The potential reimposition of tariffs by former US President Donald Trump is casting uncertainty over the UK economy, with analysts warning of indirect consequences even if Britain avoids direct trade barriers. While Trump has not explicitly committed to imposing tariffs on UK goods, his wider trade policies could impact British exports, financial markets, and economic growth through spillover effects.

The Risk of Trade Retaliation

Speaking to the BBC, Trump stated that the UK is “way out of line” but suggested that the situation “can be worked out.” The lack of clarity regarding his stance has heightened concerns, particularly as Trump’s trade strategy has historically targeted countries running trade surpluses with the US.

UK data from the Office for National Statistics (ONS) indicates that Britain enjoyed a trade surplus of approximately £71bn with the US in 2023. However, the US Bureau of Economic Analysis reports a contrasting figure, estimating that the US had a surplus of $14.5bn (£12bn) in trade with the UK. The discrepancy arises from differences in data collection methods, particularly in measuring services trade.

Should Trump focus on UK goods trade alone, a blanket tariff could affect up to £60bn worth of UK exports. Pharmaceutical products (£8.8bn), cars (£6.4bn), and power generation machinery (£5.2bn) would be among the most affected industries, with businesses facing higher costs and potential demand reduction from US buyers.

Broader Economic Implications

Beyond direct tariffs, Britain’s economy could face adverse consequences from US trade actions against other countries. A global slowdown triggered by trade restrictions, particularly if Trump extends protectionist measures against the EU and China, could curb UK growth prospects. The EU remains Britain’s largest trading partner, and any disruption to the bloc’s economy could reduce demand for British goods and services.

Ahmet Kaya of the National Institute of Economic and Social Research (NIESR) cautioned that US tariffs on Mexico and Canada alone could shave 0.1 percentage points off UK GDP growth in 2025. Meanwhile, cheap industrial exports, particularly steel, diverted from the US to Britain due to tariffs, could increase competition and undermine UK producers.

Financial Market Volatility and Borrowing Costs

A second Trump presidency could also exert pressure on UK borrowing costs. The possibility of higher US interest rates, driven by Trump’s proposed tariffs and tax cuts, has already influenced global bond markets. UK Gilt yields spiked in January following a rise in US government bond yields, a trend that may persist if the Federal Reserve delays interest rate cuts due to inflationary pressures from tariffs.

Economist Julian Jessop noted that “the main threat to the UK economy from Trump’s tariffs may well be the spillover from higher US interest rates, rather than tariffs themselves.” With UK and US bond yields moving in tandem, prolonged elevated borrowing costs could slow UK economic activity and force the government into difficult fiscal decisions, including potential tax increases or spending cuts.

UK Government’s Response and Strategic Considerations

In response to the latest uncertainty, British officials have sought “further clarification” from Washington. The Department for Business and Trade is engaging with US counterparts, particularly regarding potential tariffs on UK steel and aluminium.

Home Office Minister Angela Eagle stressed the importance of maintaining a “balanced trade relationship” with the US, highlighting the £300bn worth of trade between the two countries. However, policymakers face a dilemma: retaliatory measures risk escalating into a trade war, while inaction could leave UK businesses exposed to punitive tariffs.

Trump’s broader economic agenda, including proposed corporate tax cuts, also raises concerns that some UK firms may consider relocating production to the US to avoid tariffs and benefit from a more favourable tax environment. This could further strain domestic investment and employment levels.

Navigating an Uncertain Future

With the US accounting for 15.4% of UK exports, Trump’s protectionist stance poses a significant challenge to British economic stability. The government will need to carefully weigh its policy responses, potentially seeking closer trade ties with the EU or alternative export markets to offset risks.

The coming months will prove crucial as Trump refines his trade strategy. If the UK can avoid direct tariffs, it may still face indirect economic headwinds from a more protectionist US trade policy, making strategic economic planning more vital than ever.