How will America’s ‘Liberation Day’ hit UK businesses?
After weeks of increasingly fevered speculation, we finally know how the main thrust of the pivot towards protectionism in the US might affect the UK economy and what UK exporters will have to deal with:
- Tariffs will be charged at 10% on all goods exported by the UK to the USA, with the exception of cars on which the tariff will be 25% with immediate effect as well as steel and aluminium products where a 25% tariff rate had already been imposed previously.
- All foreign-made cars will pay 25% on entry to the USA, but the general tariffs will be far higher for many other countries than the UK’s 10%. These include the EU (20%), India (26%) and up to 49% for some smaller Asian jurisdictions. The rate of 34% announced for China is in addition to the existing tariff of 20%, making a 54% rate in total.
Whilst the UK might appear to have got off lightly, the potential disruption to global trade may have unpredictable effects on our trade with the rest of the world apart from the USA. As one prominent pundit put the issue succinctly: if the rest of the world is poorer, so is the UK. There is also a risk that major exporting nations such as China will seek to divert products that are no longer viable in the American market to the UK instead at prices, which will adversely distort competition here for UK businesses.
The Office for Budget Responsibility had warned before the final announcement that a global trade war would cut 0.6% off UK GDP in 2025 and a further 1% in 2026 if the UK and other countries retaliated. If the UK stayed its hand and didn’t respond, the reduction would be 0.4% in 2025 and 0.6% in 2026.
In either scenario, this would be a grievous blow to the UK government’s focus on using economic growth to rebuild the public finances and would force the Chancellor to look once more at her strategy of complying with her strict fiscal rules. The outcome as soon as the Autumn Budget could be even more stringent public spending cuts, even higher taxes, increased borrowing or a mixture of all or any of these options.
Looking at the microeconomics of these developments, the UK exported goods valued at £60.4bn to the USA in 2023. The Centre for Inclusive Trade Policy (CITP) thinktank has estimated that a trade war following higher tariffs could cause a drop of over a third or £22bn in this trade.
Which sectors are the most vulnerable?
Although the impact on different sectors and individual businesses within them will only become clear over time, the most vulnerable areas are likely to be those with the highest level of exports to the USA:
- Manufacturing: total exports in 2023 were £20.8bn excluding car makers. The largest single sub-sector was power generating equipment at £5.2bn. Another notable sub-sector is scientific instruments with £2.8bn or 23.7% of all its exports.
- Pharmaceuticals: £14.2bn in 2023 or 23.6% of the sector’s exports.
- Auto makers: £6.4bn or almost one in five of all cars and components exported, mainly by luxury marques such as Aston Martin, Jaguar Land Rover and Rolls Royce.
- Beverages and tobacco: £1.9bn, out of which speciality items such as Scottish Whisky are a significant element.
The temptation is to hope that because these sectors are dominated by major companies, they are big and financially strong enough to navigate these stormy commercial waters. In broad terms this is true, but the problem in terms of the increase in business risk and resultant insolvencies is that beneath these major players are supply chains made up of many smaller and more vulnerable businesses.
If the front-line exporters decide to absorb some or all of the tariffs and accept lower margins and profitability to maintain sales volumes, it is an inevitable consequence that at least some of this pain will be pushed down the corporate food chain to suppliers. They will be less able to withstand the pain.
If the Centre for Inclusive Trade Policy (CITP) predictions of a one third drop in exports is anywhere near right, that too will ripple corrosively down the supply chain as substantially reduced order levels, leaving smaller businesses to lay off staff and accept a lower contribution to their fixed costs. Inevitably, some will be forced to throw in the towel.
UK businesses, especially the auto industry can only hope that the UK government’s intention to continue trade negotiations until a deal is reached proves successful, which could lessen the blow from these latest tariffs sooner, rather than later.
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