Security, diplomacy and defence look set to dominate the conversation when Sir Keir Starmer meets President Trump face to face today.
But there are immediate threats from Trump’s tariff policies that could damage our trade and directly affect the UK economy within weeks – with around £60bn of exports each year at risk.
Some sectors of UK industry say they are incredibly worried by what tariffs could mean for them. But at the same time they just don’t know what’s going to happen, and they are not even sure what the best strategy is to protect their interests.
It could be that their best chance of blocking any tariff war has nothing to do with what they say, but lies inside the vast US economy, where inflation is rising and consumer confidence is slumping – possibly making the tariff policy less viable politically.
Complex and costly scenarios
The first wave of tariffs for the UK could arrive on March 12, when the US is set to impose 25% levies on all steel and aluminium imports. And on April 2, Trump is planning what he calls “reciprocal tariffs”, where the US will match the rates it faces when exporting to other countries. That could be particularly explosive for the UK, as the president is planning to include a range of non-tariff barriers in this calculation, including VAT.
The economic think tank Capital Economics calculates that this would imply tariffs on UK exports of 24%. That would be higher that Mexico (23%) and Canada (19%), the two countries which – alongside China – have faced the harshest criticism from Trump.
Some in the White House believe it is justifiable to include VAT rates in working out trade barriers because US sales taxes are much lower than here. But VAT is charged on UK companies as much as on goods imported from the USA – or anywhere else – so it’s hard to see how it is discriminatory rather than a reflection of our different tax regimes.
And business groups see it as potentially fatal to the rules-based system that has boosted world trade since 1947. One key concept in that system is what is known as the “Most Favoured Nation” status. Here’s how it works. Imagine the UK imports a car from the US and charges a tariff of 10%. Under current rules, that’s the tariff it is allowed to charge on any car coming from any other country. The idea is that every country is treated equally.
The Trump plan seems to rip up that idea. Instead, different tariffs would be imposed on every country – dependent on their tariffs, domestic taxes and other policies like regulation.
This would be a major rupture with the world trade system of the last 80 years – something the president may be relaxed about.
But William Bain, the head of trade policy at the British Chambers of Commerce, told Channel 4 News: “US plans to factor in countries’ sales tax or VAT regimes into tariff assessments would upend established trade norms which have been in place for decades.
“They could lead to especially complex and costly scenarios for UK businesses which will heighten uncertainty and hamper investment at a time of economic stagnation.
“The government must make the most of the time available before the introduction of these tariffs to negotiate on alternative arrangements.
‘We’re not the enemy’
Steel faces the most immediate threat, with sanctions due to arrive in a fortnight. The industry hopes its case will come up when the PM and president talk. Outside the EU, the USA is the largest export market for UK Steel, worth about £400m – business which the industry is desperate not to lose.
If they were at Sir Keir’s side, they would be making two arguments. First, much steel from the UK is high grade and sold to critical industries, including defence. So blocking it would hurt the USA as much as the UK. Second: UK steelmakers agree that there is massive overcapacity in the world steel market – around 630 million tonnes – but 100 million of that is accounted for by China. So they say we can tell the administration that UK steel is not the enemy here. But can President Trump be convinced that we are allies rather than enemies on this battlefield?
Cars are particularly vulnerable to the “reciprocal tariffs” strategy. Currently, UK car exports to the US attract a 2.5% tariff, while US exports here face a 10% tariff. And the UK car industry is in surplus with the USA – so it might attract the critical eye of a trade-sceptic president.
But it would be hard to argue the UK market has been closed to US producers: Ford dominated the market here for years but with cars made in the UK rather than brought across the Atlantic.
The reality is that one reason for the lack of US cars brought into the UK is that the two markets are very different. Fuel is cheaper in the US, roads are wider and Americans have a fondness for big SUVs and vans. The British prefer more fuel efficient and smaller vehicles that work better for a very crowded island. Those consumer preferences are unlikely to change because of the US putting up tariffs. If the US wants to export more cars here, it might need to build more cars appeal to British buyers.
The strategy: don’t react
Pharmaceuticals is another critical UK industry which is also treading a cautious path. Many key companies in this area are global concerns and have no desire to see tariffs or any trade frictions. But there is a sense that this administration says a lot of things – announcements (or threats, depending on your point of view) come thick and fast, but not all of them come to past.
Some UK industry insiders sense that the Trump administration quite enjoys a fight. So the thinking is: don’t give them the opportunity. The best tactic is to not react and not draw attention to themselves.
Business sees its role as giving the government the data it needs to make the case. They accept that a lot of the negotiation is going to take place behind closed doors and may be better for that. But that does mean they will be left waiting to see what happens.
Lower tariffs better
But tariff policy will be influenced by internal US economics and politics as much as by what Sir Keir Starmer says.
Voters don’t share President Trump’s enthusiasm for tariffs. In January, a survey of consumers by the University of Michigan reported that while 19% thought higher tariffs were better for the economy, a clear majority – 62% – said lower tariffs were better (19% said it made no difference). The Michigan survey said that “less than half of Republicans reported that higher tariffs would be better for the economy”.
Higher prices… including eggs
And inflation is going higher. The annual rate was 3% in January. It has now risen four months in a row since reaching a trough of 2.4% in September. That’s a long way from the 9.1% peak that the US hit in June 2022, but it is still a problem.
Earlier this month, polling for the Pew Research Centre found that 63% of the population describe inflation as a “very big problem” for the country – a share that’s little changed from levels a year ago under the Biden presidency. And it’s a bigger concern for Republicans, with 73% naming it a very big problem.
And US consumers expect inflation to go up further. Earlier this week, an economic think tank, The Conference Board, said inflation expectations are now at 6%. That seems pessimistic, but its senior economist, Stephanie Guichard, said it was probably due to “…the recent jump in prices of key household staples like eggs and the expected impact of tariffs”. And in comments from survey participants “there was a sharp increase in the mentions of trade and tariffs… most notably, comments on the current administration and its policies dominated the responses”.
And the same survey shows consumer confidence has slumped. The Conference Board reported that it registered the largest monthly decline since August 2021.
British industry hopes its US counterparts will be keeping these sorts of numbers in front of the president. They may prove more effective at changing his mind about whether higher tariffs are really a great idea.
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