Economists generally agree on few economic theories, but the negative impact of tariffs is one of them. The UK will be affected by US tariffs despite their close relationship, as noted by Trevor Williams in the latest issue of the INTEREST journal.
Issue 15 of INTEREST, from Moneyfacts, includes several insightful stories such as the forecasting capabilities of the Bank of England, and the MPC, mortgage lending and the origins of funding via savings deposits, who benefits from base rate reductions, the debate over commission disclosure and that calls for reduction in base rates “to encourage growth and prevent recession” are futile. The issue also explores the negative impact of tariffs.
The theory advocating for free trade without tariffs or barriers between countries was first articulated by Adam Smith in 1776 in “The Wealth of Nations”, showing that even if a country has an absolute advantage in producing goods, trade is still beneficial. David Ricardo expanded this theory in 1816 with the concept of comparative advantage, demonstrating that free trade can benefit all countries involved, even when one has an absolute advantage in all production areas.
This is the context to judge the economic impact of Trump’s announcement of a 25% tariff on goods from Canada and Mexico, a 10% tariff on China followed by a 25% tariff on European and other countries’ steel and aluminium products and threats of more tariffs if there’s any retaliation. The last time he did this there was retaliation as there is this time from Canada and Mexico. Chinese retaliation in 2018 drove 20% of US farmers into bankruptcy and led to hundreds of billions of dollars of state support.
Chinese tariffs on US goods are now over 100%, and the US has tariffs on Chinese goods of 145%. The EU and Canada have also responded, albeit holding off implementing them until the pause announced by Trump either ends or the tariffs are withdrawn.
Understanding the negative impact of tariffs
Tariffs are a tax on imports. The importer pays them, and the Government collects the taxes, which may boost their coffers until slower growth reduces it. Since tariffs are taxes, they increase the price of goods and disincentivise economic activity. They also increase firms’ costs, which can reduce the likelihood of hiring additional employees or increasing their wages.
That rise in price due to tariffs lowers economic activity, raises the prices of goods, and can lead to higher price inflation, a key concern for the central bank tasked with keeping inflation low and stable. That can lead to the central bank raising interest rates or not cutting them in a timely way, thereby weakening economic activity even further.
Economists have long contended that import protection results in substantial income losses. The 2018 trade war provides compelling evidence, revealing a staggering cumulative welfare cost of $6.9 billion in real or inflation-adjusted income reduction. This figure, coupled with an additional $12.3 billion cost to consumers and importers due to tariff revenue transferred to the Government in the first 11 months of 2018, underscores the significant economic toll of import protection.
The uncertainty generated now by announcements of on-off tariffs and threats of further tariffs if there is retaliation to the US’s tariffs is being reflected in the volatility that we are currently seeing in share price activity, particularly US share prices. This would almost certainly lead to less investment than otherwise and, therefore, weaker economic activity.
What does this mean for the UK?
The UK will be affected by US tariffs despite their close relationship. The US is the UK’s largest trading partner, with 17.2% of trade in goods and services in the four quarters to Q3 2024. UK exports to the US were £182 billion, and imports were £112 billion, resulting in a UK surplus of £71 billion. Tariffs may reduce this surplus and weaken UK economic growth. However, if the UK does not impose retaliatory tariffs, economic effects might be mitigated as consumer costs for US goods and services won’t rise.
Higher inflation expectations could lead the Bank of England to maintain its higher interest rates (currently 4.50%) than the EU’s current average of 2.50%, further impacting growth. More recent analysis shows that additional tariffs on pharmaceuticals and cars could lower UK growth by up to 1%.
This period of renewed trade uncertainty highlights that reciprocal trade protectionism rarely leads to good outcomes. (Read more on page ten).
Guest article provided by Trevor Williams, Visiting Professor at the University of Derby, author of Trading Economics and Chair of the IEA’s Shadow Monetary Policy Committee.
Read more in the latest issue of the INTEREST journal, which you can read for free here.
- ENDS
INTEREST is dispatched in advance of meetings of The Bank of England’s Monetary Policy Committee and is distributed free of charge.
Next Issue 6 June 2025. To receive the latest issue and sign up please visit: https://www.moneyfactsgroup.co.uk/magazines-and-reports/interest/
Have an opinion? Letters to the Editor invited:
interest@moneyfacts.co.uk
Economists generally agree on few economic theories, but the negative impact of tariffs is one of them. The UK will be affected by US tariffs despite their close relationship, as noted by Trevor Williams in the latest issue of the INTEREST journal.
