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
Energy minister says ‘there’s no shortcut’ to bringing down bills – as price cap rise announced
Households and businesses will have to wait for energy bills to fall significantly because “there’s no shortcut” to bringing down prices, the energy minister has told Sky News.
Speaking as Chancellor Rachel Reeves considers ways of easing the pressure on households in next week’s budget, energy minister Michael Shanks conceded that Labour’s election pledge to cut bills by £300 by converting the UK to clean power has not been delivered.
It comes as Ofgem announced the average annual energy bill will rise by 0.2% in January, despite wholesale costs falling.
Major forecasters Cornwall Insight had predicted a 1% drop – but the energy regulator has moved in the opposite direction. Between January and March, the typical annual dual fuel bill will be £1,758 – up from the current £1,755 cap.
The UK has the second-highest domestic and the highest industrial electricity prices among developed nations, despite renewable sources providing more than 50% of UK electricity last year.
“The truth is, we do have to build that infrastructure in order to remove the volatility of fossil fuels from people’s bills,” Mr Shanks said.
“We obviously hope that that will happen as quickly as possible, but there’s no shortcut to this, and there’s not an easy solution to building the clean power system that brings down bills.”
His comments come amid growing scepticism about the compatibility of cutting bills as well as carbon emissions, and growing evidence that the government’s pursuit of a clean power grid by 2030 is contributing to higher bills.
While wholesale gas prices have fallen from their peak following the Russian invasion of Ukraine in 2022, energy bills remain around 35% higher than before the war, inflated by the rising cost of reducing reliance on fossil fuels.
The price of subsidising offshore wind and building and managing the grid has increased sharply, driven by supply chain inflation and the rising cost of financing major capital projects.
In response, the government has had to increase the maximum price it will pay for offshore wind by more than 10% in the latest renewables auction, and extend price guarantees from 15 years to 20.
The auction concludes early next year, but it’s possible it could see the price of new wind power set higher than the current average wholesale cost of electricity, primarily set by gas.
Renewable subsidies and network costs make up more than a third of bills and are set to grow. The cost of new nuclear power generation will be added to bills from January.
The government has also increased so-called social costs funded through bills, including the warm home discount, a £150 payment made to around six million of the least-affluent households.
Gas remains central to the UK’s power network, with around 50 active gas-fired power stations underpinning an increasingly renewable grid, and is also crucial to pricing.
Because of the way the energy market works, wholesale gas sets the price for all sources of electricity, the majority of the time.
At Connah’s Quay, a gas-fired power station run by the German state-owned energy company Uniper on the Dee estuary in north Wales, four giant turbines, each capable of powering 300,000 homes, are fired up on demand when the grid needs them.
Energy boss: Remove policy costs from bills
Because renewables are intermittent, the UK will need to maintain and pay for a full gas network, even when renewables make up the majority of generation, and we use it a fraction of the time.
“The fundamental problem is we cannot store electricity in very large volumes, and so we have to have these plants ready to generate when customers need it,” says Michael Lewis, chief executive of Uniper.
“You’re paying for hundreds of hours when they are not used, but they’re still there and they’re ready to go at a moment’s notice.”
Michael Lewis, chief executive of Uniper
He agrees that shifting away from gas will ultimately reduce costs, but there are measures the government can take in the short term.
“We have quite a lot of policy costs on our energy bills in the UK, for instance, renewables incentives, a warm home discount and other taxes. If we remove those from energy bills and put them into general taxation, that will have a big dampening effect on energy prices, but fundamentally it is about gas.”
The chancellor is understood to be considering a range of options to cut bills in the short term, including shifting some policy costs and green levies from bills into general taxation, as well as cutting VAT.
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Tories and Reform against green energy
Stubbornly high energy bills have already fractured the political consensus on net zero among the major parties.
Under Kemi Badenoch, the Conservatives have reversed a policy introduced by Theresa May. Shadow energy secretary Claire Coutinho, who held the post in the last Conservative government, explained why: “Net zero is now forcing people to make decisions which are making people poorer. And that’s not what people signed up to.
“So when it comes to energy bills, we know that they’re going up over the next five years to pay for green levies.
“We are losing jobs to other countries, industry is going, and that not only is a bad thing for our country, but it also is a bad thing for climate change.”
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Reform UK, meanwhile, have made opposition to net zero a central theme.
“No more renewables,” says Reform’s deputy leader Richard Tice. “They’ve been a catastrophe… that’s the reason why we’ve got the highest electricity prices in the developed world because of the scandal and the lies told about renewables.
“They haven’t made our energy cheaper, they haven’t brought down the bills.”
Mr Shanks says his opponents are wrong and insists renewables remain the only long-term choice: “The cost of subsidy is increasing because of the global cost of building things, but it’s still significantly cheaper than it would be to build gas.
“And look, there’s a bigger argument here, that we’re all still paying the price of the volatility of fossil fuels. And in the past 50 years, more than half of the economic shocks this country’s faced have been the direct result of fossil fuel crises across the world.”
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