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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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%.
Ford’s UK boss has called on the government to provide consumer incentives of up to £5,000 per car to boost demand for electric vehicles and help the industry hit challenging climate targets.
Lisa Brankin, chair of Ford UK & Ireland, told Sky News that direct support for consumers to purchase zero-emission vehicles is crucial if the industry is to remain viable and hit challenging net zero milestones.
Last week, amid increased industry pressure, the government launched a “fast-track” review of its Zero Emission Mandate (ZEV), which sets targets for the proportion of new vehicles that must be electric – set at 22% this year for cars and 10% for vans.
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Manufacturers say those targets are unrealistic, and a £15,000 fine per non-compliant vehicle is too harsh. Vauxhall owner Stellantis cited the ZEV as a factor in the closure of its Luton plant announced last week.
Speaking at Ford‘s Halewood plant on Merseyside at the launch of the Puma Gen-E, the electric version of its best-selling small SUV, Ms Brankin said consumer demand has fallen far below that envisaged when the mandate was set.
“The mandate is a really aggressive trajectory to 2030 and the phase out of new petrol and diesel vehicles. For us to get a return on our investment as a manufacturer – we have spent £380m here [at Halewood] and £2bn in Cologne – we need and want to sell electric vehicles. The problem is customers are not moving as we would want.
The electric van and Puma use the power unit produced on Merseyside. Pic: Ford
“The number one thing we want is direct customer incentives, perhaps a scrappage scheme, we have been calling for a cut in VAT on electric vehicles. Something that will incentivise customers to buy EVs, and incentivise the van and car sales that we badly need in the UK.”
Asked if the incentives would need to be in the order of £2,000-£5,000 to be effective, she said: “That is a good question, but it would need to be in that region. It will need to be substantial.”
The Puma Gen-E is significant for Ford because it is the company’s smallest and cheapest EV, with a starting price of just under £30,000, bringing it closer to mass market reach than its existing models.
The Halewood plant has just begun making the Gen-E power unit, used in both the Puma and the E-Transit Custom, the electric version of Ford’s 60-year-old commercial vehicle. They say it will now power Britain’s best-selling car and van.
It comes as the entire European car industry faces challenges in the transition away from internal combustion, including softening consumer demand, stiff Chinese competition and the threat of tariffs from the incoming second Trump administration.
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Ms Brankin defended Ford’s move into electric vehicles, a transition that thus far has failed to replicate its former dominance of the UK market for petrol and diesel vehicles.
She also said state support for its UK plants at Dagenham in Essex and Halewood was dwarfed by the company’s investment.
“The support we’ve had from the government is still far below the amount that we’ve poured into our business to make the EV transition. And for us to have a sustainable business it’s important that it’s profitable for us going forward if we are going to protect the jobs we’ve already created.
“We have got a really good range of electric vehicles, we are just not seeing customers making the switch as fast as we would want them to.”
The Office for National Statistics (ONS) has admitted efforts to overhaul unreliable data on Britain’s jobs market may not be ready until 2027.
The ONS confirmed it is now “unlikely” it will be able to introduce a revamped version of its Labour Force Survey (LFS) – which is the official measure of employment and unemployment in the UK – by mid-2025, leaving policymakers in the dark over the true state of the UK workforce.
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Governor of the Bank Andrew Bailey said it was “a substantial problem” that the exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
While the labour market is going to be “the key” to future rate cuts, another member of the interest rate decider Professor Alan Taylor told the MPs of the Treasury Committee last month: “We don’t necessarily have the best statistics there.”
The government too has built policy around the belief that the UK has a high number of people out of work and not looking for work.
Just last week the government announced £240m for reforms to “get Britain working”.
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But on the same day, the Bank’s chief economist said labour force participation “has now reached the point where participation is broadly in line with a natural level it should be”.
The UK had been thought to be an outlier compared to its neighbours in that the number of people in work is lower than before the COVID-19 pandemic.
Respected thinktank the Resolution Foundation had also said that there was no rise in inactivity based on HM Revenue & Customs data and that employment had been underestimated by 930,000 since 2019.
Also revised due to changes in population is the employment estimate, which is 0.1% higher than first thought, the ONS said.
The ONS said it continued “to advise caution when interpreting changes” in things like unemployment and economic inactivity.
More than a year ago in October 2023, the ONS temporarily suspended publication of its official labour force survey due to low response rates after the pandemic and began releasing experimental estimates that relied on tax and other data sources.
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