Recently, the tariffs imposed by former President Donald Trump on various goods entering the United States have officially taken effect, eliciting swift retaliatory measures from both Canada and China. The Trump administration implemented a hefty 25% levy on goods from Canada and Mexico, which are the two largest trading partners of the US, in addition to a 20% tariff on imports from China—an increase that effectively doubled the previous rate.
In reaction, both China and Canada have initiated their own tariffs on American goods, leading to escalating fears of a global trade war that have sent shockwaves through stock markets. Tariffs are essentially taxes levied by a nation on imported or exported goods, which can significantly increase costs for consumers. In this context, The i Paper offers insights into the implications of these tariffs, drawing on expert analysis regarding how they may influence consumer prices and the retail landscape in the UK.
What are the New Tariffs?
Trump’s new tariffs are taxes applied to goods brought into the US from foreign countries, and they are paid by the companies responsible for importing these products. Typically calculated as a percentage of the product’s value, these tariffs create a financial burden for overseas companies attempting to sell in the US, rendering their goods more expensive for American consumers, while domestic competitors remain unaffected by these additional costs.
Experts have cautioned that consumer prices may rise as a consequence of these tariffs. Kathleen Brooks, the research director at XTB, stated, “While it is still early to definitively assess the full impact of tariffs on the global economy, it is reasonable to assert that they hold the potential to trigger inflation.” Trump argues that these tariffs will bolster domestic manufacturing and lessen reliance on foreign products by raising import costs. However, numerous studies from his previous administration indicated that the primary outcome of such tariffs was that companies simply passed on their increased costs to consumers.
In addition, Trump has expressed his desire for these measures to compel Canada and Mexico to address issues related to illegal immigration and drug trafficking. The newly imposed tariffs on Canada, Mexico, and China are set to impact over 40% of all goods imported into the US last year, collectively valued at a staggering $1.4 trillion. The only exception for Canadian goods is energy-related products, such as crude oil, which will incur a 10% tax.
In response, China announced on Tuesday that it would impose 15% tariffs on American imports including chicken, wheat, corn, and cotton, along with 10% tariffs on a broader range of products such as sorghum, soybeans, pork, beef, aquatic products, fruits, vegetables, and dairy. Additionally, 15 US companies have been added to China’s export control list, effectively barring exports to them. Concurrently, Canadian Prime Minister Justin Trudeau has implemented immediate 25% tariffs on $30 billion worth of US goods, with an additional $125 billion in products potentially affected within 21 days if the US does not rescind its tariffs.
Will the US Impose Tariffs on the UK?
Trump has threatened to impose tariffs on the European Union, though there are growing hopes that the UK might be spared. After a meeting with the UK Prime Minister, Trump indicated last week that there is a “very good chance” of establishing a trade deal that would eliminate the need for tariffs. Trump has criticized the US’s trade deficit with Canada, Mexico, and China, which reflects that the US purchases significantly more from these countries than they purchase from the US. In contrast, the US enjoys a trade surplus with the UK.
How Could Tariffs Affect the UK?
Even in the absence of direct tariffs on UK exports, the ongoing trade war is likely to affect British consumers. Dr. Nicolo Tamberi, a research fellow at the Centre for Inclusive Trade Policy, explained, “Given that the new tariffs mainly apply to US imports from China, Canada, and Mexico, UK imports may only be affected indirectly.” He noted that UK imports from the US that heavily utilize Canadian inputs are likely to see price increases, which will have a ripple effect not just in the UK but globally.
Products characterized by “highly integrated supply chains within North American Free Trade Agreement countries” are expected to experience price hikes. Most economists agree that tariffs will increase costs in the US, which in turn could fuel inflation and prolong higher interest rates. This scenario could lead to an economic downturn in the US, the world’s largest economy, and the health of the US economy significantly influences global economic growth, including in the UK. The National Institute of Economic and Social Research (NIESR) predicts that the 25% tariffs on Mexico and Canada could lower UK GDP growth by as much as 0.1 percentage points by 2025.
Countries targeted by US tariffs may face negative economic impacts and currency depreciation, making UK exports more expensive for them, which could adversely affect British businesses.
Which Items Could Rise in Price in the UK?
