Will ‘full-blown Trump’ tariffs drive Britain back into the arms of Europe?NEWS | 17 November 2024Four years ago, when Donald Trump last occupied the White House, Liz Truss was sent on a mission. Carrying a bottle of British gin on her flight to Washington, the trade secretary had a gift for her US counterpart to show what Americans were missing out on.
Back then, while still formally a member of the EU, Britain was hit with 25% US import tariffs on distilled spirits as Trump’s administration waged trade battles on multiple fronts, slapping border taxes across a range of goods sold by America’s allies and enemies alike.
After his re-election to a second term, government officials and company bosses are scrambling to dust down their Trump playbooks. On the campaign trail he threatened levies of up to 20% on all US goods imports, and up to 60% and 100% for China and Mexico. And this weekend, Trump’s new trade adviser, Stephen Moore, told the Times: “I’ve always said that Britain has to decide – do you want to go towards the European socialist model or do you want to go towards the US free market? Lately it seems like they are shifting more in a European model, and so if that’s the case I think we’d be less interested in having [a free trade deal].”
For Britain there are hundreds of billions of pounds wrapped up in the transatlantic “special relationship” spanning trade, defence, diplomacy and common culture. Here we explore the possible implications.
What’s at stake?
Tariffs are a form of tax applied on imports from other countries. Paid by the importer, the costs are largely passed on to consumers. The idea is to make imports more expensive relative to domestic goods, protecting local producers.
The US is Britain’s single largest trade partner, in a relationship worth more than £300bn a year in goods and services as well as a stock of more than £1tn in foreign direct investment straddling the Atlantic.
Services make up the bulk of the relationship. Business services, management consultancy, finance and travel are the biggest exports, totalling £129.2bn in the year to June 2023. Services worth £61.7bn were sold the other way.
Goods make up less than a third of exports to the US – mainly high-value products such as medicines, cars and aircraft.
In a strange quirk, America and Britain report trade surpluses with each other. US figures show a £10bn surplus last year, while the UK reckons it has a £71bn advantage. This is due to differences in data collection, but could help Britain: Trump is largely targeting countries where the US has a trade deficit.
What happened last time?
In his last presidency, Trump used the threat of tariffs as a bargaining chip, before scaling back his rhetoric to reach a deal. Still, he slapped levies on the EU, with some fallout in Britain. This included taxes on cashmere, machinery and single-malt Scotch whisky. China bore the brunt, with charges on about $450bn of bilateral trade. While American consumers paid the price, Joe Biden, for the most part, kept a tough stance towards Beijing.
However, the overall fallout was not as large as feared. UK exports to America recorded the strongest growth since the 2008 financial crisis between 2017 and 2021 in Trump’s first term – a period affected by the Covid pandemic.
“The bark and the bite were materially at odds with each other,” said Simon French, chief economist at Panmure Liberum.
Research by the International Monetary Fund shows that non-US-China trade was little affected, as exporters reallocated elsewhere – including to countries close to the main belligerents. Mexico and Vietnam benefited in particular because producers – including Apple, Nike and Adidas – sought to bypass tariffs by shipping to nearby markets.
What could happen this time?
This time around the impact could be bigger. Economists warn that a “full-blown Trump” scenario – taking his campaign rhetoric at face value – would drive up average US tariffs back to 1930s levels, fuelling inflation and hitting world trade and economic growth.
Peter Holmes, a fellow of the UK Trade Policy Observatory and professor at the University of Sussex, said there was every sign Trump was preparing for a “no holds barred” approach. Highlighting some of the president-elect’s appointments, he said: “The last time, the US trade representative had people who were hangovers from past administrations. Now it could be completely taken over by Trumpism.”
Britain, as an open economy, could be in a delicate position. The National Institute of Economic and Social Research has said Trump’s measures could halve UK growth and drive up prices for British consumers. Exporters could face a £22bn hit to global sales, the Centre for Inclusive Trade Policy warned.
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However, others say the impact should not be overstated. French said there was a case of “Trump derangement syndrome in full swing” across Europe, including the UK, in the belief that Trump 2.0 would be catastrophic. “There is another take, and it is one we put more weight on. The UK economy stands to benefit from lower energy prices and could take advantage of competitive trade diversion,” he said, referring to Trump’s “drill, baby, drill” pledge to drive up oil and gas supplies, which could lower global energy prices – despite significant environmental costs.
Trump imposing tariffs on China could also lead to a glut of exports destined for the US being diverted to other markets – which could force decisions in the EU and UK about how to respond. On one hand, it could lower prices for consumers, but there would be consequences for domestic producers. With Britain typically exporting higher-value finished goods that would be less sensitive to import tariffs, and services – which would not be hit – the UK could also escape more lightly.
It’s also unclear how far Trump would go. The consultancy Oxford Economics said it expected a targeted approach from Trump, focused on China, that would take months to be introduced.
William Bain, head of trade policy at the British Chambers of Commerce, said: “Businesses recognise it could have an economic impact, but they want to wait and see what the details of the policy are. We are hopeful a solution can be found.”
However, the uncertainty could chill business investment. Emma Rowland, policy adviser on international trade at the Institute of Directors, said: “The danger with a Trump presidency is that it’s not 100% clear what will come down the line, and whether what he says is what he does. There will be concerns around that, and investment decisions put on hold.”
Will the UK move closer to the EU?
Keir Starmer has not only come under pressure from the US to pick a side, at a time when he had begun pushing to mend fences with Europe.
The Bank of England governor, Andrew Bailey, urged ministers to “rebuild relations” with the EU at last week’s Mansion House dinner, warning that Brexit had undermined the UK’s economy. Andy Haldane, the former Bank of England chief economist, told the Guardian that Britain could have the best of both worlds. However, other experts said the UK would face tough demands in US trade negotiations that would be harder to bargain over alone.
“In 2019, Trump’s demands of the UK were so extreme they weren’t even looked at seriously by the Conservatives. If a similar set of demands came up there would be no reason to suggest the US wouldn’t be as extreme now,” said Holmes. Back then, Washington wanted London to drop “unwarranted barriers” blocking US food and agricultural products, leading to warnings of chlorinated chicken and hormone-fed beef on UK supermarket shelves.
However, Starmer has pledged to “reset” EU relations, and is pushing for a UK-EU veterinary agreement to remove Brexit barriers to agri-food trade. That would require closer alignment with EU rules, which are tougher than US requirements.
Any deal with the US could also further complicate the UK’s post-Brexit trading arrangements for Northern Ireland, where a hard border is avoided with the Republic of Ireland by applying relevant EU single market and customs rules.
John Glen, a trade expert at Cranfield School of Management, doubted if Trump would prioritise a UK trade deal. “He isn’t interested. We believe we have a special relationship, but it only exists when they want something from us,” he said. “There’s a massive imbalance. When we had balance was when we were part of the EU, as we had a better negotiating position, as opposed to being a little rock on the edge of Europe.
“We shouldn’t underplay our significance but, together with Germany and France, it’s a much bigger negotiation.”Author: Richard Partington. Source
