7 February 2025

How to handle Trump’s tariffs

Britain is vulnerable – but there are reasons for cautious optimism.

At a dinner in the City of London last night the governor of the Bank of England, Andrew Bailey, summed up the UK’s position on our exposure to Donald Trump tariffs: “Don’t jinx it,” he told attendees. What this means is that there is cautious optimism in the UK that we might escape the worst of Trump’s trade wars. Some even see benefits for Britain if the US is picking a fight with everyone else.

We’d be a lot more nervous if we were Germany, which recently reached a 12-month trade surplus of almost €70bn with the US (meaning German businesses make €70bn more exporting goods to the US than Americans make exporting stuff to Germany). This accounts for nearly half of America’s more than €150bn trade deficit with the EU, a deficit Trump has described as an “atrocity”.

In 2023 the UK sold about £60bn in goods to the US and imported about £58bn in goods from them, so our trade (in goods) balance probably looks a lot less atrocious to the White House. We’re also less dependent on goods exports. Germany’s exports account for almost half of its GDP, and most of this is goods (lots of vehicles and machinery). Our economy is mostly dependent on services (81 per cent of output and 83 per cent of employment), so for as long as Trump’s neo-mercantilism focuses on trade in goods, it’s not an existential threat for the UK.

On the other hand, Trump is a bully, and bullies deploy aggression to get what they want while making sure they’re never really endangered. Imposing very high tariffs on Mexico and Canada, as he has said he will do (currently paused for a month), comes with the risk that Americans will very quickly see price rises. A lower-risk strategy could be to pick on another, smaller trading partner and make an example of them.

Another thing bullies do is look for anyone with a weakness to pick on. Perhaps this is another reason tariffs are attractive to Trump: they offer an opportunity to be vindictive. You can pick tariffs that make your opponent’s voters angry. So, all the people planning retaliatory tariffs against the US might currently be thinking about ways to make things that Trump voters buy – guns? Bibles? Energy drinks? Monster trucks? – more expensive. When Trump imposed new tariffs on steel and aluminium from the EU in 2018, part of the response was higher tariffs on Harley-Davidsons.

In this sense we share a weakness with Germany: cars. Almost all (80 per cent) of the cars produced in the UK are exported, and the top market is the US, which takes 16.9 per cent of car exports, according to the Society of Motor Manufacturers and Traders. Almost all of the major car plants are in Labour seats (with the exception of Jaguar Land Rover Solihull, before the car manufacturing/constituency pedants write in). The West Midlands is particularly dependent on our relationship with America, because it is the region that exports the most goods to the US (13 per cent of total goods exports in 2023, according to HMRC), and Labour’s 2024 election results there were typical of its wide-but-thin majority.

So, we’re relatively dependent on the US (our largest single-country trading partner), and pushing us around would be low-risk for Trump and high-risk for our government. Do we have any options?

Maybe. There’s the Mexico-Canada gambit: promise to do something without mentioning that you’ve already been doing it for years. For America’s neighbours this meant writing new border security plans that bear a striking resemblance to their pre-existing border security plans (which it’s possible Trump hadn’t read). Our offer would probably be to buy lots of American oil and gas. We already do this (oil and gas are the two largest components of our goods imports from the US) but that shouldn’t stop us committing to, say, a bit more LNG from the US rather than Qatar.

We could also offer to do something everyone else has already done, but which we haven’t got around to doing yet, such as imposing tariffs on our imports of Chinese electric vehicles. This risks retaliatory tariffs and new inflation, so it would need some very careful diplomacy and concessions to the Chinese.

A third option is to make life more expensive for Trump’s donors. Aggressively regulate the services sold by Big Tech, concentrate on how US multinationals pay tax, form alliances that challenge America on data security and AI safety, and you might be able to create some uncomfortable conversations between Trump and his libertarian tech-broligarchs. This might not come naturally to a government that has, for example, cosied up to Google on stage and appointed a former Amazon executive to run our competition regulator, and it is risky, in that it might cause Trump to notice that we sell about £69bn more services to the US than they buy from us. But it might also be higher reward. Trump can just tell his voters that higher goods prices are the fault of foreigners, but the oligarchs are probably not so easily convinced.

This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here