The UK may ultimately get caught up in Trump’s tariff tirade. But while tariffs would hit certain industries and make life tricky for the government, I suspect the overall UK economy would cope better than some fear.
US President-elect Donald Trump has so far taken aim at Mexico, Canada and China by saying that when his presidency starts on 20th January next year he will impose a 25% tariff on all products coming into the US from Mexico and Canada, and increase existing tariffs on all products coming from China by 10%.
The UK is not in the firing line. But it may ultimately get caught in the crossfire. After all, on the campaign trail Trump threatened to place a 10% tariff on products coming into the US from all countries. So what would a 10% tariff mean for the UK economy?
A tariff is a tax imposed on the purchase of a product from a different country. It is designed to entice businesses and households to buy products made in their own country instead. So if the US imposed a 10% tariff on the UK, it would raise the price of UK products in the US by up to 10% and could mean that US businesses and households buy fewer UK products and more US products. If so, UK exporters would earn less and the UK economy would be smaller than otherwise.
In theory, the UK economy could be much smaller. In 2023, the UK exported £188bn of goods and services to the US. That accounted for 22% of the UK’s total exports and generated 7% of the UK’s GDP.
Crucially, though, £126bn of those exports are services, such as legal and accounting work, rather than goods, such as medicines and cars. And services would almost certainly be exempt from a tariff.
Even so, the UK still exports £62bn of goods to the US, which generates 2.3% of the UK’s GDP. If those exports were to suddenly disappear, then UK GDP would be 2.3% lower. That’s the same as the annual income of everyone in the UK falling by £850.
Thankfully, that’s unlikely to happen. US businesses and households will probably still buy lots of UK products, either because those products aren’t made in the US or they value the UK version enough to pay a higher price.
Moreover, tariffs tend to result in an appreciation of the currency of the country imposing the tariff and a depreciation of the currency of the country receiving it. A 5% fall in the pound against the dollar, for example, would mean that the prices of UK products in the US rise by 5% rather than 10%.
And such a weakening in the pound would make those services that the UK sells to the US in greater quantities 5% cheaper, thereby encouraging US businesses and households to buy more of them.
So while the tariff may mean the US buys fewer UK goods, it may mean the US buys more UK services. It might be the case that the tariff ends up reducing GDP by just 0.1% or, in fact, raises it by around 0.1%.
Of course, those companies that sell a lot of goods to the US would be hit the hardest. The UK sells £8.8 bn of pharmaceuticals to the US, £6.4bn of cars, £6.4bn of power generation machinery and £3.8bn of industrial machinery. What’s more, given that Trump placed tariffs on EU and UK iron, steel and aluminium exports during his first term as President, those UK companies that contribute to £2.0bn of the UK’s exports of such metals to the US would understandably be nervous.
Tariffs would also make life hard for the UK government. During Trump’s first presidency between January 2017 and January 2021, the UK was still part of the EU. That meant when Trump imposed tariffs on the EU and the EU retaliated with its own tariffs on the US, the UK was legally required to do the same.
But since Brexit, the choice now lies with the UK government. This gets right to the heart of the age-old question of whether the UK wants to be closer to the US or the EU. I suspect it will try and achieve both, by cosying up to the US but also by replicating the EU’s retaliation. But that may mean it pleases no one.
Overall, it looks as though the UK economy will grow by around 1.0% this year, which would be better than last year’s 0.3%. I suspect 2025 will be better still, with the economy growing by around 1.8% despite the UK probably being caught in the crossfire of Trump’s tariff tirade.
Paul Dales is chief UK economist of research consultancy Capital Economics.
