Tariffs: What next?

Stephen Haddrill, Director General

Since 1945, nations have signed up for freer trade, starkly aware that the trade wars of the 1930s ended in global conflict.

President Trump has fractured that consensus.  He seeks to rejuvenate manufacturing in the US and get his way on other matters.

The UK has avoided the highest tariffs but is not spared all.  Like the rest of the world, we face a general tariff of 10% on most goods with 25% on cars, steel and aluminium.  What does this mean for the UK’s economy and the livelihoods of the British people?

The most obvious point is that assessing the impact is a complex and uncertain science.  Interlocking supply chains, the differing potential retaliations and hence escalations, and the possible reversal of policy in the US make any calculation speculative.  Nevertheless, some things are foreseeable in broad terms and the UK will be exposed to them. The global economy will shrink overall and as a nation dependent on trade for almost two-thirds of our GDP, that is bad news.  Prices of traded goods will increase, directly from the tariffs but also because countries that try to manufacture previously imported goods will do so less efficiently than their former trade partners.

The UK may suffer less than some.  Our economy is dominated by services which are not directly affected by tariffs, although the US has also set its sights on greater international recognition of US professional qualifications which may lead to trouble in future.  The lower general tariff on the UK than the EU might encourage some businesses to migrate to the UK, although that is unlikely in the short term given the volatility in US policy.  Goods that no longer find a market in the US may flow into the UK at lower prices which could be good for UK consumers, although bad for UK businesses which face such competition. This confusing fog of factors is made even more opaque by possible exchange rate movements: will the pound strengthen against the currencies of those countries which are more affected by the tariffs increasing the price of our sales to the EU, still a very major market; whilst weakening against the dollar, so compensating for the tariffs?

And what about interest rates?  If overall prices rise because the UK Government retaliates, the Bank of England may defer rate reductions.  On the other hand, the pressure on it to do the opposite to stimulate the economy is bound to grow.

Last but not least is the impact on the Government’s own budget.  It will face pressure to relieve the pain on targeted sectors, especially cars, but with its own income falling and its fiscal headroom tight, its ability to intervene when most needed is limited.  As we so desperately need growth and retaliation quickly makes the economic pain worse, the case is strong for leaving others such as the EU and China to retaliate to persuade President Trump to think again.

In short there are no simple answers to what the future holds, but what we know for sure is that increased uncertainty is bad for businesses and households.  We will keep a close watch on developments and maybe help spot some patches of enlightenment.