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The US president holds up a sandwich board in the Rose Garden. On it is a list of countries. Next to each country are two columns: one for “tariffs charged to the USA” and one for “USA Discounted Reciprocal Tariffs”. The leader of the free world is cooking up a storm.
“Our country has been looted, pillaged, raped, plundered,” the most powerful man in the planet tells billions of people in Asia, Africa and Europe. The USA wants to end trade deficits and it wants firms to exclusively employ American workers.
Finance ministers fear rampant inflation. The war which triggered the cost of living crisis has not even ended. Economies have only just started to recover from years of high price growth, let alone the Covid-19 pandemic. Retaliation tariffs are drawn up by world leaders putting on a brave face while scrambling to save their economies – and industries.
Forecasters around the world struggle to add up the numbers. “Uncertainty” becomes economists’ understated go-to word to express their sense of despair. Central banks stay silent as they mull over their next steps. Investors panic. Markets slide.
And the US president takes to a social media platform, which he owns, to say America is “healing”. No territory has been left unscathed, not even islands inhabited by no one. The plan unveiled on a sandwich board is “BEAUTIFUL”.
An all-out global trade war has begun and economists are having to wake up to their nightmares.
Donald Trump’s historic Rose Garden speech has now left governments, businesses and analysts scrambling for some clarity. What had been targeted 25 per cent tariffs on car imports as well as steel and aluminium has now turned into unforgiving tariffs on all goods.
While economic powerhouses across the European Union and China will suffer tariffs between 20 and 54 per cent respectively, the UK joins the likes of Australia and Turkey in facing a tax of ten per cent.
In Downing Street, a spokesperson was quick off the mark to set the tone of the UK’s response to tariffs: “We don’t want any tariffs at all, but a lower levy than others vindicates our approach. It matters because the difference between 10 per cent and 20 per cent is thousands of jobs.”
But the hard truth is Donald Trump has not spared Keir Starmer from economic pain, the special relationship between the US and the UK has not applied to trade and £294.1bn worth of business is now under threat.
Before the tariffs were announced, central forecasters made educated guesses on what the UK economy could look like in worst case scenarios.
The UK’s fiscal watchdog, the Office for Budget Responsibility (OBR), said in a world where the US inflicted flat-rate tariffs of 20 per cent and European nations retaliated, the UK’s output would take a one per cent hit.
This has not happened. Economists at the OBR may have breathed a sigh of relief.
But researchers at the National Institute for Economic and Social Research (NIESR) said the British economy would be stagnant in 2026 if ten per cent tariffs were imposed on the UK.
Even after Trump’s tariffs have – at least partially – been unveiled, economists’ outlook reports continue to be at some degree of conflict with one another.
The differences are laid bare in the City of London where leading analysts tried to make sense of Trump’s sandwich board less than 24 hours after it was displayed.
At Barclays, economists believe that the UK’s GDP could be knocked by as much as 1.5 per cent in the scenario where retaliatory tariffs are imposed, plunging the country into recession. Meanwhile, specialists at the likes of Pantheon Macroeconomics, who neither used the same models as Barclays nor considered the same scenarios, said UK growth would be lowered by just 0.2 per cent.
“Strengthening growth in services—immune from tariffs—shows that UK growth can hold up,” Pantheon’s Rob Wood said.
But US tariffs are already unsettling some sectors, namely manufacturers.
S&P Global’s purchasing managers’ index (PMI) readings for manufacturing have shown consistent declines as trade tensions have mounted up.
Forecasts are likely to change dramatically as retaliatory tariffs shape up.
The UK could retaliate
Business secretary Jonathan Reynolds has launched a “consultation” on a possible response – effectively a playbook move to delay a response and potentially to heighten pressure. No business is going to call for tariffs to be applied to goods they need to import to the UK.
The UK government is treading a careful line. Reynolds said on Thursday morning he wanted the tariffs removed but he also suggested that retaliatory tariffs are not off the cards.
There is a greater objective at stake here, a “prize”, as Chancellor Reeves put it: a trade deal that could shake off tariffs and put the UK in a league of its own.
British policymakers may have to shrug off their worries about chlorinated chicken if they want to get a deal over the line.
In the meantime, the government published a list of products that it could slap tariffs on. A 417-page list which covers clothes as particular as anoraks and food as luxurious as lobster and caviar.
Economists have warned, however, that retaliatory tariffs imposed in a bid to protect British jobs will have a painful impact on consumers, who will take the burden of the rise in prices from higher taxes.
“Tariffs here would hurt US exporters, but they’d also hurt a UK consumer currently contending with April’s price rises and not in the mood to wrestle with another bout of inflation,” AJ Bell’s financial analysis head Danni Hewson said.
Headache for the Bank of England
Until retaliatory tariffs are announced, forecasters are holding their breaths. Most City analysts’ eyes will be on how the Bank of England considers its own response amid recession risks and uncertainty over inflations.
Recent speeches by members of the Monetary Policy Committee (MPC), which sets interest rates, have indicated that they predict Trump’s tariffs will have a disinflationary effect on UK prices. Dovish rate-setter Swati Dhingra was the first to make that suggestion, while Megan Greene followed suit earlier this week.
The Bank of England will face a dilemma. On the one hand, tariffs are going to lift the prices of some goods and its core remit is to keep a lid on inflation, as close to 2 per cent as possible, which would point to rates staying higher for longer than previously expected.
Most economists expect the MPC to go ahead with an interest rate cut when it has to make a decision in May. Evelyn Partners director Jason Hollands nonetheless said the Bank will face a “dilemma”.
“It’s not unthinkable that we will actually see interest rates come down more rapidly than expected,” he said.
“Of course any serious hit to UK economic growth could be felt in the jobs market, not just in terms of job insecurity but also in that firms suffering uncertainty – as well as the tax rises already in effect – could restrict wage and salary growth.”
Those alarm bells around the jobs market have already been rung by leading industry bodies who are facing a hellish April: a higher national minimum wage, ballooning employers’ national insurance taxes and now a tsunami of tariffs.
“Anything which injects added cost, complexity and uncertainty into the global economic trading system is never good for growth, prosperity or rising living standards, and the imposition of tariffs is no exception to that,” Allan Vallance, chief executive of the Institute of Chartered Accountants in England and Wales, said.
The Tories, meanwhile, have called on Labour to abandon their onerous Employment Rights Bill, set to cost employers a cool £5bn.
City analysts may start looking ahead to a world where the tariffs are here to stay. The UK economy may have an opportunity to survive and rebuild, but the path to such a destination is steep and treacherous.
