Building a True Trusted Trade Partnership with the United Kingdom

Commentary by Meredith Broadbent

Published January 22, 2026

On December 1, 2025, the United States and the United Kingdom struck a win-win agreement for innovation, bilateral investment, and growth in the pharmaceutical and medical technology sectors. In what is the third elaboration of the U.S.-UK Economic Prosperity Deal (EPD), first announced by leaders on May 5, 2025, the new deal, called the Agreement in Principle with the United Kingdom on Pharmaceutical Pricing, moves a step closer toward establishing a true, trusted trade partner relationship with the United Kingdom and should be applauded for what it accomplishes.

The December 1 deal allows the United Kingdom to export pharmaceutical and medical products to the U.S. duty-free by exempting these products from tariffs, including future action under Section 232 of the Trade Expansion Act of 1962 or Section 301 of the Trade Act of 1974. In exchange, the United Kingdom has made a precedent-setting commitment to increase its National Health Service (NHS) budget by 25 percent for new drugs, aiming to bring the country's spending on new drugs closer to that of the United States.

Background

The NHS enforces several key policies to limit UK government expenditures on branded medicines, including (1) cost-effectiveness thresholds, and (2) price cuts (taxes on companies) through the Voluntary Scheme for Branded Medicines Pricing and Access (VPAG).

Cost-effectiveness thresholds, set by the National Institute of Health and Care Excellence (NICE), are used to determine the level of government payment based on how much benefit a drug provides in relation to its price. NICE economists calculate quality-adjusted life year (QALY), which is an estimate of how many years of good health a drug can be expected to provide. The current QALY threshold of 20,000 pounds to 30,000 pounds allocated per year has been in place with no change since 1999. NICE generally won't pay for a drug if the pharmaceutical company refuses to provide the drug at a price within the threshold. The agreement commits the United Kingdom to increasing this threshold from 25,000 pounds to 35,000 pounds starting in April 2026.

In addition to low reimbursement prices by the NHS, U.S. pharmaceutical companies have been subject to tax assessments by the UK government, which are aimed at ensuring that total government health expenditures do not exceed a pre-determined budget cap. Pharmaceutical companies are subject to steep so-called claw-back taxes on sales of innovative medicines under the VPAG when spending on branded drugs exceeds the cap.

In the agreement, the United Kingdom has committed to reducing the repayment rate owed by companies under the current VPAG scheme from a peak of 25.5 percent to 15 percent starting in 2026, with the rate capped at or below 15 percent for the life of the scheme.

As geopolitical friction with China escalates, and the goal of securing medical supply lines takes center stage, the Trump administration and many Republican members of Congress take the view that the U.S. healthcare system bears a disproportionate burden of subsidizing pharmaceutical research and development (R&D) that is used in the UK market as well as throughout the world. Low levels of pricing reimbursement and VPAG claw-backs have functioned as serious nontariff trade barriers aimed at the U.S. industry exporting to the United Kingdom and have enabled the United Kingdom to rely on medical innovations developed through U.S. R&D efforts.

Breaking New Ground

However, when 35 members of Congress and 18 senators wrote U.S. Trade Representative (USTR) Jamieson Greer in July, urging him to "ensure foreign nations pay their fair share toward the cost of pharmaceutical research and development," few trade practitioners and industry experts saw this as a realistic negotiating objective for trade agreements. For years, the pharmaceutical industry has petitioned unsuccessfully for USTR to achieve improved market access in the form of fair pricing for reimbursements of its products through government healthcare systems. The executive order of May 12, 2025, appears to have shifted the U.S. government's focus, making drug pricing and securing "fair share" contributions of trading partners to global pharmaceutical R&D costs a key priority in trade negotiations.

The perceived political sensitivity of trade negotiations with the United States, encompassing domestic healthcare spending and drug pricing, and the impact of higher drug reimbursements on government healthcare budgets, has heretofore made trading partners-even those embarking on comprehensive free trade agreement (FTA) negotiations with the United States-extremely reluctant to accede to U.S. pressure to make concessions in this area. While the U.S.-Australia and U.S.-South Korea FTAs included provisions to boost the transparency of government pricing and reimbursement processes and ensure a right of appeal of pricing decisions to an independent body, these objectives were abandoned by the Obama administration in the Trans-Pacific Partnership negotiations.

