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 advised the Monetary Instances. “We want to grow that, as it has grown in recent years.”
But even when the UK’s reliance on providers shields it from the worst of any recent tariffs, the nation stays susceptible 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 needed to impose a 60 per cent tariff on Chinese language imports and 10 to twenty per cent on items from different components of the world.
The UK is a comparatively small, open economic system, which makes it notably susceptible to modifications in import costs. Whereas the EU is by far the UK’s greatest total commerce companion, in nationwide rankings the US comes first relating to purchases of UK items and providers.
That stated, analysts argue the UK ought to be much less uncovered to Trump’s ire than international locations that run a big commerce surplus with the US — resembling 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 line with official US figures. Nonetheless, 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?
If the UK finally ends up getting hit by US tariffs, vocal and economically delicate industries could be affected. The UK exported about £8.2bn of prescription drugs, £7.5bn of vehicles and £5.3bn of mechanical energy mills within the 12 months to the tip of June 2024, in line with official statistics.
Nonetheless, 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 line with United Nations Convention on Commerce and Improvement knowledge.
The EU accounts for greater than 40 per cent of UK items and providers exports, and about half of its items exports. “The UK would not be in the front line of countries” hit by US tariffs, stated Michael Saunders, a former Financial institution of England rate-setter who’s now at Oxford Economics. “The UK is less vulnerable.”
Any inflationary affect from commerce tensions could be mitigated if the UK opts in opposition to imposing retaliatory tariffs on the US, he added.
Based mostly on calculations that took under 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 high 20 international locations more likely 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 improve, the GDP affect to Britain could be near 0.2 per cent at most, stated economist Allan Monks at JPMorgan.
What else does the UK promote to the US?
The UK is the world’s second-largest providers exporter after the US, accounting for about 7 per cent of world providers exports. The UK will hope these don’t get snarled up in Trump’s protectionist sprint.
British providers exports made up for greater than half of its whole exports final yr — a document excessive, in line with official statistics. That is a lot bigger than a few fifth for Germany.
As a share of the economic system, providers 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 thrice the shares of Italy and Canada.
“The UK would be little affected by the direct effects of US import tariffs,” stated 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 development would undergo a blow if Trump goes forward along with his commerce plans, though the precise particulars of his tariff proposals stay unclear.
Any commerce battle between the US and key companions would have an awesome affect on EU export powerhouses resembling Germany — resulting in knock-on results for the UK economic system.
Christian Keller, an economist at Barclays, warned that uncertainty brought on by 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 liable to US tariffs due to its large manufacturing sector. It’s forecast to develop solely by 0.6 per cent in 2025 after marginally contracting this yr, in line with knowledge compiled by Consensus Economics.
The IMF has modelled the mixture of tit-for-tat tariffs, a 10-year extension of Trump’s 2017 tax cuts, diminished web migration and better world borrowing prices. It warned of a 0.8 per cent hit to forecast world financial output subsequent yr 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 stage on revenue 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 a further $7.5tn in 10 years if Trump follows by along with his proposals, in line 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 might be contagion dangers for different fiscally susceptible international locations, together with the UK, stated Sushil Wadhwani, a former BoE policymaker.
Bond market vigilantes might “switch their attention to us, having first had a go at US Treasuries”, he stated. “As a small, open economy we can’t insulate ourselves from trouble globally.”
Extra reporting by George Parker
