Week in Business: Will Donald Trump’s trade war blow up the UK economy?
Liberation Day, Independence Day, the greatest day in American history? Or the end of the global economic order and the start of a dangerous new world?
In the end it was classic Trump, sometimes reading from an autocue as if for the first time, sometimes veering off script in erratic directions, calling out supporters in the crowd, bringing up oversized props to illustrate his thinking.
But behind the showmanship and the rhetoric, President Trump blew up a global trading system and an economic order that had been taken for granted as the best way of doing things since the end of the Second World War, in the process becoming the most protectionist US President in 100 years.
From Friday night, anything imported into the US from another country will be subject to a minimum 10 per cent tariff – a tax – with many countries facing far higher rates; EU countries will face a 20 per cent levy.
Asian countries including Vietnam – which has become a manufacturing powerhouse for clothes, toys and electronics – face truly crippling tariffs meaning that entire supply chains are being totally upended. Goods exported from Vietnam to the US will now face a tariff of 46 per cent. For Taiwan it’s 32 per cent and 25 per cent for South Korea.
Trump says the tariffs will raise trillions of dollars, allowing him to deliver promised tax cuts to Americans. He also says the move is aimed to securing American jobs, protecting American manufacturing and encouraging a wave of investment as firms build factories on US soil.
There is indeed a theory behind this plan. But there’s a theory behind Communism, too, and what matters is how it plays out in practice.
How will countries respond to Trump’s tariffs?
Countries around the world – including the UK – are now urgently trying to figure out a response while hammering away at their US counterparts in a bid to negotiate. Trump likes a deal, but after the bombastic and at times shocking announcements of last night it seems unlikely that he’ll start chipping away at his new economic order anytime soon.
So where does this leave the UK economy?
Well, the US has whacked 10 per cent tariffs on exports from the UK to the US, all of which will now apply to the £60bn worth of goods that British firms ship across the Atlantic each year – including of course, cars, where the US is our largest export market and they are subject to a 25 per cent levy.
So there will be a dramatic economic impact.
A tariff is a tax, and taxes are all ultimately paid by people, not businesses. Whether through higher prices or lower wages, Trump’s tariffs will be felt be people – here in the UK and in the US.
It’s true that 10 per cent is better than the 20 per cent slapped on EU countries. Chalk that up as a Brexit win, if you like, though Keir Starmer is setting his hopes on a more comprehensive deal – with talk of a UK-US trade and economic agreement being thrashed out.
We must all hope that the government gets such a deal over the line, Lord Mandelson, the UK Ambassador in Washington and Downing St officials know that the stakes could not be higher.
UK economic growth could collapse
Trump has swung a wrecking ball through the Chancellor’s Spring Statement, her fiscal headroom and the OBR’s economic growth forecasts. Numbers that were frankly shaky last week have crumbled today.
The National Institute for Economic and Social Research claimed yesterday that if 10 per cent tariffs were imposed on UK goods – what they called a worst case scenario – economic growth in the UK would tumble to just over half a percent this year before evaporating entirely in 2026.
You read that right; some economists are now expecting zero per cent growth in the UK economy in 2026. Unless, that is, Starmer can negotiate better terms, bespoke terms.
The problem is that the UK economy is vulnerable to both the primary impact – the tariffs levied – and the secondary impacts of reduced global trade, slower global economic growth, a slump in business confidence and the likely inflationary impact of all this new friction in global trade. Even if Starmer carves out a deal – a huge ask – we will not be safe from the wider consequences.
Trump has carved up the world and the world needs to decide how it responds in the immediate and longer term.
It’s different strokes for different folks; the EU is expected to retaliate while Australia has said it won’t hit back – rejecting what it called “a race to the bottom” – good on you, Australia.
Trump sees himself as master of all he surveys, but if there is a winner from this breathtaking act of economic vandalism, it will be China.
With global supply chains and manufacturing operations being fundamentally reprogrammed in the months and years ahead, China stands to benefit enormously from America’s new protectionist mindset and that cannot be what Trump has in mind when he hails the dawn of a new golden age for America.
Global markets are reacting to this new reality as we speak and they’ll react again when countries and territories announce their response, with all eyes on the EU’s position which is set to emerge over the next 24 hours.