Trade war: Trump’s tariffs pose ‘age-old question’ for Starmer
The prospect of a global trade war looks increasingly likely after Donald Trump signed the first tariffs into law, but analysts were uncertain about its potential impact on the UK.
President Trump imposed 25 per cent tariffs on goods imports coming from Mexico and Canada, as well as an extra 10 per cent duty on Chinese goods.
He warned that the European Union would be next.
Officials from the countries facing tariffs have warned that they will retaliate, raising fears of a global trade war.
So far the UK looks relatively secure. Trump said the UK was “out of line”, but suggested a deal could be “worked out”.
The Prime Minister had been “very nice” on their calls, he added.
Many analysts have noted that the UK is unlikely to be in Trump’s firing line, because it buys more American goods than it exports, unlike the EU or China.
Which industries would be exposed to a tariff?
Paul Dales, chief UK economist at Capital Economics said: “The UK is not as exposed as many other economies and why we suspect any resulting reduction in UK GDP would be small”.
Still, some sectors would face a serious hit from the tariffs.
Capital Economics suggests that the UK’s car, pharmaceutical, and machinery sectors would be hit the hardest.
Pharmaceuticals account for 14.5 per cent of the UK’s goods exports to the US, the largest single sector. Cars make up 10.6 per cent while power generation machinery accounts for 10.5 per cent.
But experts said the biggest impact on the economy as a whole would come through the slowdown in global growth prompted by a trade war.
“For the UK the economic transmission is more indirect should global growth slow off the back of a multilateral trade war,” Simon French, head of research at Panmure Liberum said.
Many analysts had suggested that Trump’s tariffs were primarily a negotiating tool, but the speed with which he has imposed duties suggests that he is willing to go further and faster than many investors had previously anticipated.
And while the tariffs could still be negotiated away, Thomas Pugh, an economist at RSM UK, said “the risks of a global trade war…have clearly risen”.
Could tariffs impact inflation?
Many economists think that tariffs would increase inflation, since firms would pass on the extra costs to consumers. This would slow the pace of interest rate cuts.
However, there’s also a possibility that tariffs could actually weigh on inflation if countries like China try to maintain their share of global trade, by selling to new partners at lower prices.
The tariff announcements clarify the challenge facing Keir Starmer as he embarks on an attempted ‘reset’ with the EU. Starmer travelled to Europe on Monday, becoming the first Prime Minister since Brexit to join a gathering of EU leaders.
He hopes that he can forge closer ties with the EU on trade and security, while also avoiding the worst of Trump’s tariffs.
But this may well prove impossible if the trade divisions between the EU and the US harden.
For Dales, Trump’s tariffs “raise the age-old question of whether the UK wants to be closer to the US or closer to the EU.”
Senior European diplomats quoted in the Times said the Prime Minister would likely be forced back towards the EU given increasing global uncertainty.
“Brexit was a project for a stable and prosperous world, but in a complicated world, obviously the UK will be closer to Europe,” one said.
The worst case for scenario for the UK is that it fails to make any material change to its trading relationship with the EU while also making itself a target for Trump.