In this latest blog, William Bain, Head of Trade Policy, looks at the likely impact of US tariffs, how the UK should respond and what it means for our other global trade relationships:
A new trade era has started with President Donald Trump announcing tariffs of 25% for all imports of steel to the US while strongly hinting at more to come.
It is vital that the UK Government keeps a cool head in assessing its response and does not get sucked into a trade war of tit-for-tat tariffs, which could easily spiral out of control.
There is no disguising it has been a tough start to the year for business. Cost pressures are ramping up, confidence is down, and government pledges to unlock growth are yet to bear fruit.
New research by the British Chambers of Commerce (BCC) has revealed the strength and depth of the alarm among manufacturers at US tariffs. Almost two thirds of exporters in this sector say they are worried about their impact.
Not only do they fear the direct effect of these costs being passed on to them, but they are worried about the implications for global demand if a full-scale trade war erupts.
The UK will need to adopt a flexible and agile response, while assessing the reaction of other major players. There is a month until the UK’s current steel tariff quotas expire, we would encourage Ministers to respond cautiously, and retaliatory actions should only be a measure of last resort.
There are also the added complications of trade diversion to consider, where goods once destined for the US are dumped on the UK market. And there are the question marks that US policy raises for the UK’s trade relationships with the EU and China.
The US has a trade surplus in goods with the UK and our trade and investment relationships remain robust.
Our services exports with the US also won’t be subject to any tariffs and are far higher than our goods exports, giving UK trade a level of insulation from any potential impacts.
The government must keep a clear head, and if it is confident in its approach, it could yet negotiate a mutually beneficial deal with the US. This would most likely be around digital trade and critical supply chains, that would have big benefits for both our economies.
But if the US sees sustained retaliatory action from other countries, there is a risk that a global trade war could unfold, resulting in strong headwinds that would impact every nation.
The UK would then have to look more closely at how it manages not only its relationship with the US, but also the EU and China, as everyone seeks a strategic advantage.
With EU reset talks underway and a key leaders’ summit on 19 May, it is welcome that the UK and EU will begin to address some of the cost and red-tape barriers that have held back our businesses on both sides of the English Channel, and North and Irish Seas.
The final results of these negotiations won’t fully emerge until 2026, but nevertheless there are already positive signals for pro-business, pro-growth action. This includes listening to the case on making food exports easier and providing supply chain diversity by aligning to rules on raw materials and components by rejoining the Pan-Euro-Mediterranean (PEM) convention.
An improvement in the EU trading relationship would send a strong signal to businesses that their concerns have been heard, and the government is taking action to address them.
Clearly, there are risks that would need to be managed, including the US response to the UK engaging with countries or trading blocs that it views less favourably.
But this is not a zero-sum game where trading more with the US must mean we must trade less with the EU. The UK’s performance of services exports in recent times, which have increased in both markets, demonstrates that this does not apply. And speaking to businesses across the Atlantic, they have made it clear to us that they want to see the UK have a stronger trading relationship with the EU.
In the hunt for the strong economic growth that has eluded the UK for so long, the benefits from getting this right would be considerable. Aston University research shows that food exports to the EU could increase by as much as 20% with a strong deal removing certain export paperwork and checks.
Our modelling indicates that if exports had grown 1.0% in 2024, compared to a forecast contraction of 2%, then the economy could have grown up to 1.7% instead of 0.8%. That is significant.
We are only just into the foothills of the new trade era and the only certainty is that things are likely to remain unpredictable. But the UK is well set to weather this storm and could yet emerge in a stronger position than many.