Donald Trump has sent shockwaves around the world with the announcement of his “Liberation Day” trade tariffs.
The early signs are that the UK has got off lightly – with levies of 10% on goods we sell to the States – compared with as high as 50% for some countries. But is it that straightforward, and what are the implications for the global economy, the UK and your finances?
Sweeping tariffs on the £2.3trillion worth of goods imported to the US every year. A “baseline” – across the board – levy of 10% will be imposed on all countries and what they sell to the States. That kicks in straight away. On top of that, President Trump will slap “individualised reciprocal” tariffs on all countries it has a trade deficit with, ie those where the States buys more from them than the other way round. In some cases those add-ons are as high as 50%.
The UK escapes these additional tariffs, but will still see all exports to the States hit with at least a 10% extra levy. And some sectors will be hit harder. One reason the UK got off lighter than most is probably because we have broadly balanced trade with the US. It could also be about negotiations that have taken place.
Yes and no. It could have been worse, especially given there had been talk that the US could use the UK’s VAT rate of 20% as the level for import tariffs on us. Then again, that was always a deeply flawed argument. Instead, it has gone with the 10% tariffs that the UK add to imports, and not just those from the US.
President Trump has made much of the fact that its tariffs are half that imposed on US exports to each country concerned. So, if he had really wanted to cut the UK a special deal, it could have been as low as 5%. Plus, workers in various sectors here won’t be celebrating – far from it. Take the car industry, which now faces a whopping 25% tariff on UK-made motors sold to the States. The same applies on steel makers. Those sorts of tariffs have the potential to hammer demand and lead to large scale job losses.
There will be much debate over about a Brexit dividend: how the UK being out of the EU means we escaped the 20% tariff levied on the rest of Europe. There certainly is merit in that but it needs to be put in the context of the longer term economic hit since the 2016 vote to leave.
On the plus side, it appears pharmaceutical exports from the UK to the US – a highly lucrative trade – will stay tariff free, for now.
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Trump made a big play of how he believed higher tariffs will spur companies to invest in the US – open factories etc – to avoid the levies. That might work, but firms don’t make such decisions at the drop of a hat and, were they to do, it probably means job losses in other countries. The White House quoted analysis from last year that found a global tariff of 10% would grow the US economy by $728billion (£560bn) , create 2.8 million jobs, and increase real household incomes by 5.7%. The President is also adamant tariffs won’t lead to higher prices for US consumers, something most economists say is wishful thinking.
It could also prove a massive money spinner for the US government, with tariffs taking in more than £230billion in additional taxes, in theory at least.
We will have to see, but it is potentially seismic, depending how things pan out. Rain Newton-Smith, head of business lobby group the CBI, was in no doubt, saying: “Business has been clear: there are no winners in a trade war. Today’s announcements are deeply troubling for businesses and will have significant ramifications around the world.”
Imposing such hefty tariffs is like throwing sand in the gears of a machine, in this case the global economy. And when you’re the world’s biggest economy, that causes shockwaves in all countries. Many economies around the world were already in a fragile state. Doing this could push them into recession.
Much depends on what happens next, and whether other countries retaliate with higher tariffs on US goods, which would amount to a full-blown global trade war. If they don’t, and even cut the taxes they impose, then President Trump may have ultimately achieved one of his goals.
The Office for Budget Responsibility had already halved the UK’s growth forecast to 1% this year – and that was before factoring in a global trade war. Much could depend on how countries react, and if they hike tariffs still further on US exports. But it could cause the UK economy to slow even more, potentially wiping out Chancellor Rachel Reeves’ near £10billion financial buffer and leading to possible further tax rises and spending cuts.
One could be that, with a 10% tariff, foreign companies may look at the UK as a launchpad to export goods to the US. That could mean they invest in factories and other operations here. That could be especially true for EU companies, which has been hit with tariffs of 20%. Then there is talk of ‘dumping’ – companies sending goods to other countries, including the UK, that had been destined for the US. In theory that could mean bargains for consumers here, but that is far from certain. Plus, dumping risks undermining UK competitors, with an impact on the economy and jobs.
It is too early to say for sure, but the possibilities are far reaching. Economists think tariffs will push up inflation in the US, but also other countries. That could deter the Bank of England from cutting interest rates – bad news for borrowers but better for savers. Higher inflation could, in turn, push up the cost of government borrowing.
That said, if tariffs hit the economy then the Bank of England may be more included to cut rates. Tax and accounting firm RSM UK reckons growth could be dented by between 0.2% and 0.5% over the next few years. Thomas Pugh, its economist, said: “This reduction in growth will probably make the Bank of England more likely to cut interest rates this year”, and it forecast three quarter point reduction this year, which would take the central bank’s base rate to 3.75%.
The dollar has also weakened against the pound – and other currencies – in the wake of the announcement. This makes it cheaper for UK firms to import goods that are prices in dollars, which includes those from the Far East. That in turn could benefit shoppers, if the savings are passed on. It will, however, makes it more expensive for UK companies when they are exporting goods.
Then there is the impact on pensions: something that is sometimes overlooked. If you have a workplace pension then there is a very good chance at least some is invested in stocks and shares, both here and in the US. America’s main stock market has seen almost £3.9trillion wiped off its value since mid-February. Pensions are a long term investment but those sorts of shocks will impact the value of your retirement pot. And that is before the financial markets react to news of tariffs. Early signs are they will fall sharply.
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