UK chancellor Rachel Reeves doesn’t need to “speculate or leap to conclusions” about what Donald Trump’s election means for the British financial system.
“It’s an extremely necessary commerce relationship for the UK and US as properly,” she informed the Monetary Occasions. “We need to develop that, because it has grown in recent times.”
But even when the UK’s reliance on companies shields it from the worst of any recent tariffs, the nation stays susceptible to world shocks in commerce, enterprise confidence and the bond market, say economists.
What are the dangers to the UK?
Trump warned through the marketing campaign that he wished to impose a 60 per cent tariff on Chinese language imports and 10 to twenty per cent on items from different elements of the world.
The UK is a comparatively small, open financial system, which makes it notably susceptible to adjustments in import costs. Whereas the EU is by far the UK’s largest total commerce associate, in nationwide rankings the US comes first on the subject of purchases of UK items and companies.
That mentioned, analysts argue the UK must be much less uncovered to Trump’s ire than international locations that run a big commerce surplus with the US — resembling China, Germany, or Mexico.
The US had a commerce surplus with the UK, together with an $8.2bn items commerce surplus within the January-September interval, in line with official US figures. Nonetheless, partially due to variations in accounting for exports from the Channel Islands, the UK additionally reported a trade surplus with the US.
What occurs if recent tariffs are available?
If the UK finally ends up getting hit by US tariffs, vocal and economically delicate industries could be affected. The UK exported about £8.2bn of prescribed drugs, £7.5bn of automobiles and £5.3bn of mechanical energy turbines within the 12 months to the tip of June 2024, in line with official statistics.
However, a comparatively low proportion of UK items exports total go to the US — about 14 per cent in 2023, in contrast with greater than 70 per cent for Canada and Mexico, in line with United Nations Convention on Commerce and Growth information.
The EU accounts for greater than 40 per cent of UK items and companies exports, and about half of its items exports. “The UK wouldn’t be within the entrance line of nations” hit by US tariffs, mentioned Michael Saunders, a former Financial institution of England rate-setter who’s now at Oxford Economics. “The UK is much less susceptible.”
Any inflationary affect from commerce tensions could be mitigated if the UK opts in opposition to imposing retaliatory tariffs on the US, he added.
Primarily based on calculations that took into consideration the significance of the US as a commerce associate and a rustic’s commerce openness, Deutsche Financial institution concluded that the UK was not within the high 20 international locations prone to be most affected by commerce tariffs.
Complete UK exports to the US are solely 2 per cent of its GDP. As such, even assuming full pass-through from a completely carried out 10 per cent tariff improve, the GDP affect to Britain could be near 0.2 per cent at most, mentioned economist Allan Monks at JPMorgan.
What else does the UK promote to the US?
The UK is the world’s second-largest companies exporter after the US, accounting for about 7 per cent of worldwide companies exports. The UK will hope these don’t get snarled up in Trump’s protectionist sprint.
British companies exports made up for greater than half of its whole exports final 12 months — a report excessive, in line with official statistics. That is a lot bigger than a few fifth for Germany.
As a share of the financial system, companies exports account for about 18 per cent of UK GDP, the most important proportion of any G7 nation, about double the determine for Germany and 3 times the shares of Italy and Canada.
“The UK could be little affected by the direct results of US import tariffs,” mentioned Elliott Jordan-Doak, economist at Pantheon Macroeconomics. “However the direct results of Mr Trump’s doubtless tariffs are solely the beginning.”
What are the broader dangers?
IMF evaluation suggests world progress would undergo a blow if Trump goes forward together with his commerce plans, regardless that the precise particulars of his tariff proposals stay unclear.
Any commerce battle between the US and key companions would have a fantastic affect on EU export powerhouses resembling Germany — resulting in knock-on results for the UK financial system.
Christian Keller, an economist at Barclays, warned that uncertainty brought on by the spectre of tariffs would “negatively have an effect on funding and, extra typically, confidence ranges in Europe” even earlier than they take impact, which will not be till the second half of 2025.
The German financial system is closely liable to US tariffs due to its huge manufacturing sector. It’s forecast to develop solely by 0.6 per cent in 2025 after marginally contracting this 12 months, in line with information compiled by Consensus Economics.
The IMF has modelled the mixture of tit-for-tat tariffs, a 10-year extension of Trump’s 2017 tax cuts, lowered web migration and better world borrowing prices. It warned of a 0.8 per cent hit to forecast world financial output subsequent 12 months and a 1.3 per cent blow in 2026.
What about different US insurance policies?
Trump has vowed not solely to increase tax cuts handed throughout his first time period however to push by way of recent reductions in company tax charges in addition to reductions at a person degree on revenue from extra time pay, ideas and pensions. He additionally needs to deport hundreds of thousands of undocumented immigrants.
The federal debt is projected to swell by an extra $7.5tn in 10 years if Trump follows by way of together with his proposals, in line with pre-election evaluation from the Committee for a Accountable Federal Funds.
This raises the prospect of bond market buyers taking fright at US fiscal laxity and related inflation dangers. If this occurred, there may very well be contagion dangers for different fiscally susceptible international locations, together with the UK, mentioned Sushil Wadhwani, a former BoE policymaker.
Bond market vigilantes may “change their consideration to us, having first had a go at US Treasuries”, he mentioned. “As a small, open financial system we are able to’t insulate ourselves from hassle globally.”
Further reporting by George Parker
