I have a favourite economics limerick. It goes like this:
To gainfully utilise labour,
Export nations play 'beggar-thy-neighbour',
While the deficit spenders,
Resenting their lenders,
May rattle the trade tariff sabre
I keep trying to find the original source, but when you Google 'economics limerick' you get taken to the Department of Economics at the University of Limerick. I decided against ringing up their press office, on the basis that they would not find the enquiry amusing.
Anyway, what the heck is a tariff and how much will Donald Trump's fixation on them cost the UK economy? The first part is easy enough to answer: a tariff is a tax imposed by one country on the goods and services imported from another. The second part is a little more complicated.
Historically, the point of tariffs has been to protect national industries. So if the UK government wanted to boost domestic washing machine manufacturers, it might place (or 'slap', in the proper journalese) a tariff on imported washing machines. This would artificially raise the price of those imports, thereby incentivising UK consumers to buy British.
But the consumer loses out at least twice. First, because tariffs restrict choice. Foreign built washing machines may be superior and cheaper. Second, tariffs disincentivise domestic manufacturers from improving their products or cutting their costs. Why bother when foreign rivals have been priced out of your market? As a result, tariffs are inflationary, a phenomenon Americans claim to be mad about.
The next problem, of course, is that other nations have agency and are likely to reciprocate, by placing tariffs on US exports. Now, we have ourselves a trade war. Throw in Trump's not so veiled threats to ditch US treaty allies in favour of authoritarian regimes and it's all getting a little bit uncomfortable for the Atlantic alliance.
Trump, who views everything as a zero-sum game in which there can be only winners and losers, has been obsessed with tariffs for decades. He considers them to be a tax on foreign governments (they are a tax on domestic consumers) and that they can replace forms of income tax (complicated but not really).
In the 2024 US presidential election campaign, Trump said he would impose a tariff of 10 to 20 per cent on all imports, and 60 to 100 per cent on Chinese goods. The impact on the UK economy would be significant. Goldman Sachs has cut its 2025 forecast for UK GDP from 1.6 per cent to 1.4 per cent. This will materially impact the amount of money Rachel Reeves has to spend.
As for the Eurozone, the bank has reduced its forecast from an already anaemic 1.1 per cent to 0.8 per cent. And that is based on limited tariffs, mostly on automakers, not the 10 or 20 per cent blanket tariffs. In other words, things could be even worse.
If you've reached the end of today's newsletter, I'm grateful. Here's another economics limerick for the road:
We argued, when banks appeared strong,
That more capital was needless and wrong,
But we changed this impression
In the current recession,
Which more capital, we claimed, would prolong
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