Trump's tariffs would be 'shock to UK economy' pushing up prices, interest rates and unemployment

“I am a tariff man,” Trump famously posted on X in December 2018.

“When people or countries come in to raid the wealth of our nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power."

Trump argues that by raising taxes on imported goods and making them more expensive it is possible to revive US production, raise living standards and protect jobs.

“America First,” as the slogan goes.

In his first term as president, Trump slapped tariffs on imported washing machines and solar panels, then steel and aluminium before becoming embroiled in a full-blown trade war with China.

That conflict has faded during Joe Biden’s time in office but rumbles on. Many of Trump’s tariffs and restrictions are still in effect.

Earlier this year, Biden added to them, imposing higher taxes on Chinese-made electric vehicles and semiconductors.

If re-elected, Trump proposes to go even further - with additional levies of up to 60% on goods made in China and of at least 10% on goods imported from everywhere else.

The evidence that tariffs would work in the way Trump claims is mixed at best.

They would certainly help to finance the tax cuts he plans.

The problem is they are also likely to be an act of self-harm. As China demonstrated in 2018, countries tend to retaliate with trade tariffs of their own.

Analysis by the National Institute of Economic and Social Research (NIESR) finds that additional tariffs of the sort Trump advocates would make everyone poorer.

The results show countries like Canada, Switzerland and Mexico - 80% of Mexico’s exports end up in the US - would be hardest hit, but that living standards in the UK would also be damaged.

The price of UK exports to the US would inevitably rise but The National Institute of Economic and Social Research (NIESR) calculates that domestic inflation would also climb by around 3.4 percentage points in 2025 as UK imports became more expensive, reducing the spending power of households and businesses.

NIESR assumes the Bank of England would have to respond by hiking interest rates, raising costs for companies and reducing their ability to invest.

NIESR estimates that economic growth in the UK would shrivel to 0.4% in 2025 (down from a forecast of 1.2%) and stall altogether in 2026. Unemployment would also rise.

“Tariffs work like a tax on consumption. They hit lower-income households the hardest because they spend more of their income on basic goods and services,” said Ahmet Kaya, principal economist at NIESR.

He added: “Trump’s proposed tariffs would be yet another shock to the UK economy. People in the UK would face higher prices for the products that they buy and would have less money to spend on other goods and services. As our findings show, tariffs are often the worst solution to an economic problem, creating a lose-lose situation.”

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In NIESR’s view, US tariffs would hit both consumption and investment in the UK significantly, regardless of whether or not the UK retaliates, but the shock would be short-lived and by 2028 the economy would have recovered.

Some of Trump’s former advisers, like Arthur Laffer (who gave the world the curve) and Kevin Hassett (a former chair of Trump’s Council of Economic Advisors), claim the threat of tariffs is a scare tactic designed for use in the negotiation of trade agreements.

Is Trump bluffing? Only he knows. It’s interesting that NIESR’s analysis suggests the country most vulnerable to US tariffs is the US itself.

Could Trump do it? Much depends on whether he wins both the presidency and control of Congress.

Companies could challenge tariffs in court, of course, but that process would take months and there’s no guarantee of success.

The evidence shows that free trade can boost economic growth and lift living standards.

The more countries are allowed to exchange goods or services without restrictions, the more consumers tend to enjoy lower prices and wider choices.

But free trade increases competition as well as investment, generates inequality as well as opportunity and creates losers as well as winners.

Dr Ahmet Kaya, a principal economist at the National Institute of Economic and Social Research, said tariffs are a "lose-lose situation" for both the US and UK

The United States is the wealthiest economy on the planet and has demonstrably benefited from opening itself up to commerce with other countries.

But free trade has also given the US its “Rust Belt” - regions in the northwest and northeast, like Michigan, Indiana, Ohio and Pennsylvania, where over the decades heavy industry has declined, factories have closed and jobs have relocated overseas.

The US runs significant trade deficits - where imports exceed exports - with countries like China and Mexico.

Donald Trump believes these deficits harm the US economy and, as this election campaign has demonstrated, that’s a popular perception with many voters.

You do not have a vote in this election but NIESR’s research suggests your prosperity is tied to the outcome.

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