How could Trump's tariffs affect the UK?

President Donald Trump's stance on whether he will impose tariffs on the UK remains unclear, but economists warn that even if the UK avoids direct impact, the president's broader trade policies could still negatively affect the UK. These effects could manifest through a slowdown in economic growth among some of the UK's key trading partners.

Industrial exports could be diverted from the US and flood into the UK market, while the UK's financial markets could also be affected, including a potential increase in borrowing costs. When asked about future tariffs, Trump told the BBC on Sunday evening, "The UK is a little bit out of compliance, but I believe that can be worked out." However, the president did not specify in what areas he considered the UK to be "out of compliance."

One of the reasons Trump has given for imposing tariffs on other countries is that they have a trade surplus with the US, meaning they sell more goods to the US than they import from the US. He has claimed these trade surpluses are "the equivalent of massive subsidies that we give to Canada and Mexico." Although Trump suspended tariffs on Mexico for a month on Monday, he has complained about trade imbalances with the EU, stating that the EU "doesn't buy our cars, they don't buy our agricultural products, they buy almost nothing, and we buy everything from them. Millions of cars, massive amounts of food and agricultural products."

Therefore, one scenario in which the UK might be considered "out of compliance" and face the risk of tariffs, in Trump's view, is if the UK also has a trade surplus with the US. The UK's Office for National Statistics estimates that the UK had a trade surplus of approximately £71 billion with the US in 2023. However, the US Bureau of Economic Analysis estimates that the US had a $14.5 billion (about £12 billion) surplus in trade with the UK in the same year. Both agencies acknowledge that this discrepancy is due to different ways of measuring trade. The UK agency does not count trade flows through British Crown dependencies (such as the Isle of Man), which are significant financial service centers that significantly impact the overall data. Another key factor appears to be differences in how trade in services (such as banking and finance) is measured compared to physical goods. Nevertheless, there remains some uncertainty about the specific reasons for the statistical discrepancies, which the two agencies are working to resolve.

Meanwhile, the UK government will undoubtedly hope that President Trump is more inclined to adopt the US figures, which show that the US sells more goods to the UK than it buys from the UK, and that he will focus more on trade in goods rather than services. If the president were to impose across-the-board tariffs on goods exported from the UK to the US, according to UK figures, this would affect about £60 billion of goods exported in 2023. Of this, pharmaceuticals accounted for £8.8 billion of UK goods exports to the US, cars £6.4 billion, and power-generating equipment £6.4 billion. The immediate impact of tariffs would be to increase the price of these goods for US businesses and consumers, but over time it could reduce US demand for these goods, thus negatively impacting UK businesses that export them.

Furthermore, the UK could also be negatively affected by US tariffs on other countries in other ways. A slowdown in the global economy, particularly in the EU, would dampen the UK's growth prospects. If the UK's trading partners fall into recession as a result of tariffs, analysts believe they would lower interest rates, and their currencies would fall in value, making UK exports to them more expensive. "US tariffs on our other trading partners would still negatively affect the UK economy through their impact on supply chains and exchange rates," said Ahmet Kaya of the National Institute of Economic and Social Research (NIESR). The NIESR estimates that the 25% tariffs the US threatened to impose on Mexico and Canada could reduce UK GDP growth by 0.1 percentage points in 2025.

Some economists warn that exports (such as steel made in China) that might be diverted from the US market due to new tariffs could be sold, or "dumped," into the UK market at below the cost of production, which could negatively impact sales for UK steel producers. Some analysts suggest that US interest rate rises resulting from tariffs could also spill over into UK borrowing markets. The UK government's borrowing costs (i.e., gilt yields) spiked in January, partly because US government bond yields also rose. "The main threat to the UK economy from Trump tariffs is probably the spillover from higher US interest rates, rather than the tariffs themselves," said economist Julian Jessop. "US and UK government bond yields are now moving in sync again. If the Fed (the US central bank) is more reluctant to cut US interest rates, which seems quite possible, then UK borrowing costs will also stay higher for longer." Higher borrowing costs could slow UK economic growth and put pressure on the UK government to cut public spending or raise taxes to comply with its chosen borrowing rules.