Key Elements of the Agreement in Principle

While the written text of the agreement has not yet been made public, the core of this agreement, as reflected in government documents, is a UK commitment to boost NHS reimbursement prices for new pharmaceutical products. As discussed above, this will involve a 25 percent increase in the QALY benchmark for new drugs to £25,000-35,000 per year. The increase will apply to new National Institute for Health and Care Excellence (NICE) technology appraisals and those currently in progress, but will not be retroactive for drugs already on the market. According to NICE, the agency currently recommends 91 percent of the treatments it evaluates, around 70 per year. Estimates are that raising the payment threshold will mean approving up to five more drugs per year. Additionally, the UK government will ensure that higher prices for new medicines "are not materially eroded" by the rebates payable under the United Kingdom's VPAG scheme.

In return, the United States has promised to exempt new UK-origin pharmaceuticals, pharmaceutical ingredients, and medical technology from Section 232 tariffs for at least three years and refrain from targeting UK pharmaceutical pricing practices in any future Section 301 investigation-meaning that pharmaceuticals from the United Kingdom will enjoy duty-free access to the U.S. market.

Secure Medical Supply Chains and the Administration's Most-Favored-Nation Drug Pricing Scheme

The U.S.-UK agreement on pharmaceutical pricing stands as an important precedent as the United States works to rebuild secure medical supply chains with sustainable revenue streams to support the development of innovative medicines to combat cancer and other diseases and guard against the next pandemic. It is also a breakthrough for the president's MFN drug pricing scheme, which aims to both lower U.S. drug prices and boost foreign prices. The deal also puts pressure on other major drug exporters, such as the European Union, to seek similar deals.

In the new world of tough competitive and security threats from China, where steady capital investment in R&D is essential, the agreement, if implemented, represents an important breakthrough that will help sustain and grow a foundational industry in both countries. UK officials have hailed the agreement as a vital economic and health achievement, aimed at securing medicine access for patients and boosting the United Kingdom's life sciences sector. The United Kingdom is currently the only country to have secured zero-percent U.S. tariffs on pharmaceutical and medical technology products for the duration of President Trump's term, safeguarding a sector worth over £11 billion annually to the United Kingdom. UK Business and Trade Secretary Peter Kyle said, "This deal guarantees that UK pharmaceutical exports... will enter the [United States] tariff free, protecting jobs, boosting investment and paving the way for the United Kingdom to become a global hub for life sciences."

UK Science and Technology Secretary Liz Kendall noted that the "deal will help ensure UK patients get the cutting-edge medicines they need sooner, and our world-leading UK firms keep developing the treatments that can change lives." The deal will reinforce confidence in the United Kingdom as an investment destination, confidence that had been wavering as firms like AstraZeneca and Bristol-Myers Squibb struggled to be competitive in the old UK regulatory environment. Many investment decisions in the United Kingdom were on hold, and there was awareness in the government that firms might begin shuttering certain operations.

Implementation Challenges

The trade negotiating environment is hectic and complex as the administration pushes to conclude simultaneous bilateral trade negotiations with key trading partners all over the world. But notable wins are being scored that will stand as important precedents for U.S. industry.

The new structure that the administration is pursuing on trade, while still emerging, so far seems to be iterative in nature, with sectoral accomplishments announced as they are agreed to. This process contrasts with the traditional U.S. method of aiming for comprehensive agreements in which "nothing is agreed until everything is agreed." The old approach, as slow and cumbersome as it was, did result in enforceable agreements, often knitted together by cross-sectoral, bilateral trade-offs.

If no approval of the U.S.-UK Economic Prosperity Deal by Congress is contemplated, including earlier gains for U.S. beef and ethanol exports contained in the EPD, members of Congress will need to focus on how implementation will be monitored and assured, particularly as governments change. Congress could exercise its authority to pull back on tariff benefits in the event the United Kingdom fails to follow through on its commitments.

This U.S.-UK pharmaceutical deal could be a big win in terms of building a true, trusted trade partnership so that the two countries can lead in R&D spending, build global market share, and work together to diversify the supply of critical inputs. Much will depend on whether Congress takes a role in monitoring implementation, particularly as governments change. If Congress and the Trump administration work together, the agreement is a precedent that should stand the test of time, even as governments turn over and struggle to fund necessary investments.

Meredith Broadbent serves as a senior adviser (non-resident) with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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