Should we fear Trumponomics? What tariffs could mean for the US, UK, EU, China and the world
There’s fear in some quarters of another Donald Trump presidency but will the economics be that bad?
Not a single vote has been counted but the policies of a possible second Trump presidency have already influenced financial markets.
The cost of US and UK borrowing – measured through 10-year revenue-raising instruments called bonds – has been upped as traders eyed the price-rising impact a Trump presidency could have on the world’s biggest economy.
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A signature policy of his – tariffs – could make things worse for US consumers, in turn hurting the world economy of which the UK is a part.
Precise detail on what tariffs Trump would apply on what goods and from where remains to be seen. He’s said all goods coming into the country could be slapped with a 10% tax.
Goods from China are going to be particularly hit with an anticipated 60% levy.
Why tariffs?
The hope is that by making imports more expensive goods made in the US will be more competitive and comparatively cheaper. More people would buy those things and life would be better for US producers, the thinking goes.
If US producers are doing well, they’ll hire more people, Trump expects. He’s calculating that more people working for US companies doing well will make for a strong economy and happy voters.
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Parts of America have been severely impacted by factory closures as companies move to parts of the world with cheaper wages and operating costs.
This accelerated since the 1990s when the North American Free Trade Agreement (NAFTA) made it easier and cheaper to export to the US, reducing the incentive to produce in the country.
Donald Trump campaigns in North Carolina. Pic: Reuters
Blue-collar workers, traditionally not college-educated, lost and continue to lose out majorly from plant closures. These are the voters Trump is targeting and who form his base of support.
It’s worth noting Trump isn’t the only fan of tariffs with the Biden administration implementing them on Chinese electric cars, solar panels, steel and aluminium as it sought to protect the investment it had made in such industries from cheap and heavily subsidised goods.
What will the effect be?
China, unsurprisingly, will be levied the highest and experience the greatest direct strike.
The hit will be “notably negative”, according to analysis from the National Institute of Economic and Social Research (NIESR), a leading thinktank.
It will face short-term pressures on manufacturing and trade with its gross domestic product (GDP) – the measure of everything produced in the country – to fall about 1% a year for two years, NIESR says.
Economists at Capital Economics quantify the cost at about a 0.5% to 0.7% reduction in GDP.
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UK should ‘expect’ Trump tarrifs
The US
That said the effects will be felt most keenly by those living in the US who will pay more.
If usually cheap imported goods get pricier that probably will cause the overall rate of inflation to rise.
Here the knock-on influences emerge. Higher inflation will just mean more expensive borrowing through upped interest rates as the US central bank, known as the Fed, will act to reduce inflation.
There’s no mystery around how high interest rates can weigh on an economy, the literal goal of hiked rates is to suppress buying power and to take money out of the economy.
Fears of the US ending up in recession spooked stock markets and triggered a global sell-off just three months ago.
Stock prices can seem nebulous but they impact the value of most people’s pensions.
A recession isn’t predicted but the US economy will falter, NIESR says.
Economic growth in America, as measured by GDP, would decrease by around 1.3 to 1.8 percentage points over the next two years, depending on whether the countries it trades with retaliate, upping their own duties on US goods.
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Worldwide reverberations
As tariffs make exporting less favourable exporters will simply export less, meaning less is produced and the worldwide economy slows.
The blow to the global economic output could be a 2% GDP drop after five years of Trump being in office, according to NIESR.
The consequences of Trump tariffs won’t just be short-term, NIESR forecasts, with global GDP still lower than it would have been without the imposition even in 15 years’ time.
Specific countries will be hit worse than others: Mexico and Canada for whom the US makes up roughly 80% and 50 % of trade, respectively will experience the greatest pain.
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The EU
It doesn’t look too bad for the European Union (EU) by comparison and could even be good for the bloc, some say.
NIESR reckons the euro area will be less badly affected than the UK over five years but the immediate impact will be worse.
The good news first: if Trump doesn’t lean too heavily into tariffs and focuses more on cutting taxes to grow the economy that bump could lead to stronger demand for European goods, notwithstanding import levies, suggests research from economic advisory firm Oxford Economics.
The bad news: it won’t look so good if the US economy turns bad through more aggressive policies like high tariffs on more goods, the firm says. That would mean a “large” fall in European exports, it adds.
And finally, some neutral news: not even high tariffs would be inflationary for the continent, Oxford Economics expects. Reduced demand and lower goods prices would just offset the higher import costs, it says.
