sterling stood at $1.3435 against the greenback on Tuesday, compared to $1.3418 last Wednesday.

Elsewhere, yields on the U.K. government’s benchmark 10-year bonds — also known as gilts — moved up to 4.464% on Tuesday, compared to 4.359% last Wednesday.

— Hugh Leask

Coming up

Jan. 21: U.K. inflation rate for December
Jan. 22: Retail sales for January
Jan. 23: GfK consumer confidence for January

— Holly Ellyatt