Good morning from New Economy Brief.
US tariffs on Canada, Mexico and China were due to come into effect on Tuesday following an executive order from the President. Following last-minute negotiations, the threatened 25% tariffs on the USA’s closest neighbours have been suspended for 30 days. Meanwhile, a 10% levy on Chinese imports is still planned, with China announcing retaliatory tariffs of between 10% and 15% on US liquefied natural gas, coal, crude oil and farm equipment.
This week, we explore the potential international economic impacts of Trump’s tariffs, the possible consequences for the UK, and the need for a progressive conversation on trade protections.
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Impact on the US
Tariffs play an important role in Trump’s protectionist and low tax agenda. Along with claiming that they will curb undocumented migration and the flow of drugs into the US, he has argued that tariffs can raise the income needed to make tax cuts. He has even floated the idea that tariffs could replace federal income tax altogether (many experts dispute this, with some estimating that a 70% tariff across the board would be needed).
However Lori Wallach, Director of Rethink Trade at the American Economic Liberties Project, argues that tariffs will do little to “rebuild American manufacturing” or raise wages unless they are paired with policies that boost investment and stop price-gouging. Tariffs will also likely raise prices for US consumers, costing middle-income American families an estimated $2,500 to $3,900 per year and hitting the lowest earners hardest. Governments all over the world have been ousted for failing to tackle the cost of living; time will tell if US voters continue the pattern and punish Trump.
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Impact on the UK
It is still unclear whether Donald Trump will impose tariffs on the UK. Speaking to the BBC on Sunday he said that “the UK is way out of line but I’m sure that one… I think that one can be worked out.” But tariffs on our trading partners could still hurt. For example, the National Institute of Economic and Social Research (NIESR) estimates that if the 25% tariffs on Mexico and Canada go ahead, they could cut UK GDP growth by 0.1 percentage points in 2025 by reducing the purchasing power of countries the UK exports to. In its 2022 risk assessment, the Office for Budget Responsibility (OBR) calculated that an all-out global trade war could lower UK GDP by as much as 5%. And this is before we consider other Trump policies that could impact the global – and UK – economy – such as how the President’s approach to deregulating oil and gas extraction is likely to slow the green transition and exacerbate the economic consequences of climate change.
The danger of a deal. Despite these knock-on effects, avoiding direct tariffs will be considered a win for the UK. The Prime Minister has said that he is pushing for a “strong trading relationship” with the US. And Trump’s tone towards the UK has been noticeably softer than his rhetoric towards the European Union – not to mention Canada, China and Mexico. But campaigners warn that a trade deal with the Trump administration would harm British food standards, public services and our ability to regulate the Big Tech giants, with a former White House negotiator saying last month that food standards and the NHS would likely be “on the list” in negotiations.
Difficult choices ahead? With rather awkward timing, Trump is threatening the EU with tariffs just as Keir Starmer is attempting to reset the UK's relationship with it. The Prime Minister has said that the UK is “not choosing between the US and the EU”, but how long Starmer can walk this tightrope remains to be seen.
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Trade as a tool of power
Clearly, Trump’s tariffs are being used to extract concessions from other countries. His threats make it easy to view tariffs as an inherently regressive policy. However, as Global Justice Now’s Nick Dearden argues, tariffs are “neither the work of the devil nor of the angels”. Tariffs are an important tool for governments to protect domestic industries and jobs, and as Dearden argues, ‘free trade’ and the insistence that countries should avoid tariffs has in many cases served Western imperialism and disempowered Global South countries. One notorious example of this is the impact of trade liberalisation policies on rice production in Haiti, where the IMF pressured the government to slash tariffs on imports, resulting in Haitian rice farming being wiped out.
South-South trade and a ‘multipolar’ order. US isolationism could motivate increased South-South trade as Global South countries re-orientate themselves away from the dollar and from reliance on raw material exports to richer, industrialised nations. This would align with Global South civil society calls for reduced economic dependence on countries like the US. Macrodose has more on the trend towards a ‘multipolar’ world. What is clear is that international economic uncertainty is unlikely to disappear any time soon, and Trump’s actions may even accelerate the end of the unipolar order in which the US dominates the global economy.
Climate-friendly transport? Rosie Allen, Johann Beckford and Nick Davies from Green Alliance have published a new report looking at how to cut the climate impact of transport in the UK. They find that despite progress, current policy is still “falling short of what’s needed to meet the UK’s climate commitments”. They propose a range of solutions, including investing in more rail freight capacity, capping bus fares and encouraging a shift from vans to cargo bikes in urban areas.
Support for electric vehicles. Meanwhile Persuasion UK and IPPR have dug into public support for electric vehicles (EVs). They found that most UK voters are instinctively positive towards EVs, but their attitudes are soft. People are sympathetic to the idea of EVs as part of the solution to climate change, but they also think they are too expensive and worry about problems charging them.
A different approach to fiscal multipliers. The New Economics Foundation is making the case for a ‘bucket approach to fiscal multipliers’ in a new paper by Dominic Caddick and Chaitanya Kumar. They argue that “fiscal multipliers, which measure the impact of government spending on gross domestic product (GDP), are central to economic forecasting but are applied too narrowly, limiting the perceived benefits of public investment.” A bucket approach would be more flexible and context-sensitive; it “captures the varied economic impacts of different types of government spending and allows for a dynamic approach to multipliers.”
Public doubts over AI. 55% of Brits do not trust Prime Minister Keir Starmer to ensure that AI will be used to benefit society as a whole, according to a new poll by Survation commissioned by Autonomy. New Economy Brief covered the government’s plans for AI in January.
Tackling poverty through housing. In a new report on child poverty and housing, IPPR recommends that local housing allowance (LHA) is reset to cover average local rents, and that the benefits cap is removed. Other recommendations include beefing up the Renters’ Rights Bill to give private renters more protections, and expanding the supply of social housing.
