Under Donald Trump’s mass tariffs scheme, the UK is one of a number of countries on the minimum rate of 10% (along with Australia, Singapore, Brazil, Argentina, UAE, Egypt and others). Much of the world economy is on much higher tariff rates. The EU rate is 20%. Vietnam’s is 46%. China’s is 54%.
The fact the US tariff being applied to the UK is so much lower than that for other countries means there are dimensions in which the UK will gain from Trump’s tariffs as well as dimensions we lose.
The main ways we lose are straightforward. Our exporters to the US lose out because they face an increased tariff. They also lose out because the US economy will suffer as a consequence of imposing tariffs – by some estimates by as much as 3-4% of GDP – and if the US economy is smaller, then US consumers and firms will be buying fewer goods and services from the UK. There will also be a hit to the rest of the world economy – perhaps a percentage point or more (estimates differ markedly). A weaker world economy means other countries will be buying fewer UK exports and that the products they supply to the UK as imports will be less abundant.
But these losses are by no means the end of the story. The tariff on UK products being much lower than that on many other economies means that UK exports to the US will become cheaper relative to US imports from those other countries. So in cases where the main alternative to an import from the UK is not a US product but, instead, a product from the EU, China, Vietnam or some other country with a much higher tariff rate, UK exports to the US may actually increase.
If Trump’s tariffs are maintained for some time, investors in firms in those other countries will quickly work out that if they relocate business activities to the UK then they’ll be better-placed to export to the US. So the UK may gain investment inflows as a consequence.
In the meantime, producers in these other countries who are no longer able to export, competitively, to the US will try to sell their products elsewhere. Since we in the UK impose much lower tariffs (or, in the case of those such as the EU with whom we have an FTA, no tariffs at all), it may be attractive to seek to sell those products to us, instead. That means the UK market may be flooded, over the next couple of years, with cheap Chinese, Vietnamese and EU products, taking down UK inflation.
How should we expect these losses and gains to net out, relative to the world without Trump’s tariffs? Could the UK actually benefit from Trump’s decisions even if he drives the US and the world economy into recession? Maybe. It isn’t inconceivable. But it’s also plausible that we lose out significantly.
UK services exports to the US are about £120 billion. If those fell in line with a US GDP drop of 4%, that would cost us about £5bn. UK exports to the rest of the world are about £660bn. If those dropped 1%, in line with a global GDP hit of 1% from Trump’s tariffs, that would cost us about £6.5bn. So losses to the UK from those two key sources are potentially about £11.5bn, or a little under 0.5% of GDP.
So to gain overall, we’d need to get more than a 0.5% out of the net of gained exports to the US when competing against Chinese, Vietnamese, EU, etc. products versus losses when competing against US products, plus extra inward investment plus the gains from cheap products from China, Vietnam and the EU, and at least some of that last effect is likely to be only temporary. We only export about £60bn in goods to the US, so a gain of £12bn would be a net 20% increase – which seems very unlikely. Some investment diversion into the UK may occur over time, but probably the main source would be the EU. East Asian investment diversion seems more likely to take the form of re-onshoring to the US or to within the USMCA net, if Trump settles his recent disputes with Mexico and Canada.
The short-term gains to the UK economy from products that would have been sold in the US being available cheap here could be material. And that will at least buffer the negative impacts of Trump’s tariffs on the UK economy if not fully outbalance them.
As we’ve seen, it is not inconceivable that the UK could gain net overall even in the long-term, if our net goods exports to the US rise by enough in cases we compete against higher-tariffed non-US competitors and that triggers additional investment inflow to the UK to take advantage. However, for that to happen we’d need the net beneficial effect to be implausibly large – more than a 20% increase in UK goods exports to the US.
More likely, alas, is that although we will not be as badly affected as other countries and although it’s not that implausible we gain overall in the short-term from an inflow of cheap goods no longer able to be sold in the US, over the longer term Trump’s tariffs will probably be bad for us too.
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