Should UK fear Trumponomics? What tariffs could mean for global economy

There’s fear in some quarters of another Donald Trump presidency but will the economics be that bad?

Not a single vote has been counted but the policies of a possible second Trump presidency have already influenced financial markets.

The cost of US and UK borrowing – measured through 10-year revenue-raising instruments called bonds – has been upped as traders eyed the price-rising impact a Trump presidency could have on the world’s biggest economy.

If Trump clinches victory could we see global economic repercussions?

US election latest: Shock poll puts Harris ahead in Iowa

A signature policy of his – tariffs – could make things worse for US consumers, in turn hurting the world economy of which the UK is a part.

Precise detail on what tariffs Trump would apply on what goods and from where remains to be seen. He’s said all goods coming into the country could be slapped with a 10% tax.

Goods from China are going to be particularly hit with an anticipated 60% levy.

Why tariffs?

The hope is that by making imports more expensive goods made in the US will be more competitive and comparatively cheaper. More people would buy those things and life would be better for US producers, the thinking goes.

If US producers are doing well, they’ll hire more people, Trump expects. He’s calculating that more people working for US companies doing well will make for a strong economy and happy voters.

Parts of America have been severely impacted by factory closures as companies move to parts of the world with cheaper wages and operating costs.

This accelerated since the 1990s when the North American Free Trade Agreement (NAFTA) made it easier and cheaper to export to the US, reducing the incentive to produce in the country.

Blue-collar workers, traditionally not college-educated, lost and continue to lose out majorly from plant closures. These are the voters Trump is targeting and who form his base of support.

It’s worth noting Trump isn’t the only fan of tariffs with the Biden administration implementing them on Chinese electric cars, solar panels, steel and aluminium as it sought to protect the investment it had made in such industries from cheap and heavily subsidised goods.

What will the effect be?

China, unsurprisingly, will be levied the highest and experience the greatest direct strike.

The hit will be “notably negative”, according to analysis from the National Institute of Economic and Social Research (NIESR), a leading thinktank.

It will face short-term pressures on manufacturing and trade with its gross domestic product (GDP) – the measure of everything produced in the country – to fall about 1% a year for two years, NIESR says.

Economists at Capital Economics quantify the cost at about a 0.5% to 0.7% reduction in GDP.

The US

That said the effects will be felt most keenly by those living in the US who will pay more.

If usually cheap imported goods get pricier that probably will cause the overall rate of inflation to rise.

Here the knock-on influences emerge. Higher inflation will just mean more expensive borrowing through upped interest rates as the US central bank, known as the Fed, will act to reduce inflation.

There’s no mystery around how high interest rates can weigh on an economy, the literal goal of hiked rates is to suppress buying power and to take money out of the economy.

Fears of the US ending up in recession spooked stock markets and triggered a global sell-off just three months ago.

Stock prices can seem nebulous but they impact the value of most people’s pensions.

A recession isn’t predicted but the US economy will falter, NIESR says.

Economic growth in America, as measured by GDP, would decrease by around 1.3 to 1.8 percentage points over the next two years, depending on whether the countries it trades with retaliate, upping their own duties on US goods.

👉 Listen to Sky News Daily on your podcast app 👈

Worldwide reverberations

As tariffs make exporting less favourable exporters will simply export less, meaning less is produced and the worldwide economy slows.

The blow to the global economic output could be a 2% GDP drop after five years of Trump being in office, according to NIESR.

The consequences of Trump tariffs won’t just be short-term, NIESR forecasts, with global GDP still lower than it would have been without the imposition even in 15 years’ time.

Specific countries will be hit worse than others: Mexico and Canada for whom the US makes up roughly 80% and 50 % of trade, respectively will experience the greatest pain.

The EU

It doesn’t look too bad for the European Union (EU) by comparison and could even be good for the bloc, some say.

NIESR reckons the euro area will be less badly affected than the UK over five years but the immediate impact will be worse.

The good news first: if Trump doesn’t lean too heavily into tariffs and focuses more on cutting taxes to grow the economy that bump could lead to stronger demand for European goods, notwithstanding import levies, suggests research from economic advisory firm Oxford Economics.

The bad news: it won’t look so good if the US economy turns bad through more aggressive policies like high tariffs on more goods, the firm says. That would mean a “large” fall in European exports, it adds.

And finally, some neutral news: not even high tariffs would be inflationary for the continent, Oxford Economics expects. Reduced demand and lower goods prices would just offset the higher import costs, it says.

Another firm, Capital Economics, also isn’t too concerned about the European economy under Trump.

“Smaller than many fear”, is how it described the suspected short-term macroeconomic consequences.

What about the UK?

It’s got to be bad for the UK, right? The US is the country’s biggest trading partner after all, making up just under 20% of our trade

Again, not so. The UK doesn’t even make it into the top 10 worst-affected countries under NIESR’s research.

Capital Economics anticipates the knock would be small and maybe even positive, though inflation may be higher than if there were no second Trump administration.

But there’s no consensus on this point with NIESR forecasting GDP will be lower because of fewer exports and higher global interest rates.

This downturn would slow UK exports to other countries, NIESR says.

NIESR estimates UK GDP could be between 2.5% and 3% lower over five years and 0.7% lower in 2025. So instead of the 1.5% rate of GDP predicted by the IMF for next year, the economy would grow by 0.5%.

On the night, Sky News will have access to the most comprehensive exit poll and vote-counting results from every state, county and demographic across America through its US-partner network NBC.

You can find out more about Sky News’ coverage here.

Should UK fear Trumponomics? What tariffs could mean for global economy

More on Donald Trump

Related Topics: