Trade impact on UK businesses and fiscal policies with trump trade

With Donald Trump’s return to the White House, the future of US-UK trade relations and its impact on British businesses are under intense scrutiny.

On the campaign trail, Trump has promised universal tariffs of between 10% and 20% on imports from all countries, alongside a 60% tariff on goods from China. The US is a crucial trade partner for the UK, accounting for 15.4% of UK exports, valued at over £60 billion. If these tariffs are implemented, they could significantly impact the UK economy.

According to the National Institute of Economic and Social Research (NIESR), such protectionist measures could reduce UK growth by 0.7 and 0.5 percentage points in the first two years, while inflation and interest rates in the UK are also likely to rise.

These tariffs could hit hard in sectors like automotive, aerospace, chemicals, pharmaceuticals, and machinery, where UK exports to the US are substantial and face strong American competition. With increased costs from higher tariffs, UK firms would be forced to either absorb the expenses, lowering their profit margins, or pass them on to consumers, risking reduced demand as US buyers turn to more affordable domestic options. For some companies, exporting to the US may become unviable, threatening their survival.

In addition to tariffs, Trump’s proposal to lower corporate taxes in the US could make relocating production to the US more attractive for some UK companies. By shifting operations stateside, these firms could benefit from lower taxes and avoid expensive tariffs on exports.

This strategy poses serious risks to the UK economy, potentially reducing domestic efficiency and resulting in job losses. However, relocating also involves high costs, requiring capital investment and the restructuring of complex supply chains, making it a challenging but possible response to Trump’s policies.

Trump’s protectionist stance could create a complex scenario for UK firms, forcing them to balance tariff-related losses against the potential benefits of relocating to a lower-tax environment in the US. For some, exploring alternative export markets may also become attractive, with EU countries—a group collectively representing the UK’s largest export market—emerging as a natural option to absorb redirected trade flows.

Over the past decade, the share of the EU as a destination of UK export have declined by 3.6 percentage points, dropping from 51% in 2014 to 47.4% in 2023. Conversely, the US share as an export market for UK businesses has grown by 2.3 percentage points, rising from 13.1% to 15.4%. However, if significant tariffs are placed on UK goods sold in the US, we may see a reversal of this trend, with UK firms refocusing on EU markets to mitigate the impact.

For the UK government, the shift in US trade policy may lead to retaliatory tariffs. Such measures could offer some relief to domestic producers competing with US exporters but would also risk raising inflation and slowing economic growth. The government may also consider economic policies to retain investment and cushion against potential job losses across impacted regions and sectors. Finally, strengthening UK’s relationship with the EU —potentially through reduced trade barriers and regulatory alignment— could lower costs for British businesses and enhance trade opportunities within Europe.