What do tariffs mean for the UK?
On 2 April, standing in the Rose Garden of the White House, Donald Trump announced new tariffs on UK exports to the US. Trump has since delayed the implementation of the higher rates of tariffs for 90 days. But what are tariffs? How will these new tariffs affect the UK? And how should the UK government respond to this change to the world economic order?
What trade does the UK do with the US?
The announcement on 2 April that America would impose a 10% tariff on all British goods and a 25% tariff on all foreign-made cars is likely to further damage the UK's manufacturing sector following Brexit. President Trump has enacted 10% tariffs on almost every country in the world (excluding Belarus, Cuba, Russia, and North Korea), arguing that the trade deficits the US has with many other countries put the US at a disadvantage. It is his hope that imposing tariffs will reduce the trade deficit and motivate international companies to bring industry back to the US.
What is a trade deficit? - A trade deficit relates to when a country's total value of imports exceeds the total value of its exports, meaning it buys more goods and services from other countries than it sells to them.
How do the US tariffs work? - Trump's tariffs are effectively an import tax which must be paid by the importing company to the US Treasury on goods produced from foreign countries.
At the end of the third quarter of 2024, the UK was running a trade surplus with the US of around £71.1 billion per year (this includes goods and services). In particular, the three goods which the UK exports most to the US are:
Cars (£8.3bn per year)
Pharmaceuticals (£7.2bn per year)
Generators (£5.2bn per year).
As the US is the UK's second-largest export market for cars after the EU, Trump's new 25% tariff on automobile imports will hit UK car manufacturers hard - Jaguar Land Rover has this week suspended all shipments of cars to the US for a month - with fears of job losses rising across the industry.
How damaging will tariffs be for the UK?
US tariffs are expected to deliver a 0.7% hit to the UK economy, seven times the growth secured by the government last quarter. Because tariffs are currently only imposed on goods rather than services, it is the manufacturing sector which will be most affected, particularly in the industrial hubs of the North East and Midlands. This additional hit to manufacturing will prove to be particularly damaging to a sector which has struggled following Britain’s decision to leave the EU. Research by the London School of Economics has found that following Brexit, the value of the goods exported to the EU from the UK has fallen by 13.2% (£27 billion). Further research by Cambridge Econometrics suggests that by 2035 leaving the EU will have lowered the gross value added (GVA) of manufacturing by 17.2%.
Fortunately independent research carried out by Frontier Economics on behalf of Best for Britain found that deep regulatory alignment on goods and services between the UK and the EU can provide some insulation from the effect of Trump’s tariffs and claw back around a third of the GDP loss caused by Brexit. The research also shows that deep regulatory alignment on goods and services between the UK and the EU would deliver up to 1.5% GDP growth in the long term. Crucially, this growth will be most keenly felt by the UK’s industrial centres, which would otherwise be most affected by Trump’s tariffs. For example, rather than seeing a 0.14% constriction in regional GVA per year, deep regulatory alignment with the EU on goods and services would deliver 0.24% growth in regional GVA per year for the North East. It is a similar picture across the North West, Midlands, and Yorkshire with a Common Sense Deal with the EU both protecting these regions from tariffs and delivering crucial growth.
Will there be more tariffs in the future?
Trump has shown himself time and again to be temperamental and erratic and there is no guarantee that these tariffs will be the end of the road. Shortly after ‘Liberation Day’, the New York Times reported that the next industry in the crosshairs of the Trump administration may bethe pharmaceutical sector. As mentioned, pharmaceuticals are the UK's second largest export to the US after cars, so a future tariff on foreign-made medicines would damage the UK economy further.
The inconsistency (and irrationality) of the Trump administration's isolationist economic policy has spooked markets across the world, from their domestic S&P 500 to the UK’s FTSE 100. Markets in Asia have proven particularly volatile after tariffs between China and America have rapidly escalated - at the time of writing Chinese imports to the US are subject to a 125% import tax, whilst US imports to China are now subject to an 84% import tax with Beijing hinting further tariffs may lie ahead. The increased tension between the two economic superpowers means a global trade war is increasingly likely. The UK's position outside of the EU has made our country more vulnerable to US tariffs. Having left the largest trading bloc in the world, Britain stands alone with less bargaining power and ability to retaliate in any trade dispute.
What should the Government do in response to US tariffs?
Polling for Best for Britain found that three times as many Brits (43%) want the government to respond to US tariffs by deepening ties with our main trading partners such as the EU, rather than cosying up to Trump in the hopes of an exemption. Additionally, a poll of almost 15,000 people undertaken by YouGov on behalf of Best for Britain released earlier this year found that 46% of people said the EU should be the Government's top priority when it comes to trade, compared to less than half that number who would opt for the US (even before the imposition of tariffs).
Rather than prioritising a deal with the US, the UK government should pursue a deal with the EU that delivers deeper goods and services alignment, as - according to the previous Conservative government's own modelling - it would deliver twice as much economic growth as a US-UK FTA. A US trade deal that lowers our food standards is very unlikely to be a popular move with the UK public - recent polling by More in Common found that 62% of Brits oppose allowing chlorinated chicken into our food market, a key demand from the Trump administration for any kind of trade deal.
Regulatory alignment with the EU drives regional growth whilst insulating the UK from the negative economic effects of Trump’s tariffs. With public opinion evidently in favour of prioritising trade with the EU and against the lowering of British food standards, the government must use the UK-EU summit on 19 May to pursue a common sense deal that protects UK businesses and consumers and unlocks economic growth.