The UK Should Not Retaliate Against Trump's Tariffs

5 reasons why

It has been reported that the UK government is prepared to levy retaliatory tariffs on goods imported to the UK from the US. The list apparently includes bourbon, Levi jeans, and Harley-Davidson motorcycles. While I have some sympathy for the government’s position as it will have businesses impacted by Trump’s tariffs lobbying it to take action and the media complaining that the government is being weak and not standing up for Britain.

However, the government should resist calls to levy retaliatory tariffs. Here are five reasons why.

First, almost every other country will slap retaliatory tariffs on US goods. This is an opportunity for the UK to distinguish itself and make the most of having an independent trade policy due to Brexit. The UK has the opportunity to take the lead in promoting free trade and its benefits to the US and the rest of the world. It will also demonstrate to Trump that, unlike the EU, the UK has no interest in getting into a trade war with the US. While the UK is certainly disappointed that the US is levying tariffs on exports from Britain, the UK government values its trading relationship with the US and so has no intention of placing further strain on it. Given Trump’s ego (and the fact that the UK doesn’t have a trade surplus in goods with the US) this will likely be a more effective strategy of dealing with Trump and getting him to drop the tariffs on UK goods. It would also make a FTA with the US more likely (it’s still unlikely to happen but would be significant).

Second, while tariffs levied on UK goods entering the US are obviously not ideal and it will hit some British firms, it won’t be that bad for the UK. As mentioned above, the UK does not have a trade surplus in goods with the US because we just don’t export a lot of manufactured goods to America. As such, while the government should lobby Trump to drop the tariffs, it is not as urgent for the UK as it will be for a country such as Germany or China. It would be preferable for the government to instead offer whatever support it can to the UK firms impacted by Trump’s tariffs.

Third, levying tariffs on US goods will drive up costs for UK firms. This is a very obvious point but it’s worth pointing it out. Forcing companies to pay a levy at the border creates added costs for them and increases the cost of doing business. Given that the tariffs are likely to be slapped on US goods such as bourbon then this will disproportionately impact the hospitality industry which is already struggling in the UK. At a time when business confidence is already at rock bottom due to Labour’s recent austerity Budget, the government should not be making things even more difficult for domestic firms and risk placing their survival and the livelihoods they support in jeopardy.

Fourth, these additional costs for businesses will be passed onto consumers in the form of higher prices. While tariffs do not technically cause inflation, they do increase the cost of goods. Although the period of very high inflation is now over, there is still a cost of living crisis in the UK and so many people are struggling to make ends meet. Far too many households in the country are already in poverty and have to rely on food banks. Levying tariffs on goods from the US will exacerbate this and it will be the most vulnerable in society who will suffer the most.

Finally, tariffs are a tax. As discussed above, the incidence tends to fall on domestic firms and consumers in the form of higher prices. As such, tariffs are a tax on households. During the General Election, Labour repeatedly promised that they would not increase taxes on working people and the government has been rightly criticised for breaking the spirit of that pledge by increasing Employers’ National Insurance Contributions which is very much a tax hike on working people. Moreover, earlier this week the Chancellor promised businesses that Labour would not introduce any more tax increases for businesses. People would be justifiably outraged if a government which made these promises then went and increased VAT or Business Rates as these are taxes on households and firms. If the government does end up levying retaliatory tariffs on US goods then it would have essentially introduced a new tax. This would be a clear breach of its Manifesto promise and would be a betrayal of the electorate.

All of this is not to say that tariffs are always wrong. Sometimes they can serve a strategic purpose in incentivising other countries to open up their markets to UK goods. What is more, sometimes they may be necessary as a temporary measure in order to challenge unfair trade practices such as subsidies and ‘dumping’ (the Trade Remedies Authority generally does a very good job at striking the right balance).

However, tariffs always cause economic harm and the UK should be aiming for trade liberalisation, not seeking to erect even more barriers. Moreover, for all the reasons discussed above, retaliatory tariffs are definitely not the solution in this case. If Donald Trump wants to make Americans poorer by placing jagged rocks in his own ports then that’s his business, the UK should not do the same.

Why we should all be Mileinials

Yesterday I wrote an article for CapX. It's why I think that Javier Milei has done a good job during his first year as President of Argentina. Although the poverty rate is unacceptably high and it’s disappointing that the country has not yet dollarised, inflation has been tamed and the economy is growing. Milei has achieved this through sound money, reducing the size of the State, and deregulating the rental market. He is also going for trade liberalisation by abolishing tariffs. The UK government could learn a thing or two from him. You can read the article here.

Thanks as ever for reading. I might write another blog post this week, time permitting.