Why Trump could crush the British economy

A Republican win risks devastation for companies that sell into the US market

Donald Trump has a flair for turning usually mundane or technocratic topics into powerful material for his presidential campaign.
“The most beautiful word in the dictionary is tariff, and it’s my favourite word,” he said earlier this month. “It’s more beautiful than love. It’s more beautiful than anything.”
The former, and potentially future, president of the US is proposing major new taxes on trade. He has not pinned down a precise trade policy but has indicated he could slap a tax of 10pc or 20pc on everything imported from abroad, and a higher rate of 60pc on imports from China.
Such measures would have extremely serious consequences for the world economy. Britain would not be spared.
In the run up to the Budget, attention has been focused on the impact of Labour’s first fiscal statement in 14 years on the economy. But could the outcome of the US election have a bigger impact?
The US is Britain’s biggest individual trading partner, accounting for 17.7pc of all our international trade. Britain’s exports to the US totalled £192bn in the 12 months to March, while imports were worth £117.2bn, according to the Department for Business and Trade.
For every £100 worth of goods and services Britain sells abroad, the US buys £22 of it.
Two-thirds of British exports to the US come in the form of services – covering everything from tech, banking and consulting to holidays. This trade may be spared the worst of the impact because Trump tends to focus his attention on manufactured goods.
However, the impact on companies that do sell into the American market may be devastating.
“The whole industry lost sales and market share in what has been for decades the industry’s largest and most valuable market,” says Mark Kent, chief executive of the Scotch Whisky Association, recalling a trade spat during Trump’s first term in office.
An EU-US trade dispute over aerospace subsidies led to a 25pc tariff on imports of single malt whisky into America. Kent says the industry in Britain lost £600m of sales over the 18 months for which the tax was in place.
Those taxes came in when Britain was part of the EU, and Brussels hit back by targeting iconic American products including Harley Davidson motorcycles.
“The industry was collateral damage in a trade dispute about aerospace subsides,” says Kent “The impact fell disproportionately on small and medium-sized distillers across Scotland, who only produce single malts.”
The US levy is only suspended and is currently due to come back into force in 2026, he notes.
“While currently suspended, these tariffs must never be allowed to return and cause further damage to Scotland’s distillers.”
Scotch is a high-profile sector and was deliberately singled out by Trump to cause maximum embarrassment. While notable, the overall economic impact was relatively limited.
But an across-the-board tariff would hammer plenty of other big British industries. Medicinal and pharmaceutical exports to the US in the most recent 12 months totalled £8.4bn. Car exports were worth £7.1bn.
Those were mostly premium vehicles, so their sales are particularly valuable to the industry.
Data from the Society of Motor Manufacturers and Traders shows 15.4pc of car exports in the first half of this year went to the US.
Just how damaging Trump’s tariffs prove to be depends on how much other nations retaliate, says Ahmet Kaya at the National Institute of Economic and Social Research (NIESR).
If other countries responded with tariffs of their own, international trade would slow and the whole world would be left poorer.
Three years into a trade war, he estimates that the US economy would be 3.5pc smaller than it otherwise would have been. China’s would be 2.1pc smaller than previously anticipated.
That drains growth from the global economy, with Britain suffering along with the rest of the world.
In Wednesday’s Budget, Reeves is attempting to pull off the difficult trick of raising taxes while boosting investment spending to avoid crushing growth. However, Kaya’s estimates show a tariff war would cut the British economy off at the knees.
Without a trade war, NIESR predicts the British economy will grow by 1.2pc next year.
If Trump wins the election and immediately imposes across-the-board tariffs, with matching retaliation from Britain and others, growth would be just 0.4pc – meaning two-thirds of Britain’s potential would have been wiped out.
At the same time, a trade war would see inflation more than double – shooting back up to around 4.5pc – effectively re-starting the cost of living crisis just as families and businesses thought prices were starting to get back under control.
“Slower growth in the US, in China and in the global economy, as well as much slower global trade growth – these are the direct impacts,” says Kaya.
“There is an indirect impact coming from interest rates because of higher inflation. Obviously the Bank of England would respond to high inflation by keeping interest rates even higher, which will dampen investment growth.”
Even if Trump opts for more selective tariffs, rather than across-the-board levies, Britain could still be vulnerable.
“While the UK would theoretically be more insulated from more selective tariffs given its economy poses less of a competitive threat to US manufacturing relative to the EU, [the Trump] campaign’s row with the Government over Labour activists campaigning for Kamala Harris could encourage Trump to keep the UK in its sights when drawing up a list of places with unfair trade practices or where extraordinary threats are coming from,” says Allie Renison, a former government adviser and now a trade expert at SEC Newgate.
Britain would also struggle to respond.
“Unlike the EU who have expanded their trade defence arsenal in recent years, the UK doesn’t have a huge range of unilateral ‘economic security’ mechanisms it can draw on to respond,” says Renison. Even if we did, “the impact of standalone retaliatory tariffs on the American economy would be less of a deterrent than the EU doing it,” she adds.
If Trump pressed ahead with across-the-board tariffs, which is technically more difficult, she suspects the UK might want to club together with others like the EU to fight back.
That is just one of the geopolitical shifts a tariff war could prompt. A US trade war could also push Britain into the arms of China.
Economists at French institute CEPII predict that US exports to almost every other nation would collapse over the course of this decade if Trump launches a tariff blitz – by more than one-fifth to the UK and almost 30pc to Germany. At the same time, the world will import from China, giving America’s great rival even more sway over the rest of the world economy.
The implications may be more than just economic. A trade war on the whole world could prompt questions as to “whether trade policy objectives may supplant or undermine key US alliances with Australia and the UK (AUKUS), India, Japan and Australia (the Quad), NATO, and a coalition among the US, Japan and South Korea,” analysts at investment bank Morgan Stanley have noted.
The British Government could face a diminished economy and a wholesale shakeup of international relations, just as it launches an expensive set of tax rises at home. Unfortunately, the Chancellor can’t breathe a sigh of relief once she gets the Budget out of the way.