Trump trade war would be worse than Brexit for UK

Such has been the attention devoted to Labour’s budget on October 30, that it has been easy to forget that, less than a week later, on November 5, an even more momentous event will take place in America.
I was intrigued to read in our news pages a few days ago, a story headlined: Trump trade war with China ‘could be worse than Brexit for UK’. Quoting security sources, it warned that Britain could be caught up in a damaging trade war between the world’s two biggest economies, America and China, on top of the direct damage caused by the former president’s pledge to impose new tariffs on everybody, including this country.
According to one Whitehall source quoted in the piece, by my colleague Steven Swinford: “There are significant concerns in the security services about the economic impact of a full-blown trade war with China. We could end up as collateral damage. It could have a huge impact on supply chains to western countries. The worry is that it will be a bigger hit to GDP than Brexit was.”
This threat has crept up quite quietly, not least because there are plenty of other concerns about the former president, including his unwillingness to support Ukraine against Vladimir Putin’s Russia. But it is clear enough, an “America first” policy of imposing 60 per cent tariffs on imports from China and 10 or 20 per cent on imports from everywhere else. It is a far cry from the aftermath of the 2016 presidential election, when the mood music from the Trump White House was that Britain would be at the front of the queue for a post-Brexit trade deal with America. It never happened then, and it looks further away than ever now.
That a Trump re-election is a possibility, and indeed appears to have become more likely in recent days, is a puzzle to many on this side of the Atlantic. Not only is the former president a convicted criminal and knee deep in other legal disputes, but his opponents have been picking up on the 78-year-old’s increasingly erratic behaviour.
The Biden White House, with Kamala Harris as vice-president, has presided over strong economic growth, putting other big economies to shame. The cumulative rise in US gross domestic product since the end of 2019, 9.4 per cent, is almost twice as much as the next best G7 performer, Canada, and compares with just 2.9 per cent for the UK.
However, and this will gladden the heart anybody who believes that low inflation matters, it is the price rises of the past few years, and their legacy in higher price levels, that appear to be more important electorally than growth and jobs. Though average US gas (petrol) prices have fallen by about 12 per cent over the past 12 months, they remain some 50 per cent higher than at the time of the last presidential election, in November 2020.
Indeed, this has been a terrible time for incumbent governments seeking re-election against the backdrop of a cost-of-living crisis, as Labour’s July landslide here clearly demonstrated. The fact that the US presidential race is close perhaps shows that many US voters have serious doubts about Trump, too. This is not to say that Harris has a convincing and articulate economic programme, though from what we know it would be less damaging to the rest of the world than Trump’s offering.
How bad would a second Trump trade war be? America’s Brookings Institution says that Trump’s tariffs would lead to chaos for business and result in higher US inflation. The tariffs imposed by Trump during his first term were damaging, but his new proposals would cover roughly ten times as many imports, by value.
“Experience shows — and economists agree — that tariffs lead to persistently higher prices for customers,” Brookings said in a recent assessment. “But the near-term damage will be even greater if massive disruptions in supply chains create chaos for businesses that rely on imports.
“Trump has promised to increase tariffs on imports from China by 60 percentage points and on all other imports by 10 to 20 percentage points. His insistence that this would not make American consumers and businesses pay higher prices reflects a basic misunderstanding of how tariffs work in practice.”
If the Trump tariffs were to result in higher US inflation, as would be expected, this would have implications for the pace of interest rate reductions by America’s Federal Reserve and, by extension, other central banks.
The Peterson Institute for International Economics, another prominent US economic think tank, says that Trump’s tariffs would amount to a “game of chicken” with other countries. The assumption that they would not retaliate is likely to prove false, it argues, increasing the economic damage from what it describes as an “irresponsible and counterproductive” policy, with no upside. The most famous example of a damaging global trade war was in the 1930s.
For Britain, this matters. When the world’s biggest economy becomes a poster boy for protectionism, that has to be bad news. America is this country’s single largest export destination, with exports of goods and services there of £192 billion, in current prices, over the latest four quarters. The US share of UK exports of goods and services, 22.3 per cent, was just over half of the combined share of exports going to the EU.
A new round of US tariffs would thus be damaging, the more so if it results in a wider trade war. World trade has yet to get back on a strong growth path after the shocks and disruptions of recent years, including the tariffs imposed by Trump during his first term.
UK exports in volume terms, so adjusted for inflation, are this year running below 2019 levels, alone among leading economies. Any further knock to export prospects will make it much harder to achieve the kind of economic growth needed to fix the UK’s problems, including those for the public finances.
David Smith is Economics Editor of The Sunday Times [email protected]