Issue 15 of INTEREST, from Moneyfacts, includes several insightful stories such as the forecasting capabilities of the Bank of England, and the MPC, mortgage lending and the origins of funding via savings deposits, who benefits from base rate reductions, the debate over commission disclosure and that calls for reduction in base rates “to encourage growth and prevent recession” are futile. The issue also explores the negative impact of tariffs.
The theory advocating for free trade without tariffs or barriers between countries was first articulated by Adam Smith in 1776 in “The Wealth of Nations”, showing that even if a country has an absolute advantage in producing goods, trade is still beneficial. David Ricardo expanded this theory in 1816 with the concept of comparative advantage, demonstrating that free trade can benefit all countries involved, even when one has an absolute advantage in all production areas.
This is the context to judge the economic impact of Trump’s announcement of a 25% tariff on goods from Canada and Mexico, a 10% tariff on China followed by a 25% tariff on European and other countries’ steel and aluminium products and threats of more tariffs if there’s any retaliation. The last time he did this there was retaliation as there is this time from Canada and Mexico. Chinese retaliation in 2018 drove 20% of US farmers into bankruptcy and led to hundreds of billions of dollars of state support.
Chinese tariffs on US goods are now over 100%, and the US has tariffs on Chinese goods of 145%. The EU and Canada have also responded, albeit holding off implementing them until the pause announced by Trump either ends or the tariffs are withdrawn.
Understanding the negative impact of tariffs
Tariffs are a tax on imports. The importer pays them, and the Government collects the taxes, which may boost their coffers until slower growth reduces it. Since tariffs are taxes, they increase the price of goods and disincentivise economic activity. They also increase firms’ costs, which can reduce the likelihood of hiring additional employees or increasing their wages.
That rise in price due to tariffs lowers economic activity, raises the prices of goods, and can lead to higher price inflation, a key concern for the central bank tasked with keeping inflation low and stable. That can lead to the central bank raising interest rates or not cutting them in a timely way, thereby weakening economic activity even further.
Economists have long contended that import protection results in substantial income losses. The 2018 trade war provides compelling evidence, revealing a staggering cumulative welfare cost of $6.9 billion in real or inflation-adjusted income reduction. This figure, coupled with an additional $12.3 billion cost to consumers and importers due to tariff revenue transferred to the Government in the first 11 months of 2018, underscores the significant economic toll of import protection.
The uncertainty generated now by announcements of on-off tariffs and threats of further tariffs if there is retaliation to the US’s tariffs is being reflected in the volatility that we are currently seeing in share price activity, particularly US share prices. This would almost certainly lead to less investment than otherwise and, therefore, weaker economic activity.
What does this mean for the UK?
The UK will be affected by US tariffs despite their close relationship. The US is the UK’s largest trading partner, with 17.2% of trade in goods and services in the four quarters to Q3 2024. UK exports to the US were £182 billion, and imports were £112 billion, resulting in a UK surplus of £71 billion. Tariffs may reduce this surplus and weaken UK economic growth. However, if the UK does not impose retaliatory tariffs, economic effects might be mitigated as consumer costs for US goods and services won’t rise.
Higher inflation expectations could lead the Bank of England to maintain its higher interest rates (currently 4.50%) than the EU’s current average of 2.50%, further impacting growth. More recent analysis shows that additional tariffs on pharmaceuticals and cars could lower UK growth by up to 1%.
This period of renewed trade uncertainty highlights that reciprocal trade protectionism rarely leads to good outcomes. (Read more on page ten).
Guest article provided by Trevor Williams, Visiting Professor at the University of Derby, author of Trading Economics and Chair of the IEA’s Shadow Monetary Policy Committee.
Read more in the latest issue of the INTEREST journal, which you can read for free here.
- ENDS
INTEREST is dispatched in advance of meetings of The Bank of England’s Monetary Policy Committee and is distributed free of charge.
Next Issue 6 June 2025. To receive the latest issue and sign up please visit: https://www.moneyfactsgroup.co.uk/magazines-and-reports/interest/
Have an opinion? Letters to the Editor invited:
interest@moneyfacts.co.uk
