Donald Trump has threatened Europe with a slew of tariffs, having slapped 25 per cent levies (before dropping them) on Mexico and Canada. The US president is capricious and often a bully, but he is also (as the Financial Times suggests) “deceptively negotiable”: he suspended the tariffs after eking out concessions on unrelated policy issues from both Mexico and Canada. Trump might be quick to suggest an extreme idea – but he is also quick to let one go and settle for another offering. We should bear that in mind when we consider the threat of tariffs against the UK that he has been hinting at.
Let’s not panic yet. As my colleague Will Dunn suggests, there is a quiet optimism in some corners of Britain’s economic establishment: “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.”
But as we begin to come to terms with Trump’s new reality, let’s consider the possible winners and unfortunate losers of his tariff war. First, there is a relatively simple, common-sense principle to keep in mind: placing import taxes on goods coming in to a country hurts consumers more when those consumers are highly reliant on overseas imports.
China’s retaliatory tariffs on goods such as machinery won’t have much of an impact in China, for instance, as Chinese consumers are more reliant on European machinery than American. But American tariffs on Chinese imports might bite. In fact, it’s already biting. The tariff war Trump waged in his first administration continued to some extent under Joe Biden. In 2018 when 7.5 per cent and 25 per cent import duties were placed on certain Chinese goods, the value of total goods imported from China to the US naturally dropped, then drifted, then dropped some more.
This isn’t abstract theory. It’s what has happened already. But the “Little Trade War That Wasn’t” with Mexico and Canada is still, I suppose, at concept stage. Trump’s row-back is not just evidence of his negotiability, but an illustration of the idea that the president’s agenda will be closely linked to fortifying US stocks and shares. Anyway, right now we are in purgatory. Tariffs are still being mooted and they could yet become a reality.
We know that tariffs valued at 25 per cent on imported Chinese goods cut the level of imports by 48 per cent. In 2018 their value was $226bn. In 2023 it was $118 bn.
As of 2023 Mexico and Canada are America’s first- and third-largest trading partners. A blanket application of tariffs on Mexican and Canadian goods wouldn’t make much difference to the league tables (China would return as America’s biggest trading partner). But assuming what happened to Chinese imports can happen elsewhere, Canadian imports would fall from $429bn to $223bn. And the value of Mexican imports would drop from $480bn to $250bn.
That’s an assumption made after five years of trade change between the US and China. One year of tariffs doesn’t suggest anything that extreme. But after supply changes and behavioural shifts by American consumers and industry, that is the situation five years on.
And so, these tariffs would certainly cut imports to America; the hundreds-of-billions hit to industries in Canada and Mexico would almost certainly lead to job losses (however temporary); fewer people in turn would be able to buy American; fewer people in the US would be successfully exporting their goods. Welcome to trade.
In summary, the value of goods sent America’s way by its biggest trading partners could as much as halve. And that’s before we even consider the knock-on effects.
The median American who gave Donald Trump a second term on the assumption of fiscal prudence and cost-of-living relief might be in for a surprise. And businesses reliant on overseas imports will be faced with significantly higher costs, which could lead to job losses.
Impacts are harder to quantify for households. Revenues already raised from tariffs on China are in the billions of dollars. Tariffs on Canada and Mexico would likewise raise billions – the Tax Foundation estimates as much as $31bn-$36bn from Canada, and $41bn-$47bn from Mexico.
On a simple spreadsheet, that looks like a nice earner. But the knock-on effects in terms of price rises, consumer spending, job losses and GDP overall could be damaging, reducing total net earnings to the American exchequer.
Assumptions about a productivity hit would only be likely to hurt median incomes by 1.1 per cent. But that is nearly $400 per annum. Assuming no behavioural change from the consumer, and that there would be price rises from overseas exporters to offset tariff costs, that $400 a year would become just the starting point for further demands on average Americans’ pockets.
[See more: How to handle Trump’s tariffs]
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