Donald Trump has announced the US is to put tariffs on imports from Canada and Mexico, and increase those on Chinese goods, and suggested he will bring in similar levies on items from the EU. What could these new charges mean for the UK?
What will be the impact on the UK?
The UK economy will be hit by the indirect effects of White House policy.
First, tariffs are likely to lead to a general slowdown in global trade volumes, which will depress economic growth, particularly for an open economy such as the UK. Trump’s approach is also expected to push up prices, leading to a temporary resurgence in inflation.
If financial markets start betting on higher inflation – and hence higher interest rates – that is likely to drive up the cost of borrowing in the US. And that in turn has tended to increase the yields on UK government bonds, known as gilts, because the two markets are closely interlinked.
Higher gilt yields – and hence higher government borrowing costs – will make it harder for the chancellor, Rachel Reeves, to meet her self-imposed fiscal rules, and could prompt her to make cuts to future spending plans.
Trading on the brokerage IG’s weekend markets suggests that there could be a fall in the value of the FTSE 100 index on Monday, which would be bad news for investors in the UK’s largest companies.
How could this affect the UK’s plans to negotiate a closer relationship with the EU?
It’s complicated. So far, UK ministers have tried to placate Trump – with Reeves praising his optimism, for example. But with the EU expected to be subject to US tariffs, and potentially to retaliate, it may become increasingly difficult for the UK to avoid picking sides.
The EU is the UK’s closest and largest trading partner, and a UK-EU summit is planned for the spring at which there are hopes of striking a deal that could help dismantle some post-Brexit trade barriers. But the UK may now feel constrained by a desire not to offend Washington.
Similarly, Reeves travelled to China recently, signalling the importance of open trade, but the US may demand that allies join it in erecting barriers against competition from Beijing.
What will happen if Trump imposes tariffs on the UK?
Most of the UK’s exports to the US are services, such as banking and consulting, which do not tend to be subject to tariffs.
However, research by the Centre for Inclusive Trade Policy, a thinktank, suggested that a 20% across-the-board tariff could lead to a £22bn reduction in exports from the UK to the US, with the hardest-hit sectors including fishing and mining.
