UK chancellor Rachel Reeves doesn’t wish to “speculate or jump to conclusions” about what Donald Trump’s election means for the British economic system.
“It’s an incredibly important trade relationship for the UK and US as well,” she informed the Monetary Instances. “We want to grow that, as it has grown in recent years.”
But even when the UK’s reliance on companies shields it from the worst of any recent tariffs, the nation stays weak to world shocks in commerce, enterprise confidence and the bond market, say economists.
What are the dangers to the UK?
Trump warned through the marketing campaign that he wished to impose a 60 per cent tariff on Chinese language imports and 10 to twenty per cent on items from different elements of the world.
The UK is a comparatively small, open economic system, which makes it notably weak to modifications in import costs. Whereas the EU is by far the UK’s largest total commerce companion, in nationwide rankings the US comes first in terms of purchases of UK items and companies.
That mentioned, analysts argue the UK needs to be much less uncovered to Trump’s ire than international locations that run a big commerce surplus with the US — comparable to China, Germany, or Mexico.
The US had a commerce surplus with the UK, together with an $8.2bn items commerce surplus within the January-September interval, in accordance with official US figures. Nevertheless, partially due to variations in accounting for exports from the Channel Islands, the UK additionally reported a commerce surplus with the US.
What occurs if recent tariffs are available in?
If the UK finally ends up getting hit by US tariffs, vocal and economically delicate industries can be affected. The UK exported about £8.2bn of prescription drugs, £7.5bn of automobiles and £5.3bn of mechanical energy mills within the 12 months to the tip of June 2024, in accordance with official statistics.
However, a comparatively low proportion of UK items exports total go to the US — about 14 per cent in 2023, in contrast with greater than 70 per cent for Canada and Mexico, in accordance with United Nations Convention on Commerce and Improvement information.
The EU accounts for greater than 40 per cent of UK items and companies exports, and about half of its items exports. “The UK would not be in the front line of countries” hit by US tariffs, mentioned Michael Saunders, a former Financial institution of England rate-setter who’s now at Oxford Economics. “The UK is less vulnerable.”
Any inflationary influence from commerce tensions can be mitigated if the UK opts in opposition to imposing retaliatory tariffs on the US, he added.
Primarily based on calculations that took into consideration the significance of the US as a commerce companion and a rustic’s commerce openness, Deutsche Financial institution concluded that the UK was not within the prime 20 international locations prone to be most affected by commerce tariffs.
Complete UK exports to the US are solely 2 per cent of its GDP. As such, even assuming full pass-through from a completely applied 10 per cent tariff enhance, the GDP influence to Britain can be near 0.2 per cent at most, mentioned economist Allan Monks at JPMorgan.
What else does the UK promote to the US?
The UK is the world’s second-largest companies exporter after the US, accounting for about 7 per cent of world companies exports. The UK will hope these don’t get snarled up in Trump’s protectionist sprint.
British companies exports made up for greater than half of its whole exports final 12 months — a document excessive, in accordance with official statistics. That is a lot bigger than a couple of fifth for Germany.
As a share of the economic system, companies exports account for about 18 per cent of UK GDP, the most important proportion of any G7 nation, about double the determine for Germany and 3 times the shares of Italy and Canada.
“The UK would be little affected by the direct effects of US import tariffs,” mentioned Elliott Jordan-Doak, economist at Pantheon Macroeconomics. “But the direct effects of Mr Trump’s likely tariffs are only the start.”
What are the broader dangers?
IMF evaluation suggests world progress would undergo a blow if Trump goes forward along with his commerce plans, although the precise particulars of his tariff proposals stay unclear.
Any commerce conflict between the US and key companions would have an incredible influence on EU export powerhouses comparable to Germany — resulting in knock-on results for the UK economic system.
Christian Keller, an economist at Barclays, warned that uncertainty attributable to the spectre of tariffs would “negatively affect investment and, more generally, confidence levels in Europe” even earlier than they take impact, which is probably not till the second half of 2025.
The German economic system is closely vulnerable to US tariffs due to its huge manufacturing sector. It’s forecast to develop solely by 0.6 per cent in 2025 after marginally contracting this 12 months, in accordance with information compiled by Consensus Economics.
The IMF has modelled the mix of tit-for-tat tariffs, a 10-year extension of Trump’s 2017 tax cuts, decreased web migration and better world borrowing prices. It warned of a 0.8 per cent hit to forecast world financial output subsequent 12 months and a 1.3 per cent blow in 2026.
What about different US insurance policies?
Trump has vowed not solely to increase tax cuts handed throughout his first time period however to push by recent reductions in company tax charges in addition to reductions at a person degree on earnings from time beyond regulation pay, ideas and pensions. He additionally needs to deport thousands and thousands of undocumented immigrants.
The federal debt is projected to swell by an extra $7.5tn in 10 years if Trump follows by along with his proposals, in accordance with pre-election evaluation from the Committee for a Accountable Federal Price range.
This raises the prospect of bond market buyers taking fright at US fiscal laxity and related inflation dangers. If this occurred, there could possibly be contagion dangers for different fiscally weak international locations, together with the UK, mentioned Sushil Wadhwani, a former BoE policymaker.
Bond market vigilantes might “switch their attention to us, having first had a go at US Treasuries”, he mentioned. “As a small, open economy we can’t insulate ourselves from trouble globally.”
Further reporting by George Parker
