UK May Dodge Tariffs, Global Trade War Looms

The first weeks of the Donald Trump's administration have been marked by a flurry of announcements and U-turns on US trade policy.

One of the first decrees centred on Trump's favourite word: tariffs. He announced that US consumers and businesses would be taxed an extra 25% when they bought Canadian or Mexican products. (Canadian oil got off more lightly, with a 10% tariff.)

But because this is Donald Trump we're talking about, it later emerged that none of this was actually happening , for now. It might be next month, or later, or maybe not at all.

However, US residents definitely face an additional 10% on the cost of products from China. There is also a plan for a 100% tax on semiconductors from Taiwan .

And President Trump announced new import taxes will "definitely happen" on products from the European Union. If these do ever come to pass, it's possible there may be a better deal for the UK .

The reason for the possible Great British exemption from new US import taxes is that the stated goal of these taxes is to reduce the US trade deficit. This deficit refers to the fact that the US buys much more from the rest of the world than the rest of the world buys from it.

And, depending on how we measure the financial flows coming in an out of tax havens such as the British Virgin Islands, the UK is one of the few countries in a position to make the case that it actually has a trade deficit with the US (the UK buys more from the US than the US buys from it).

What about consumers?

Being able to avoid new US tariffs would be very good news for the UK. If the US imposed import taxes on UK products and services, it would be bad for their consumers, who end up paying more. But it would also be bad for UK industry. Moreover, the UK would likely retaliate and tax US products, ultimately hurting British consumers as well.

In theory, the UK miraculously escaping new US import taxes might even mean it indirectly benefits from a trade war between the US and the EU. If the UK can sell and buy more cheaply to both sides while they tax each other , it becomes more competitive. The UK would also get its imports more cheaply, and international businesses may want to establish subsidiaries in the UK.

It is interesting to imagine a world in which a medium-sized, free trade supporting country like the UK ends up the winner of a global commercial war between its two most important trading partners .

Things are not that simple however. Research shows that a major impact of tariffs is changes in global supply chains.

As the UK has learned the hard way with Brexit , modern supply chains are increasingly interconnected. British exports are typically made with components from the European continent, which are themselves made with Chinese inputs.

Additional costs anywhere in the chain result in more expensive products. Moreover, it is not clear that UK products made with EU and Chinese components would be exempt from US import tax.

This is a global problem. For every final product a UK consumer ends up buying, there are many firms trying to source the best possible components and materials to make it with. If the US levies a 100% tax on chips and semiconductors from Taiwan , this means that products from the US tech industry will become more expensive for UK firms to use. This is even more pertinent given that China has retaliated to the new 10% US tax on its products by limiting the export of metals the US uses to produce its own chips.

In this way it is easy to underestimate how sensitive supply chains are to small shocks, and what the butterfly effect of a trade war between two other countries might be on products bought and sold in the UK. So, while the UK would definitely be better off not being subject to US taxes, the main focus should be on helping to avoid global trade wars.

How to do this is not clear, because no one seems to understand what Trump really wants from his tariffs. One theory is that he wants to pass for a madman and bully other countries into committing to buy more US-manufactured products.

Or, in the case of Europe, to increase military spending by buying more US military equipment . In that case, tariffs would be short-lived and the impact limited. It will simply increase the incentives for international firms not to depend too much on the US.

Or perhaps Trump really has no idea what he is doing, seemingly pursuing the two opposing goals of keeping domestic prices low while attempting to reduce its trade imbalance with ever-increasing import taxes. In that case, the consequences for consumers all over the world would be very bad. This is in part because of the effect on supply chains, but also because when the US economy is in bad shape the entire world suffers.

Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.