Good morning from New Economy Brief.
Over the last couple of weeks we've looked at the rationale behind Trump's tariffs and their impact on the Global South.
This week we're turning our attention to how the tariffs are affecting the UK economy, and how the government is starting to respond to protect key sectors from the fallout.
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How might tariffs reshape the UK economy?
Even in the short term, the impact of tariffs will be complex and hard to predict. For example, Megan Greene, an external member of the Bank of England’s Monetary Policy Committee, emphasised this week that these tariffs could have both inflationary and disinflationary effects. In this section, we’ll cut through the complexity by identifying a few headline impacts.
Export suppression. Tariffs make products made by British firms more expensive for American consumers, which is likely to reduce demand and slow UK economic growth. The US accounts for 15.3% of total UK goods exports, mainly in machinery, transport equipment and chemicals. A briefing from the House of Lords Library estimates that this makes up around 1.4% of UK GDP. Parts of the UK will be hit harder than others: regional analysis from the Centre for Local Economic Strategies (CLES) suggests the West Midlands could bear the brunt of trade restrictions, as many of the cars produced there are exported to the US. CLES also finds the East of England exports a lot of goods to the US, including in the pharmaceuticals, life sciences, aerospace and defence sectors, so demand is likely to be hit here too.
Trade diversion. High tariffs on imports to the US could also lead to a phenomenon called ‘dumping’, where exporters – especially from China – divert cheap products to UK markets. Once again, the scale and impacts of such dumping are hard to predict and will probably vary widely by sector. Dumping is likely to reduce prices, which could be welcome in sectors where the UK has limited domestic industry. For example, relying on cheap Chinese imports for heat pump components might not be such a bad thing – it could help us cut emissions faster from heating buildings by boosting consumer demand. But in sectors where the UK does have an industrial base, like car manufacturing, low-cost imports could undercut UK companies. The government will want to avoid any more industries going the way of steel, which dumping has played a significant – albeit highly contested – part in bringing to the brink of collapse, requiring the government to intervene to save jobs.
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How is the UK responding to the immediate impacts of trade frictions?
The longer-term impacts of Trump’s global trade war on the UK economy are difficult to predict, partly because they depend on the final shape of various trade deals – between the US and UK and the UK and EU to name a couple. What is certain in the near-term, though, is the level of extreme uncertainty; and uncertainty is bad for investment and growth. On Monday, the IMF shaved 0.5% off its forecast of UK GDP growth for 2025 and on Wednesday, the latest purchasing managers’ index (PMI) showed UK export orders falling at their fastest pace since the early months of the pandemic in 2020.
Investment poaching. Trump’s anti-net zero stance and generally combative approach to global trade and international relations has also created major uncertainty about the US market as a safe bet for long-term investment. The EU earlier this week signalled that it aims to capitalise on this uncertainty by promoting the 28-country trading block as a safer, more stable place to do business; lots of demand is already shifting from US to EU financial assets. There are also opportunities for the UK to capitalise on a potential wave of green private investment leaving the US.
“Come and build it in Britain”. The UK government is trying to counter uncertainty by stabilising business confidence and pitching the UK as a safe place to invest. At a summit of the International Energy Agency this week, Chancellor Rachel Reeves and Secretary of State for Energy Security and Net Zero Ed Miliband joined with the National Wealth Fund and Great British Energy to write to global clean energy companies to urge them to “come and build it in Britain”. They pledged that Britain will be a “safe haven” from global storms with the clarity, consistency and urgency of its clean energy mission, in an attempt to attract some of the capital investment leaving the US.
Risks of relying on private finance. The government is bringing forward an initial £300 million investment through Great British Energy to invest in supply chains for offshore wind manufacturing components. They hope this will “directly and indirectly mobilise billions in additional private investment - helping de-risk clean energy projects and supporting thousands of jobs and revitalising the UK’s industrial heartlands.” However, there is a risk that mobilising private capital locks in extractive behaviours as investors seek ever-higher returns, encouraging further profiteering from UK infrastructure and the green economy. (Check out IPPR’s Making Markets in Practice report for more examples of market-shaping policies, and Mariana Mazzucato and Dani Rodrik’s paper on why industrial policy should include conditionalities to ensure public value in public-private investment projects.)