Another firm, Capital Economics, also isn’t too concerned about the European economy under Trump.
“Smaller than many fear”, is how it described the suspected short-term macroeconomic consequences.
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What about the UK?
It’s got to be bad for the UK, right? The US is the country’s biggest trading partner after all, making up just under 20% of our trade
Again, not so. The UK doesn’t even make it into the top 10 worst-affected countries under NIESR’s research.
Capital Economics anticipates the knock would be small and maybe even positive, though inflation may be higher than if there were no second Trump administration.
But there’s no consensus on this point with NIESR forecasting GDP will be lower because of fewer exports and higher global interest rates.
This downturn would slow UK exports to other countries, NIESR says.
NIESR estimates UK GDP could be between 2.5% and 3% lower over five years and 0.7% lower in 2025. So instead of the 1.5% rate of GDP predicted by the IMF for next year, the economy would grow by 0.5%.
Business
Donald Trump’s tariffs will have consequences for globalisation, the US economy and geopolitics
For decades, trade and trade policy has been an economic and political backwater – decidedly boring, seemingly uncontroversial.
Trade was mostly free and getting freer, tariffs were getting lower and lower, and the world was becoming more, not less, globalised.
But alongside those long-term trends, there were some serious consequences.
Trump latest: US president announces sweeping global trade tariffs
Mature, developed economies like the UK and US became ever more reliant on cheap imports from China and, in the process, saw their manufacturing sectors shrink.
Large swathes of the rust belt in the US – and much of the Midlands and North of England – were hollowed out.
And to some extent that’s where the story of Donald Trump’s “Liberation Day” really began – with the notion that free trade and globalisation had a darker side, a side he wants to remedy via tariffs.
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Trump’s tariffs: Ed Conway analysis
He imposed a set of tariffs in his first term, some on China, some on specific materials like steel and aluminium. But the height and the breadth of those tariffs were as nothing compared with the ones we have just heard about.
Not since the 1930s has the US so radically increased the level of tariffs on all nations across the world. Back then, those tariffs exacerbated the Great Depression.
It’s anyone’s guess as to what the consequences of these ones will be. But there will be consequences.
Consequences for the nature of globalisation, consequences for the US economy (tariffs are exceptionally inflationary), consequences for geopolitics.
Imports from the UK will face a 10% tariff, while EU goods will see 20% rates. Pic: Reuters
And to some extent, merely knowing that little bit more about the White House’s plans will deliver a bit of relief to financial markets, which have fretted for months about the imposition of tariffs. That uncertainty recently reached unprecedented levels.
But don’t for a moment assume that this saga is over. Nothing of the sort. In the coming days, we will learn more – more about the nuts and bolts of these policies, more about the retaliatory measures coming from other countries.
We will, possibly, get more of a sense about whether some countries – including the UK – will enjoy reprieves from the tariffs.
To paraphrase Churchill, this isn’t the end of the trade war, or even the beginning of the end – perhaps just the end of the beginning.
Donald Trump has announced a 10% trade tariff on all imports from the UK – as he unleashed sweeping tariffs across the globe.
Speaking at a White House event entitled “Make America Wealthy Again”, the president held up a chart detailing the worst offenders – which also showed the new tariffs the US would be imposing.
“This is Liberation Day,” he told a cheering audience of supporters, while hitting out at foreign “cheaters”.
Follow live: Trump tariffs latest
He claimed “trillions” of dollars from the “reciprocal” levies he was imposing on others’ trade barriers would provide relief for the US taxpayer and restore US jobs and factories.
Mr Trump said the US has been “looted, pillaged, raped, plundered” by other nations.
Pic: AP
His first tariff announcement was a 25% duty on all car imports from midnight – 5am on Thursday, UK time.
Mr Trump confirmed the European Union would face a 20% reciprocal tariff on all other imports. China’s rate was set at 34%.
The UK’s rate of 10% was perhaps a shot across the bows over the country’s 20% VAT rate, though the president’s board suggested a 10% tariff imbalance between the two nations.
It was also confirmed that further US tariffs were planned on some individual sectors including semiconductors, pharmaceuticals and critical mineral imports.
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Trump’s tariffs explained
The ramping up of duties promises to be painful for the global economy. Tariffs on steel and aluminium are already in effect.
The UK government signalled there would be no immediate retaliation.
