Impact of a Trump Trade War on the UK Economy

As the Labour Party prepares for its budget announcement on October 30, attention is also turning to a significant upcoming event in the United States on November 5. This date could herald major economic consequences for the UK if former President Donald Trump opts for a trade war with China.

Recent reports have highlighted the potential ramifications of a Trump-led trade conflict, indicating that it could be even more detrimental to the UK than Brexit. Sources within security circles have raised alarms about the risks of a trade dispute between the US and China negatively affecting the UK economy.

A UK government source, as noted by Steven Swinford, expressed profound concerns regarding the impact of a trade war on supply chains. The source suggested, “There are significant fears that we might endure substantial collateral damage. It could significantly impact GDP, potentially more than Brexit did.”

This looming threat has gained less media coverage, largely overshadowed by various issues surrounding the former president, such as his stance on Ukraine and Russia. Trump’s current policy favors imposing steep tariffs—60% on Chinese imports and 10-20% on all other imports—marking a stark shift from the previous expectation during the post-Brexit period when the Trump administration appeared keen on offering the UK favorable trade terms.

The possibility of Trump winning a second term in office raises eyebrows, especially considering his legal troubles and diminishing political stability. His erratic behavior is also a topic of concern among his opponents.

In contrast, the Biden administration has demonstrated robust economic performance, achieving significant GDP growth that surpasses other major economies. Since late 2019, the US economy has expanded by 9.4%, a stark comparison to the UK’s modest 2.9% growth in the same period.

Despite reports of low inflation, the rising cost of living remains a critical issue for American voters. Although gas prices have dropped recently, they still remain approximately 50% higher than in 2020, indicating persistent inflationary pressures.

The current political atmosphere in the US suggests that many voters harbor doubts about Trump, particularly when juxtaposed with the economic achievements of the Biden administration. While the Biden team’s economic strategies may not be fully convincing, they do appear less likely to harm global trade compared to Trump’s proposals.

The potential consequences of a renewed Trump trade war could be severe, with the Brookings Institution warning that his tariffs would likely lead to significant business disruptions and increase inflation in the US. The proposed tariffs would target ten times more imports than those implemented during Trump’s first term.

Brookings researchers indicated that academic consensus suggests tariffs lead to sustained price increases for consumers, and immediate consequences could be dire if supply chains are significantly disrupted.

Trump’s commitment to raise tariffs risks fueling inflation, which would affect interest rates set by the Federal Reserve and subsequently influence other global central banks.

The Peterson Institute for International Economics describes Trump’s tariff strategies as a dangerous gamble with other nations, suggesting that anticipated retaliations could exacerbate economic distress. Historical examples of protectionist policies, notably the trade wars of the 1930s, illustrate the potential for widespread economic damage.

For the UK, these developments are crucial. As the world’s largest economy adopts protectionist measures, the implications for Britain could be severe. The US represents the UK’s largest export market, with trade totalling £192 billion in recent quarters—accounting for 22.3% of UK exports, greater than the combined total of all EU nations.

New tariffs or a full-blown trade conflict would hinder the prospects for British exports, which are already struggling to recover to pre-2019 levels. This ongoing decline poses significant challenges for the UK economy, complicating efforts to address public financial issues and foster sustainable growth.

David Smith is the Economics Editor of The Sunday Times