Napoleon Bonaparte famously said: “When somebody punches you in the face, do not immediately offer him a piece of your birthday cake.” Admittedly, the source for this quote is not particularly reliable (the source is me; I made it up). What Napoleon might actually have said, when he was told that the Russians were abandoning a prime strategic position at the Battle of Austerlitz, was: “When the enemy is making a mistake, we must take care not to interrupt him.”
However historically accurate they are, either or both of these aphorisms might now be useful in thinking about how Britain should respond to the imposition by the US government of the highest trade barriers since 1909.
The market reaction confirmed Donald Trump as the world’s most successful anti-capitalist: in a single day, the president reduced the market value of American companies by about $2.5trn. The world’s 500 richest people lost $208bn, according to Bloomberg (microscopic violins at the ready for those guys). What’s notable about this is that the S&P 500 index of America’s largest publicly traded companies had already lost $4trn in value from the peak of post-election corporate optimism. Trump’s tariffs therefore exceeded by some distance the pessimism that had been priced in by the market. That huge one-day drop is investors accounting for higher inflation expectations and an increased probability of recession in the US.
At the same time, Trump has to rely on the rest of the world believing that he will inflict even more damage on his own economy. “The chips are starting very soon,” he told reporters yesterday, which was (probably) not a reference to a pending food order but to semiconductors, which are currently exempt from tariffs. He also warned that tariffs on pharmaceuticals (also currently exempt) could be imposed “at a level that we haven’t really seen before”. A semiconductor shortage could well contribute to inflation, as it did in 2023, and a spike in prices of generic medicines would be horrendous for the working-class Americans on whose behalf Trump claims the tariffs have been implemented. Then again, perhaps this is also supposed to signal to other countries that he will not be moved by reciprocal tariffs that threaten his voters.
It may even be that the talk of Elon Musk’s departure as a “special government employee” is another way to make Trump seem unassailable. Reciprocal tariffs are often designed to cause specific political pain, so the leaking of Trump’s intention to ditch Musk (though Musk dismissed these reports as “fake news”) might be an indicator to anyone who’s enough of a joker to suggest a “Tesla tariff” that it won’t make any difference.
What will make a difference? When negotiating with anyone, but especially with a bully, there are some general principles that most people already know: don’t give in, be patient, and team up.
One scenario diplomats are considering is the idea that if other countries work together and are patient, a rather appropriately named “doughnut effect” will begin to take place as other countries develop less of an economic relationship with the US and more of a relationship with each other. For a business, America’s powerful economy and its wealthy consumers make it a great market in which to participate, but if there is a constant risk you might be targeted with very high taxes for political reasons that have nothing to do with you, that is going to impact decisions about where you invest.
At an ideas level, this is underpinned by the fact that the Trump administration fundamentally does not see the global system of trade and investment in the same way as most other people. Current account and trade balances are generally agreed to be a consequence of the global economy seeking equilibrium between the comparative advantages of each country. To Trump, a trade deficit is bad because it makes you a loser. This adds more urgency to the argument that fixing the UK’s trade relationship with the EU (£153bn in goods exports for 2023) is more important than fixing our trade relationship with the US (£60.4bn in goods exports for 2023). The Global Britain of Brexiteer fantasy was dreamed up in a world in which America was our economic ally.
That said, the US is our biggest single-country trading partner, and goods are only part of the story (we had a £68.9bn trade surplus in services with the US in 2023, which they appear not to have noticed for the moment). We also have a very close security relationship. You cannot simply work around a country from which you lease your nuclear weapons. And as I’ve previously reported, much of the tariff impact (especially on the car industry) will be felt in Labour constituencies. Most pressingly, the economic shock of the tariffs is thought to have already wiped out Rachel Reeves’s headroom for the next Budget, according to Oxford Economics.
But the fact that Trump is already talking about making concessions to other countries – “as long as they’re giving us something, that’s good”, as he put it yesterday – suggests that his appetite for economic pain is not unlimited. He does care how the stock market reacts. At some point Jeff Bezos (who lost $15.9bn yesterday) will start to wonder if there’s another putative autocrat who might be a better investment. We know that whatever Britain put on the table before “Liberation Day” made no difference, so we should not be in any rush to return with more concessions.
[See also: Trump’s tariffs are designed to extend American power]
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