Trump's tariffs will 'shock UK economy', raising prices, interest rates and unemployment

I am subject to tariffs. Trump famously posted on X in December 2018.

When people or countries come in to plunder our country's wealth, I hope they pay for the privilege of doing so. “This will always be the best way to maximize our economic strength.”

Trump argues that raising taxes and higher prices on imported goods can restore U.S. production, raise living standards and protect jobs.

As the slogan says, America First.

During his first term in office, President Trump launched a full-scale trade war with China after imposing tariffs on imported washing machines and solar panels, followed by tariffs on steel and aluminum.

That conflict died down during Joe Biden's presidency, but it continues. Many of Trump's tariffs and restrictions remain in effect.

Earlier this year, Biden added higher taxes on Chinese electric vehicles and semiconductors.

If re-elected, Trump proposes even higher tariffs, including additional tariffs of up to 60% on Chinese goods and at least 10% on goods imported from other countries.

The evidence that tariffs will work the way Trump claims is mixed at best.

They will certainly help finance the tax cuts he plans.

The problem is that there is a high possibility that these are acts of self-harm. As China demonstrated in 2018, countries tend to retaliate with their own trade tariffs.

Additional tariffs of the type Trump advocates would make everyone poorer, according to an analysis by the National Institute for Economic and Social Research (NIESR).

The results show that countries such as Canada, Switzerland and Mexico (80% of Mexican exports come from the US) will be hit hardest, but living standards in the UK will also be damaged.

Impact of US tariffs on UK GDP and inflation. Source: National Institute of Economic and Social Research

Although the price of Britain's exports to the United States will inevitably rise, the National Institute for Economic and Social Research (NIESR) estimates that domestic inflation will rise by about 3.4 percentage points in 2025 as the price of British imports rises and households' spending power decreases. And business.

NIESR assumes that the Bank of England should respond by raising interest rates, raising business costs and reducing investment capacity.

NIESR estimates that UK economic growth will contract by 0.4% in 2025 (down from a forecast of 1.2%) and plateau entirely in 2026. Unemployment will also increase.

Tariffs act like taxes on consumption. Ahmet Kaya, chief economist at NIESR, said low-income households are hardest hit because they spend more of their income on basic goods and services.

He added that President Trump's proposed tariffs would be another shock to the British economy. People in the UK will pay higher prices for the products they buy and will have less money to spend on other goods and services. As our research shows, tariffs are often the worst solution to economic problems, creating a lose-lose situation.

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In NIESR's view, US tariffs will hit both UK consumption and investment hard regardless of whether the UK retaliates, but the impact will be short-lived and the economy will recover by 2028.

Some of Trump's former advisers, such as Arthur Laffer (the man who gave the world the curve) and Kevin Hassett (former chairman of Trump's Council of Economic Advisers), argue that the threat of tariffs is a scare tactic designed to be used to negotiate trade agreements. .

Is Trump bluffing? Only he knows. It is interesting to note that according to NIESR's analysis, the country most vulnerable to US tariffs is the United States.

Impact of US tariffs on US, Chinese and UK GDP growth. Source: National Institute of Economic and Social Research

Can Trump do it? Much will depend on whether he wins both the presidency and control of Congress.

Of course, companies could challenge the tariffs in court, but that process could take months and there's no guarantee it would succeed.

Evidence shows that free trade can stimulate economic growth and improve living standards.

As more countries allow the exchange of goods or services without restrictions, more consumers tend to enjoy lower prices and wider choice.

But free trade increases competition and investment, creates inequality and opportunity, and creates losers as well as winners.

Dr. Ahmet Kaya, chief economist at the National Institute of Economic and Social Research, said the tariffs were a “lose-lose situation” for both the US and UK.

The United States is the wealthiest economy on Earth and has clearly benefited from opening up commerce with other countries.

But free trade also gave America the Rust Belt. Regions of the Northwest and Northeast such as Michigan, Indiana, Ohio, and Pennsylvania have seen decades of heavy industry decline, factories closing, and jobs moving overseas.

The United States has a significant trade deficit with countries like China and Mexico, where imports exceed exports.

Donald Trump believes that these deficits are harmful to the American economy, and as this election campaign has demonstrated, this is a popular perception among many voters.

You don't have a vote in this election, but NIESR's research shows that your prosperity depends on the outcome.

Want expert briefings on American politics and the presidential race? Listen to our latest podcast, Talking Politics USA

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