Trump tariffs: How the UK finds itself in a strong position on US trade
What if Britain has, almost entirely by accident, navigated itself into about the best possible position it could be in, as Donald Trump embarks on a trade war with nearly all his economic partners?
I realise this might, at first, sound a little odd. After all, when the world is facing economically-destructive measures (blanket tariffs are invariably value-destructive, in the short run at least) it’s hard to see much in the way of victories. Moreover, when it comes to Donald Trump, no one, including his own cabinet and staff, can quite predict what will happen next. Consider the roller-coaster over tariffs in the past few days alone.
Even so, the fact remains that of all the countries and regions in the world, Britain seems much less likely than most to face the kind of peremptory tariffs the president is so keen on.
Trade war latest: Trump pauses Mexico tariffs for a month
To see why, it helps to remember that the one thing Mr Trump hates above all else is trade deficits – when you import more goods (and it seems to be goods he mostly cares about) from another country than you send there in return.
America has an enormous trade deficit with China and with Mexico too, not to mention a smaller but not insubstantial deficit with Canada. When the president talks about the reasons for his tariffs he sometimes mentions illegal fentanyl imports, but, even more often, he references the size of the trade deficits. He wants America to make more stuff domestically and suck in less stuff from overseas.
We could have a long conversation (and I suspect we probably will have a long conversation in the coming months) about the extent to which deficits are, per se, a bad thing. But in the short run let’s focus on the UK and its strengths in this game.
First, since the UK is no longer part of the European Union, it will not automatically face the same trade terms as its neighbours on the continent. If the US imposes tariffs on the EU, Britain will not necessarily face them.
Second, if there is one country in the world with even bigger trade deficits than the US, it’s Britain. This country has deindustrialised even quicker than America, with the upshot that unlike the EU or Canada or Mexico, Britain is one of the few countries in the world to import more goods from America than America imports from it.
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How will Trump’s tariffs affect Brits?
Footnote: that last point actually depends on whose numbers you’re looking at. Look at America’s figures and it has a trade surplus with the UK. Look at Britain’s figures and America has a trade deficit with us. But either way, both are very small. The numbers are essentially balanced.
Third, in recent months, the new Labour government has begun to improve its relationship with China. Chancellor Rachel Reeves went on a financial diplomacy mission to Beijing last month. And unlike nearly every other industrialised country in the developed world, Britain has not imposed tariffs on imports of Chinese electric vehicles.
Many diplomats have raised their eyebrows about this, but in the event that America wanted to do a deal with Britain, this is precisely the kind of thing the government could quickly reverse: “Oh alright then – in return for this trade deal, we’re willing to impose those tariffs on China – the ones everyone else has already introduced.”
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How Trump’s tariffs could impact consumers
The funny thing about these three strengths is that, first off, up until recently many would have seen each of them – Brexit, our deindustrialisation and our cosying up to China – as weaknesses rather than strengths. They certainly weren’t part of any grand strategic plan.
Even so, the UK nonetheless finds itself in an unexpectedly propitious position when it comes to negotiating with the US. It has a better chance than most nations to act as a diplomatic bridge between America and Europe. Its chances of sealing that much-vaunted trade deal with the US have improved rather than deteriorated. Indeed, I’m told that leading members of the administration believe a trade deal with the UK could be sealed in a matter of months.
Whether that actually eventuates remains to be seen. After all, if there’s one thing you can’t predict when it comes to Donald Trump it’s, well, anything.
Government borrowing last month was the highest in five years, official figures show, exacerbating the challenge facing Chancellor Rachel Reeves.
Not since 2020, in the early days of the COVID pandemic with the furlough scheme ongoing, was the August borrowing figure so high, according to data from the Office for National Statistics (ONS).
Money blog: Borrowers warned of wider market risk
Tax and national insurance receipts were “noticeably” higher than last year, but those rises were offset by higher spending on public services, benefits and interest payments on debt, the ONS said.
It meant there was an £18bn gap between government spending and income, a figure £5.25bn higher than expected by economists polled by Reuters.
A political headache
Also released on Friday were revisions to the previous months’ data.
Borrowing in July was more than first thought and revised up to £2.8bn from £1.1bn previously.
For the financial year as a whole, borrowing to June was revised to £65.8bn from £59.9bn.
State borrowing costs have also risen because borrowing has simply become more expensive for the government. Interest payments rose to £8.4bn in August.
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Earlier this month: Why did UK debt just get more expensive?
It compounds the problem for Ms Reeves as she approaches the November budget, and means tax rises could be likely.
Her self-imposed fiscal rules, which she repeatedly said she will stick to, mean she must bring down government debt and balance the budget by 2030.
Read more:
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Tax rises?
Ms Reeves will need to find money from somewhere, leading to speculation taxes will increase and spending will be cut.
“Today’s figures suggest the chancellor will need to raise taxes by more than the £20bn we had previously estimated,” said Elliott Jordan-Doak, the senior UK economist at research firm Pantheon Macroeconomics.
“We still expect the chancellor to fill the fiscal hole with a smorgasbord of stealth and sin tax increases, along with some smaller spending cuts.”
Sin taxes are typically applied to tobacco and alcohol. Stealth taxes are ones typically not noticed by taxpayers, such as freezing the tax bands, so wage rises mean people fall into higher brackets.
Increased employers’ national insurance costs and rising wages have meant the tax take was already up.
Responding to the figures, Ms Reeves’s deputy, chief secretary to the Treasury, James Murray, said: “This government has a plan to bring down borrowing because taxpayer money should be spent on the country’s priorities, not on debt interest.
“Our focus is on economic stability, fiscal responsibility, ripping up needless red tape, tearing out waste from our public services, driving forward reforms, and putting more money in working people’s pockets.”
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