“So high, so horrible, so obnoxious”: this was how Donald Trump described the ideal tariff shortly before the US election last year. Trump has promised tax increases on all imports into the US, and especially on America’s three biggest trading partners. Canada and Mexico could face tariffs of 25 per cent, while Chinese goods could be taxed at 60 per cent.
Behind this threat is the antique economic theory of mercantilism, which holds that a country becomes stronger the more it exports and weaker the more it imports. In Trump’s zero-sum thinking, exports are wins and imports are losses. The US runs the world’s largest trade deficit, and China runs the world’s largest trade surplus; America is being robbed! He believes that foreign companies will move manufacturing to the US to avoid aggressive taxation, creating jobs, while a deliberately weakened dollar could increase exports.
This idea emerged in a world of simple trade routes – a world that is decades if not centuries in the past. The supply web of America’s most valuable company, Apple, spans more than 50 countries. To make a modern phone or laptop requires raw materials from every continent except Antarctica. It is unlikely that Trump can impose very high tariffs on these countries without causing prices to increase in the US and economic damage around the world. Credible forecasts suggest that if the UK was to face 10 per cent tariffs on exports to the US, our GDP growth could be reduced by 0.7 percentage points, which could put us in technical recession territory.
This won’t bother Trump, who will blame price rises on someone else (probably the Federal Reserve) and who may be emboldened by the Biden administration’s continuation – and extension – of the tariffs he implemented in his last presidency.
The countries that sell the most goods to the US have the most to lose. Alongside China there are the major manufacturing economies of Japan, Germany, India, Vietnam and South Korea. Britain’s economy relies more heavily on services, which are less of a focus for Trump’s protectionism. This doesn’t mean the UK is not exposed. The US is our biggest single-country trade partner, accounting for about 15p in every £1 of goods exported (the EU as a bloc is bigger, making up around half).
If his past performance is anything to go by, Trump will use the threat of tariffs as leverage in deal-making. He may well use the prospect of higher tariffs, and the economic damage they could cause, to force countries including the UK to pick a side in his trade war: tax Chinese imports as the US does, or face higher tax on your exports to America. Neither Britain nor the EU has much to gain from being forced into either position, but it is unlikely they will be permitted to remain neutral.
This article is part of the series: The Year in 2025. You can find the rest here
Content from our partners
Related
This article appears in the 08 Jan 2025 issue of the New Statesman, The Great Power Gap