Some economists are warning that Chinese-made steel could be redirected from US markets and “dumped” onto the UK market at lower prices, potentially undermining the sales of UK steel manufacturers. Jess Corsair, a senior economist at the Agriculture and Horticulture Development Board, stated, “Canada, Mexico, and the EU are significant agricultural exporters, and increased trade barriers into the US will likely result in these products being diverted to other markets where trade is less costly. This scenario poses a risk of more products being funneled into the UK.”
Trump’s tariffs will also drive up the price of American cars, as manufacturers rely on parts imported from Canada and Mexico. TD Economics estimates that car prices in the US could rise by approximately $3,000 (£2,400), while a report from US consultancy Anderson Economic Group suggests that price increases could reach as much as $12,000 (£9,400). This increase will likely affect cars imported from the US to the UK, although they represent a relatively small segment of the British car market. Trump has recently voiced concerns about the limited number of cars purchased in the UK from US manufacturers like Ford, Chrysler, and General Motors.
Less than three percent of the cars sold in the UK last year were from US companies, with Tesla being the most popular brand, accounting for 2.6% of UK new car sales. Tesla sources about a quarter of its materials from Mexico. Dr. Tamberi noted that car prices in the UK could rise due to the integrated nature of supply chains. Companies such as Volkswagen and Stellantis, which operates in Mexico, may also face exposure to Trump’s tariffs, while shares of UK firm Aston Martin have seen declines. Additionally, industrial machinery is another sector where price increases could occur, potentially leading firms that utilize that machinery to pass higher costs onto UK consumers.
Dr. Ahmet Ihsan Kaya, a principal economist at NIESR, warned of “knock-on effects,” considering that the US is central to many supply chains. “For example, if tariffs cause Chinese chips to become more expensive, the price of US circuits used in cars manufactured in the UK would also rise,” he said. Furthermore, oil prices have surged amid apprehensions regarding supply disruptions, with experts suggesting that this would primarily impact petrol prices rather than energy costs for consumers. Tony Jordan, a founding partner at energy consultancy Auxilione, noted, “Oil prices have a greater effect on petrol prices than they do on energy prices, which are generally felt more at the pump than in the household heating.” Dr. Tamberi cautioned that the range of items affected by price increases could broaden if tariffs are imposed directly on the UK.
If tariffs extend to additional countries, the consequences will be more pronounced. The ultimate outcomes will largely depend on how various nations respond to the tariffs.
Furthermore, the International Chamber of Commerce United Kingdom has indicated that tariffs on the EU will also have indirect repercussions. Chris Southworth, secretary-general of the International Chamber of Commerce UK, asserted, “If the US imposes tariffs on the EU, it will inevitably impact the UK, given that 40% of our trade is with Europe. It is in our economic interest to facilitate a resolution.” He added, “The UK finds itself in a unique diplomatic position currently. We are not part of the major trade blocs anymore, yet we remain staunch advocates of open trade and are well-positioned to foster diplomatic solutions with countries worldwide. Our role is pivotal in helping mitigate the adverse effects on those caught in the crossfire.” Southworth emphasized the importance of early dialogue to prevent a tariff war, advocating for pragmatism and a level-headed approach.
Impact on UK Inflation and Interest Rates
Some analysts contend that the repercussions of Trump’s tariffs are already manifesting in the UK, particularly through a modest impact on the value of the pound. Charlie Cornes of the Centre for Economics and Business Research remarked, “Since the weekend, we have observed a depreciation of the pound against the dollar. A weaker pound tends to be inflationary for the UK, as it raises the cost of imports, although the changes so far have been relatively minor.” Cornes further explained, “Should Trump proceed with tariffs on the UK, the principal impact channel would likely be reduced exports, resulting in higher prices for US consumers buying UK goods. If the UK were to retaliate, this could lead to further inflationary pressures for British consumers.”
He pointed out that the UK’s primary imports from the US include machinery, transport equipment, and chemicals, all of which could experience price increases. If inflation in the UK rises as an indirect consequence of heightened global tariffs, it could compel the Bank of England to maintain higher interest rates for an extended period. While current interest rates stand at 4.5%, there are no guarantees that the Bank would opt to keep them at that level in the face of global inflationary pressures, potentially resulting in higher mortgage rates.
The main threat to the UK economy arising from Trump’s tariffs may stem more from the spillover effects of increased US interest rates than from the tariffs themselves, according to economist Julian Jessop. He noted, “US and UK government bond yields are moving in tandem again. If the Federal Reserve becomes more hesitant to lower US rates, as appears likely, borrowing costs in the UK will remain elevated for an extended duration.”
