Trump’s tariffs: helping you understand their impact

This policy is designed to:

• Generate revenue: As tariffs are a tax, they generate revenue for the government that imposes them. It should be noted that this benefit can be offset if the tariffs damage economic growth, leading to lower tax from other sources.
• Incentivise reshoring: The tariffs imposed aim to incentivise companies to shift manufacturing and jobs to the US. However, many goods produced in the US rely to some extent on parts manufactured elsewhere, leading to higher costs for manufacturers.
• Improve trade deals: As the US is the largest and most powerful economy in the world, Trump views tariffs as a negotiating tool to seek better trading terms for the US. However, imposing tariffs can lead to retaliatory tariffs from other countries, as we have already seen with China potentially escalating into a ‘trade war’ that harms both economies.
• Protect domestic industries: By making imported goods more expensive than locally-produced ones, tariffs aim to protect domestic industries. However, this can reduce the incentive for domestic businesses to innovate and improve (as their products become artificially cheaper). This is likely to reduce the attractiveness of US produced goods on the international market in the long run.

There is a common misconception that the business in the country exporting the goods pays the tariffs. In reality, tariffs are a tax paid by the domestic company that imports the goods, which then pass the costs on to consumers. For example, US consumers will ultimately pay more for goods ranging from electronics to bicycles to cars (although it is likely that exporters will be pressurised to drop prices to ‘share the pain’). Similarly, any other country imposing tariffs in retaliation will cause prices on goods imported from the US to rise in price for their consumers.

Historically, widespread tariffs have led to lower growth, higher inflation and, in some cases, recession. The immediate impact has already been felt in investment markets, which have responded negatively to trade barriers, lower corporate earnings estimates,and, a lack of certainty.

Longer term, the US may be viewed as a less reliable trading partner, potentially strengthening trade between other nations and trading blocs.

At this stage, the UK has not announced an intention to impose reciprocal tariffs, preferring to reach a trade agreement with the US.

If a reciprocal tariff were announced, it would make goods imported from the US more expensive, including technology, mechanical appliances, and cars. However, some prices have fallen due to the expectation of lower global growth, including oil prices, which may lead to lower petrol and diesel costs.

There is also scope for any future agreement to hinge on the watering down of the Digital Services Tax or the Online Safety Bill, effectively impacting US services rather than goods.

The UK exported around £58.7bn of goods to the US last year, including cars, medicines, aircraft/aerospace equipment, and scientific instruments. If demand for these goods falls due to tariffs, it could lead to slower economic growth and job losses. This in turn, could reduce the total tax revenue generated by the UK government, potentially leading to a fall in public services or an increase in tax rates. Overall, in the short term, it is likely that there will be a negative effect on the UK’s economic outlook.

The Bank of England (BoE) is forecast to cut interest rates several times this year. However, the mandate of the BoE is to control inflation to levels of around 2%. If tariffs cause inflation to rise, it may make interest rate cuts less likely. However, if tariffs dampen growth but have less impact on UK inflation then more interest rate cuts could become likely.

• Falls in the value of investment markets are already evident, and we may face a period of volatility until there is more clarity.
• If you are already invested but not taking an income, it may be unwise to encash investments. Moving existing investments to cash realises a loss and rules out capturing any potential recovery in the value of assets.
• If you are considering investing it may be tempting to delay making an investment until markets have recovered. However, this may not be the right approach, as it is impossible to predict when volatility will ease and markets have clearly recovered. Also, if you are investing for the long term, ironically, periods of volatility may be a good time to invest.
• If you are already taking an income, bear in mind that the state pension and defined benefit pensions are unaffected. However, defined contribution pension savings will have fallen. As such, you may wish to consider whether you can or should reduce income for a period or delay making any large one-off withdrawals.