Trade deals. Politico reports that “the UK is now primarily focusing on trying to get the 25 percent tariffs on British auto and steel exports dropped and to avoid expected measures on pharmaceutical goods” in a trade deal with the US. Much is still to play for, but Global Justice Now’s Nick Dearden warns that the US negotiators may demand many things such as deregulation of the tech sector and dropping the Digital Services Tax. Alternatively, former Treasury Minister Lord Jim O’Neill argues that countries like the UK should coordinate with other G7 countries to stimulate domestic demand, mobilise investment and forge new trade ties to mitigate the economic damage from the Trump Administration’s tariffs.
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Protection of UK industry will require fiscal space.
Looking beyond the nearer-term impacts of tariffs, a protracted global trade war is likely to lead to a recession and supply-side inflation. Reduced aggregate demand could erode the UK's industrial base and preventing this will require countercyclical policy – government spending to mitigate against recession and support demand. Protecting crucial parts of the supply chain from trade disruptions and ensuring consistent demand for key sectors will require fiscal space. But under the current fiscal framework, lower growth instead pushes the Chancellor into a pro-cyclical approach: making politically unpopular and economically counter-intuitive spending cuts, or raising taxes to avoid them. Both options would take demand out of the economy and harm growth.
Bringing back ‘securonomics’? Against this backdrop of economic turmoil, the government has stuck to two lines. First, that “the world has changed” and we need to protect UK industry from global instability; and second, that ironclad fiscal rules is the foundation for domestic economic stability. But the tension between these two is already clear and only likely to grow – with borrowing already £14.6bn higher than expected at last month’s Spring Statement, it will become harder and harder to defend the economy while remaining within the government's fiscal commitments.
What would it take to trigger the emergency breakout clause? The 90-day pause on tariffs announced by Trump a couple of weeks ago expires in early July. If the tariffs are reinstated the harm to the UK economy will be significant. But even if Trump backs down, the chaos he has already unleashed on the global economy has caused damage that will take a long time to repair. The Chancellor’s difficult position will probably come to a head before the next Budget in the Autumn, when the Office for Budget Responsibility estimates the effects on UK economic growth once again. The New Statesman’s George Eaton has suggested that she could use an emergency breakout clause to “temporarily suspend” her fiscal rules to create fiscal space without having to formally rewrite them. With a "ruthless" Spending Review around the corner and economic uncertainty showing little sign of abating, Rachel Reeves may start finding this option increasingly attractive…
Defending against Trump. Global Justice Now’s Nick Dearden argues that, rather than trying to avoid being hit with tariffs, Britain should work with other countries to stand up to Trump’s attempt to remake the global order. He thinks we should be ”rethinking what a decent world economy would look like — pushing for economic coordination and planning between countries”, and points to the EU’s proposal to target the power of US oligarchs as “necessary tools to build economies with vastly reduced dependence on US capital.”
Climateflation and food prices. Economists Mark Blyth and Nicolò Fraccaroli argue that the inflationary impacts of climate change will be larger than Trump’s tariffs. They point to research from the Potsdam Institute for Climate Impact Research and the European Central Bank which finds that, “assuming temperature increases projected through 2035, which are probably understated, food inflation will increase by 0.92 to 3.23% per year, while headline inflation will rise between 0.32 and 1.18% per year.”
Tackling food insecurity. The Centre for Local Economies Strategies’ (CLES) Julian Boys argues that the global trade war and associated supply chain disruptions should be a wake-up call to invest in sustainable local food systems. A CLES report with ShefFood and the University of Sheffield’s Institute for Sustainable Food examined how public sector institutions like schools, hospitals and universities could do more to support local food systems through progressive procurement.
Rising energy prices fuel the far right. Economists Tom Krebs and Isabella Weber looked at the energy price crisis in Germany to explain how “policy making based on market fundamentalism caused substantial damage to Germany’s economy and helped the far-right Alternative for Germany (AfD) double its political support.” They argue policymakers are taking huge economic and political risks by clinging to a belief in self-regulating markets in times of economic crisis.
Benefit cuts lose votes. New analysis from the Joseph Rowntree Foundation and More in Common shows that cuts to sickness disability benefits will fall heaviest on Labour’s heartlands. The research finds that “of the 100 constituencies with the highest proportion of working-age people in receipt of health-related social security, only 8 are not held by the Labour Party.”
