What impact will Trump’s tariffs have on the UK?

Despite the UK government's prior hopes, it ultimately failed to secure an exemption from the 25% steel and aluminum tariffs imposed by US President Donald Trump.

UK Prime Minister Keir Starmer stated that the UK would "keep all options on the table" but did not announce immediate retaliatory measures. The British Broadcasting Corporation (BBC) is currently assessing the specific impact these tariffs could have on the UK, as well as potential subsequent developments.

In 2024, the UK's exports of steel and aluminum raw materials to the US were approximately £470 million. However, it's important to note that these latest US tariffs—import taxes—also cover products made from steel and aluminum, including fitness equipment, furniture, and machinery. The Global Trade Alert think tank estimates that the UK exported approximately £2.2 billion worth of such products to the US in 2024. Therefore, the total value of affected UK exports is approximately £2.7 billion.

For context, the UK's total goods exports to the US in 2024 were approximately £58 billion. Consequently, the goods affected by Trump's new tariffs account for slightly less than 5%. The UK hopes to reach a free trade agreement with the Trump administration, which could mean these tariffs would be removed. However, it is currently impossible to determine if and when such an agreement could be reached.

Trump has also threatened to impose reciprocal tariffs on all US trading partners, including the UK, starting next month. These are taxes levied on goods imported into the US, at rates similar to those the US imposes on goods imported from other countries. The White House has stated that it will consider countries' value-added tax (VAT) rates when determining the level of these tariffs. The US government views VAT as a discriminatory tax on US imports, even though it applies equally to imported goods and domestically produced goods. The UK's standard VAT rate is 20%, which could mean the UK is subject to substantial reciprocal tariffs from the US.

While the UK has not yet taken retaliatory action, the EU has confirmed plans to impose tariffs on €26 billion (£22 billion) worth of goods imported annually from the US. The EU is targeting goods such as American bourbon whiskey, jeans, and Harley-Davidson motorcycles, chosen for their iconic status and, in some cases, where they are produced, making them politically sensitive.

Despite the UK's desire for a free trade agreement, the government may face increasing pressure to take retaliatory action similar to the EU if the US imposes reciprocal tariffs that are deemed unfair and punitive. The US President has various and often-changing justifications for imposing these import taxes. One reason is his claim to restore fairness to US trade relations with the rest of the world. Trump complains that some other countries impose higher tariffs on goods imported from the US than the US imposes on goods imported from those countries.

In 2023, the US's average external tariff was 3.3%, slightly lower than the UK's average tariff of 3.8%. It is also lower than the EU's average tariff of 5% and China's average tariff of 7.5%. However, the US's average tariff is significantly lower than some of its other trading partners, such as India (17%) and South Korea (13.4%). Overall, Trump has some justification for pointing out that some countries impose higher average tariffs on imported goods than the US does.

Another justification the President has given for imposing tariffs is to raise more tax revenue for the US government. During his 2024 presidential campaign, he suggested that tariff revenue could completely replace federal income taxes. Considering the US's $3 trillion in annual imports and $2 trillion in income tax revenue, this is not only unrealistic but also requires consideration of the fact that tariffs would increase prices on consumer goods in the US.

Trump also hopes to put pressure on other countries to change certain policies. This was an explicit justification for the US imposing tariffs on Canada and Mexico, with the White House stating it hoped to force these countries to eliminate cross-border fentanyl smuggling. Another key objective the President has put forward is to encourage multinational manufacturing companies to invest and produce more goods in the US, in order to create domestic jobs.

Some of these justifications are inconsistent. Tariffs cannot simultaneously be a major permanent source of tax revenue and a way to massively bring manufacturing back to the US, as the latter would imply a sharp fall in imports—and therefore tariff revenue. Furthermore, the vast majority of economists are highly skeptical of the likelihood of tariffs achieving many of these goals.