Donald Trump launched a trade war yesterday, as the US President activated his 25 percent steel and aluminium tariffs.
The new tariffs, seen as a bid to to reorder trade in his favour, are the latest in a series of border-hopping punitive financial measures designed by Trump to redress so-called “bad deals”. He believes the US is ultimately losing out on the world’s stage, and is now aiming to renegotiate and renege – but has come under fire from allies he has targeted.
What are trade tariffs?
They’re a tax imposed on goods imported from other countries. The levy isn’t paid by the company producing the goods, by whoever is importing it. Typically the levy is a percentage of the cost of the goods. So, for example, if a import is $100 (£77.23) and the tariff is 25% then what the company importing has to pay is $125 (£96.54).
Whether those companies than pass this extra on, or absorb it, is their choice. Passing it on means higher prices for their customer, whether that be another business or ultimately consumers further down the line. And absorbing it means a hit to profits.
So why is President Trump going hell for leather with tariffs?
It’s part of his “America first” policy, and have used been as a negotiating tool to force other countries to bow to its demands, whether on trade on border issues. Until now, his tariffs have been targeted at neighbours Canada and Mexico, plus China, which together accounted for around 40% of US imports last year. He also believes Canada and Mexico aren’t doing enough to stem the flow of migrants, while all three he accuses of being complicit in the production of illegal drugs such as fentanyl, a huge problem in the US.
While highly unorthodox in terms of the speed and number announced, there are signs it has has at least some success, from his point of view anyway. President Trump halted a plan to double US tariffs on Canadian steel and metal imports to 50%. It came after the Canadian province of Ontario suspended new charges of 25% on electricity that it sends to some northern states in the US. It’s a high risk tactic but, when you’re in charge of the world’s biggest economy, he feels he can throw his weight around.
It’s also worth remembering that tariffs can bring a money, a lot of money, for the US government. And that would allow Trump to spend big, if he wanted.
Are UK goods subject to tariffs?
While not singled out, the UK has now been caught up in a global 25% levy imposed on steel and aluminium imports to the States. For all the hopes that the President would make the UK a special case, it didn’t happen. As a result, it makes UK made steel imported by US firms that much more expensive. And while that also applies to foreign competitors also selling into the States, producers here say they already suffer from higher costs, especially for energy – crucial for steel making.
Will Trump extend tariffs to other products, impacting the UK?
We really don’t know at this stage, and it is difficult to predict what the President might do next. But, unless the UK can carve out an exemption, we will be caught up in the same way as with steel if he does impose more.
Are there indirect ways the UK could be impacted?
Yes, and this is perhaps where the bigger concern is. The President’s tariff “tantrums”, and the tit-for-tat nature of other countries’ responses, has raised big concerns about the state of the global economy. However you look at it, tariffs are roadblocks to growth, especially when they are imposed in such a dramatic way. Professor Alan Taylor, a member of the Bank of England’s monetary policy committee member, said: “If you put sand in those wheels (of trade) we’re going to be worse off by some margin.”
There has been talk this week that a global trade war could push parts of the world into recession. That wouldn’t take much, given the weak nature of many economies. There has also been speculation that Trump’s tactics could backfire and tip America into recession, not helped by an interview the President gave at the weekend refusing to rule it out. Most experts think that is unlikely.
Here, Bank of England Governor Andrew Bailey last week warned tariffs risked having a “substantial” hit to the UK and world economies. And slower growth could impact workers in the pocket, he went on: “We have to take it very seriously.” Professor Taylor told the same hearing the threat to global trade could rank alongside past shocks, from financial crisis to the pandemic. “These kind of big shocks leave big scars,” he said. “We are living in an age of uncertainty. It is crucial that we understand that.”
And slower growth means less money for companies to invest, less money to expand, and less to pay workers more, and take on extra staff. The uncertainty over the state of the economy risks making the situation even worse.
What about interest rates?
If the UK economy took a hit, the Bank of England may look at reducing interest rate to try to boost spending. However, it’s focus is inflation and trying to get it to 2% – it is currently some way above that, at 3%. Some economists think tariffs will push up inflation in the US, contrary to what the White House has been saying this week. If that were to happen then interest rates are likely to stay higher for longer. Then again, latest figures showed US inflation fell more than expected last month, to 2.8%.
While the Bank of England doesn’t take its lead from America’s central bank, it will be aware that higher global interest rates will impact on UK economic growth. Threadneedle Street is expected to hold its base rate at 4.5% next week, but there is huge uncertainty over just what impact tariffs will have in the timing of future cuts (the most likely movement for now). The longer rates stay where they are, the bigger the impact on millions of borrowers, whether households and businesses, on and mortgages, loans and other products. On the flip side, delaying rate cuts is better news for savers.
What if the UK does negotiate an exemption from tariffs?
That is a very big ‘if’ as it stands, but anything is possible, given PM Keir Starmer’s apparent warm dealings of late with the President. As well as avoiding direct tariffs, some experts believe the UK could attract investment, given its favoured status. Even if it doesn’t, there is a school of thought that tariffs on China and the EU could result in companies looking to offload more goods – potentially at a discount – in the UK. That argument has been linked especially with electric cars, which could mean lower prices for consumers. But, as with all these things, there is a catch. For cheaper imports risk undercutting domestic producers, and that has a knock on impact for jobs.
What about my pension and investments?
If you’ve got a workplace pension, then at least some of it will likely be invested in shares. And, given the size of the US, some of that will mean exposure to US stock markets. A Trump bump has turned into a slump, with rapid falls in US stocks over the past three weeks. Any impact on your pension pot will depend on the type of stock, as some of the biggest fallers have been tech companies. Then again, investing for retirement is over the long-term, so you shouldn’t panic when you see short-term fluctuations.