How vulnerable is the UK to Trumpnomics?

British Prime Minister Rachel Reeves doesn't want to speculate or jump to conclusions about what Donald Trump's election means for the British economy.

It is a very important trade relationship for the UK and the US as well, she told the Financial Times. We want to grow it like it has grown in recent years.

But even if Britain's dependence on services shields it from the worst of the new tariffs, the country remains vulnerable to global shocks to trade, business confidence and bond markets, economists say.

What are the risks to the UK?

During his presidential campaign, President Trump warned that he would impose tariffs of 60% on Chinese imports and 10-20% on products from other countries.

Because the UK is a relatively small and open economy, it is particularly vulnerable to changes in import prices. The EU is the UK's largest overall trading partner, but the US tops the list of countries when it comes to purchasing British goods and services.

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But analysts argue Britain should be less exposed to Trump's wrath than countries with large trade surpluses with the United States, including China, Germany and Mexico.

According to official US statistics, the US had a trade surplus with the UK, including a trade surplus in goods of $8.2 billion in the January-September period. However, partly due to export accounting differences in the Channel Islands, the UK reported a trade surplus with the US.

What happens when new tariffs come in?

If the UK is hit by US tariffs, vocal and economically sensitive industries will be affected. According to official figures, the UK exported around 8.2 billion units of medicines, 7.5 billion units of cars and 5.3 billion units of mechanical generators in the 12 months to the end of June 2024.

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Nonetheless, data from the United Nations Conference on Trade and Development shows that the share of all UK goods exports to the US will be relatively low at around 14% in 2023, compared with more than 70% for Canada and Mexico. .

The EU accounts for more than 40% of UK exports of goods and services and around half of goods exports. Michael Saunders, a former Bank of England interest rate setter now at Oxford Economics, said the UK would not be at the forefront of countries hit by US tariffs. The UK is less vulnerable.

He added that the inflationary impact of trade tensions would be alleviated if Britain did not impose retaliatory tariffs on the US.

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Deutsche Bank concluded that the UK was not among the top 20 countries most likely to be affected by trade tariffs, based on calculations that took into account the importance of the US as a trading partner and the country's openness to trade.

UK exports to the US account for just 2% of GDP. So even assuming the 10% tariff increase is fully implemented, the UK's GDP impact would be closer to 0.2% at best, said Alan Monks, an economist at JP Morgan.

What else does Britain sell to the US?

The UK is the world's second largest exporter of services after the United States, accounting for around 7% of global services exports. The UK will be hoping these don't get caught up in Trump's protectionist rush.

According to official statistics, Britain's services exports hit a record high last year, accounting for more than half of total exports. This figure is much larger than Germany's roughly one-fifth.

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Services exports to the economy account for around 18% of the UK's GDP, the largest share of any G7 country, around twice that of Germany and three times that of Italy and Canada.

Elliott Jordan-Doak, an economist at Pantheon Macroeconomics, said the UK would see little direct impact from US import tariffs. But the direct impact of President Trump's tariffs is only the beginning.

What are the wider risks?

An IMF analysis says global growth could be hit if President Trump presses ahead with his trade plans despite the exact details of his tariff proposals being unclear.

A trade war between the US and its key partners could have a major impact on EU export powerhouses such as Germany, which could have a knock-on effect on the UK economy.

Christian Keller, an economist at Barclays, warned that the uncertainty caused by the specter of tariffs would have a negative impact on investment and, more generally, on confidence levels in Europe even before the tariffs take effect, which is not expected until the second half of 2025. Maybe not.

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The German economy is at risk of U.S. tariffs due to its large manufacturing sector. After contracting slightly this year, it is expected to grow just 0.6% in 2025, according to data compiled by Consensus Economics.

The IMF modeled the combination of retaliatory tariffs, a 10-year extension of President Trump's 2017 tax cuts, declining net migration and rising global borrowing costs. The forecast for global economic output next year warned that it would take a 0.8% hit and by 1.3% in 2026.

What about other U.S. policies?

Trump has pledged to not only extend tax cuts passed during his first term, but also push for new cuts in corporate tax rates and lower individual-level earnings from overtime pay, tips and pensions. He also wants to deport millions of undocumented immigrants.

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A pre-election analysis by the Committee for a Responsible Federal Budget predicted that if President Trump implements his proposals, the federal debt would increase by $7.5 trillion within 10 years.

This increases the likelihood that bond market investors will be spooked by US fiscal easing and associated inflation risks. If this happens, there could be a risk of contagion to other financially vulnerable countries, including the UK, said Sushil Wadhwani, a former BoE policymaker.

He said bond market watchdogs could turn their attention to us because they looked at U.S. Treasury bonds first. As a small, open economy, we cannot protect ourselves from problems occurring globally.

Additional reporting by George Parker

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