Business and Trade Secretary Jonathan Reynolds said: “We will always act in the best interests of UK businesses and consumers. That’s why, throughout the last few weeks, the government has been fully focused on negotiating an economic deal with the United States that strengthens our existing fair and balanced trading relationship.
“The US is our closest ally, so our approach is to remain calm and committed to doing this deal, which we hope will mitigate the impact of what has been announced today.
“We have a range of tools at our disposal and we will not hesitate to act. We will continue to engage with UK businesses including on their assessment of the impact of any further steps we take.
“Nobody wants a trade war and our intention remains to secure a deal. But nothing is off the table and the government will do everything necessary to defend the UK’s national interest.”
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Who showed up for Trump’s tariff address?
The EU has pledged to retaliate, which is a problem for Northern Ireland.
Should that scenario play out, the region faces the prospect of rising prices because all its imports are tied to EU rules under post-Brexit trading arrangements.
It means US goods shipped to Northern Ireland would be subject to the EU’s reprisals.
The impact of a trade war would be expected to be widely negative, with tit-for-tat tariffs risking job losses, a ramping up of prices and cooling of global trade.
Research for the Institute for Public Policy Research has suggested more than 25,000 direct jobs in the UK car manufacturing industry alone could be at risk from the tariffs on car exports to the US.
The Society of Motor Manufacturers and Traders (SMMT) had said the tariff costs could not be absorbed by manufacturers and may lead to a review of output.
The tariffs now on UK exports pose a big risk to growth and the so-called headroom Chancellor Rachel Reeves was forced to restore to the public finances at the spring statement, risking further spending cuts or tax rises ahead to meet her fiscal rules.
Read more:
What do Trump’s tariffs mean for the UK?
The rewards and risks for US as trade war intensifies
A member of the Office for Budget Responsibility (OBR), David Miles, told MPs on Tuesday that US tariffs at 20% or 25% maintained on the UK for five years would “knock out all the headroom the government currently has”.
But he added that a “very limited tariff war” that the UK stays out of could be “mildly positive”.
He said: “There’s a bit of trade that will get diverted to the UK, and some of the exports from China, for example, that would have gone to the US, they’ll be looking for a home for them in the rest of the world.
“And stuff would be available in the UK a bit cheaper than otherwise would have been. So there is one, not central scenario at all, which is very, very mildly potentially positive to the UK. All the other ones which involve the UK facing tariffs are negative, and they’re negative to very different extents.”
Business
Donald Trump’s tariffs will have consequences for globalisation, the US economy and geopolitics
For decades, trade and trade policy has been an economic and political backwater – decidedly boring, seemingly uncontroversial.
Trade was mostly free and getting freer, tariffs were getting lower and lower, and the world was becoming more, not less, globalised.
But alongside those long-term trends, there were some serious consequences.
Trump latest: US president announces sweeping global trade tariffs
Mature, developed economies like the UK and US became ever more reliant on cheap imports from China and, in the process, saw their manufacturing sectors shrink.
Large swathes of the rust belt in the US – and much of the Midlands and North of England – were hollowed out.
And to some extent that’s where the story of Donald Trump’s “Liberation Day” really began – with the notion that free trade and globalisation had a darker side, a side he wants to remedy via tariffs.
He imposed a set of tariffs in his first term, some on China, some on specific materials like steel and aluminium. But the height and the breadth of those tariffs were as nothing compared with the ones we have just heard about.
Not since the 1930s has the US so radically increased the level of tariffs on all nations across the world. Back then, those tariffs exacerbated the Great Depression.
It’s anyone’s guess as to what the consequences of these ones will be. But there will be consequences.
Consequences for the nature of globalisation, consequences for the US economy (tariffs are exceptionally inflationary), consequences for geopolitics.
Imports from the UK will face a 10% tariff, while EU goods will see 20% rates. Pic: Reuters
And to some extent, merely knowing that little bit more about the White House’s plans will deliver a bit of relief to financial markets, which have fretted for months about the imposition of tariffs. That uncertainty recently reached unprecedented levels.
But don’t for a moment assume that this saga is over. Nothing of the sort. In the coming days, we will learn more – more about the nuts and bolts of these policies, more about the retaliatory measures coming from other countries.
We will, possibly, get more of a sense about whether some countries – including the UK – will enjoy reprieves from the tariffs.
To paraphrase Churchill, this isn’t the end of the trade war, or even the beginning of the end – perhaps just the end of the beginning.
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