Britain is unusually well shielded from a tariff shock
Each of the past few decades’ big shocks has battered Britain harder than many of its peers. The crash of 2008 pummelled its finance-heavy economy. Then, in 2020-21, came the one-two punch of Brexit and the pandemic. Most recently, spiking European gas prices in 2022 squeezed Britain’s gas-reliant grid especially hard.
But as Donald Trump’s on-and-off-again tariff rodeo shakes the world economy, Britain has found itself in the rather unfamiliar position of being quite well insulated, and even in places poised to benefit from the turmoil. Certainly, any global slowdown would be bad news for an open and internationally exposed economy like Britain’s. But the direct hit from Mr Trump’s new tariffs is unlikely to be vast. Even before Mr Trump appeared to climb down on April 9th, offering a 90-day pause on tariffs above 10% to all countries except China, Britain had landed with the lowest 10% rate on most of its goods exports.
Unlike every other economy of comparable size, though, the bulk of British exports are in services, which are not directly affected by the tariff conversation (see chart 1). America is Britain’s second-largest trading partner, after the European Union (EU), but two-thirds of that trade is in services, mostly in desk work like banking or law (see chart 2).
If serious pain comes, a likelier channel is through a global slowdown spilling over to Britain. But that sort of shock, a reduction in global demand, is something that traditional recession-fighting tools are equipped to handle. The Bank of England has interest rates at 4.5%, well above what most economists would consider “neutral”. That leaves plenty of space for stimulatory rate cuts if needed.
True, the tariffs could cause inflation, bringing the dread prospect of stagflation. That would complicate the case for monetary stimulus. After years of above-target inflation, the bank’s credibility is already wobbly, which increases the odds that a one-off rise in prices could become self-reinforcing. But—especially if the British government continues not to retaliate—an economic slowdown would if anything probably pull inflation down. Oil prices fell by more than 20% after Mr Trump’s tariff announcements on April 2nd, and have recovered only slightly since. Import prices more broadly may fall too, if foreign producers no longer as competitive in America sell instead to Britain and other free-traders.
Another risk is that knock-on effects of the tariffs tangle global supply chains, which have evolved to rely heavily on inputs from a wide range of countries. Even 10% tariffs could jam up global production, making goods scarcer. “The question is whether we see orderly or disorderly fragmentation [of trade],” says Emily Fry of the Resolution Foundation, a think-tank. But supply chains do have a record of adapting. During the covid-19 pandemic, a much bigger shock to global supply chains, goods consumption overall still rose.
Keep calm and carry on
Still, the British economy will almost certainly suffer in the short run. The Office for Budget Responsibility, Britain’s fiscal watchdog, laid out several tariff scenarios in its latest set of forecasts, put out a week before Mr Trump’s initial announcements. Those suggest around a 0.6% short-term hit to British GDP, narrowing eventually to 0.3% over the medium term.
The comparatively fortunate position that Britain has found itself in reflects luck more than geopolitical ingenuity (although Sir Keir Starmer does deserve some credit for keeping relations with Mr Trump friendly). The prime minister says that his tariff strategy has four legs: sign a deal with America to lower the tariffs on Britain; discourage allies from an “all-out trade war”; push free-traders to lower barriers among themselves; and liberalise more at home (as the government recently has on its electric-vehicle targets for carmakers).
Extracting concessions from America will no doubt be tricky. But Mr Trump did emphasise in his statement of April 9th, in which he announced a partial tariff pause, that he was enthusiastic about negotiating with countries that had chosen not to retaliate. That will be music to Sir Keir’s calm-and-collected ears. Expect an orchestrated diplomatic overture.
The outlines of Britain’s offer are already clear. The government has indicated that as part of a deal it might offer concessions on Britain’s heavy-handed taxes and regulations for big technology companies. American tech giants are unpopular with British voters; blaming Mr Trump may be a convenient pretext to ditch rules that were choking growth anyway.
How open Mr Trump will be to this sort of gambit remains less clear. Previous efforts at a trade deal with America have stumbled over food standards. That may be avoidable this time, as the emphasis would be narrowly on squeezing tariffs, not on reaching a comprehensive agreement. This would also avoid complicating slow-moving talks with the EU, over harmonising food trade, which could be a bridgehead to a broader deal with the bloc.
Focusing minds there would be a promising route; compared with America, the EU is twice as valuable as an export market for Britain. And it has proven to be far more reliable. Sir Keir has said a “much better trading relationship with the EU” is feasible. Perhaps “Liberation Day” may be just the jolt required to deliver it.■
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