From the Desk of the Chief Economist April 2025

It’s finally happened, and then it hasn’t… First the US announced sweeping global tariffs, sparking widespread global market turbulence, and now it’s rolled back the majority: there’s still a 10% baseline tariff (except for Canada, Mexico and China), the pre-existing tariffs are unaltered (e.g. on cars and steel) and tariffs of 125% remain on US purchases of Chinese products. Tariffs are levied on non-US content and exporters will be required to provide information on the US content of their products if they want to reduce their tariff.

The UK had originally fared better than some other countries in “only” being subject to the baseline 10% tariff. Higher tariffs were then levied on other economies – including the EU at 20% – in proportion to the size of their trade in goods deficits with the US. 34% on China (before retaliation), 46% on Vietnam, 36% on Taiwan and Thailand, and 32% on Indonesia. Japan faced a 24% levy. Meanwhile some products were exempt, including pharmaceuticals, semiconductors, copper, bullion, energy and minerals not available in the US, and the levy did not apply to the car sector already hit by 25% tariffs.

These tariffs were to remain in place “until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated”. But tribulations in bond markets have led the President to “pause” the most damaging elements of the tariff package.

Why tariffs?

From the perspective of the US, tariffs are a proportionate retaliation to unfair trade practices in other countries. The President considers there to be an “absence of reciprocity” in the US’s trade relationships with trading counterparts, citing policies including unfair tariffs, currency manipulation and VAT.  The decline in the US manufacturing sectoral share of GDP is given as evidence of the impact of unfair practices: this share was 17.4% in 2023 from 28.4% in 2001. This otherwise seems to be a blanket global punishment for the US having a trade in goods deficit.

Domestic policy of foreign governments is considered within the scope of the US’s judgement here. It is suggested that some countries are deliberately supressing domestic consumption through their tax structures so as to boost exports. Ireland and Germany are picked out, with respective shares of consumption in GDP of 24% and 49%, alongside Singapore, China and South Korea. By comparison, the consumption share of GDP is 68% in the US and 61% in the UK. Trump is not the first to levy such accusations: the EU has done so with China and concerns about global imbalances and the role of domestic consumption date back to before the financial crisis.

Barriers to scale are cited too, with a mixture of security justifications and domestic industry priorities given as justification for the need for certain sectors to have domestic and global scale. Disruption to supply chains from Covid and actions by Houthi rebels is further given as evidence of the US’s broader supply chain vulnerability. In the defence sector, there is a desire for more of the supply chain to be domestically located, and for stockpiles to be greater in order to support resilience. Food security features is a priority as well, with the loss of a trade surplus in agriculture put down to non-tariff barriers.

The link between manufacturing and innovation is also given as a justification for prioritising this sector. Statistics cited note that while manufacturing represents 11% of US gross domestic product, it accounts for 35% of productivity growth and 60% of exports.  And the broader reach of the sector is noted too: each manufacturing job is said to drive 7-12 jobs elsewhere.

Regulatory barriers come up, including: technical barriers to trade; non-scientific sanitary and phytosanitary rules; inadequate intellectual property protections; suppressed domestic consumption (e.g., wage suppression); weak labour, environmental, and other regulatory standards and protections; and corruption.

Will the US’s actions have the desired effect on their economy?

The intention is that tariffs will bring manufacturing activity back into the States. For those exporting into the States or producing in the States using imported components, a number of options are on the table.

• Do nothing – i.e. tariff simply gets layered onto current product price, and the cost is picked up by the final customer
• Cut non-tariff price – product price goes up by less than the tariff levied, with profit margins falling
• Increase US content of product
  • Source US raw materials and intermediate inputs
  • Move final production to the US

Which of the above options makes sense for a company depends on the product, its components and their availability and price in the US, and expectations for trade and tariff policy.

Some companies have already shifted more activity to the States – e.g. an IoD member has acquired a manufacturing company in the US in order to provide local manufacturing services. However, the reality is that this will not be feasible at scale under current production methods. There simply isn’t the amount and type of labour needed to deliver largescale production out of the States. And where that labour is available, the cost is vastly higher than the equivalents currently being utilised: the National Association of Manufacturers states that in 2023, manufacturing employees earned an average of $102,629, including pay and benefits; in China, it is around 25% of that figure, and for South Korea, it is around 40%. Even in Germany, it is less than 75% of the US figure. While it can be argued that this cost will stimulate investment in new production methods which will increase productivity and bring unit costs down, this will not deliver in the short-term and it is unknown how much it can deliver in the long-term, leaving the US nursing considerably higher costs in the here and now.

Although the desire is that tariffs will encourage US consumers and producers to switch to US products, in practice this will not happen completely. There won’t be perfect substitutes available for all non-US sourced products at an appropriate price point (now and potentially in the future, as per above), so US consumers and producers will end up paying tariffs. This will provide a source of revenue to the US government, which they could use to help alleviate the impact of tariffs on consumption. The burden of tariffs is disproportionately shouldered by the low paid, who have the highest marginal propensity to spend and spend a larger proportion of their income on goods rather than services, and tariff revenue could be used to pay for an income tax cut for lower paid groups.

The overall net impact on the US economy is expected to be negative – both in the near-term and further out. Estimates of the impact of the 2 April tariff package suggested that the tariffs announced could increase US core PCE inflation by nearly 2%, while reducing growth by 1-3%. Goldman Sachs estimated that the probability of a US recession had increased to 45%, while JP Morgan thought 60%. This would have further affected demand for exports into the States. The US dollar depreciated in response as US growth was expected to weaken. By raising the price of imports further, this would create additional inflationary pressure, although it would also help the competitiveness of US exporters. The significant declines in US stock markets that took place would have hit US wealth which would act to suppress consumer demand.

Uncertainty over the direction of future policy, both in the States and other countries, remains heightened regardless and this will act to depress activity, particularly investment. The lasting macro and market implications will depend on various factors, including the duration of any tariffs and their level, retaliatory actions, and fiscal support offsets as well as expectations in all these areas. But if policy volatility and unpredictability remains high, so will financial market volatility. Over the longer term, tariffs in the US will lead to lower competition, choice and innovation, as well as higher prices, weakening productivity and growth.

What effect will this have in the UK and globally?

In the 24 hours after the tariff announcements on the 2 April. A little over a third (37.2%) of IoD members expect to be affected by US tariffs, although 13% are still not sure. Of those expecting to be affected, 70% expect profits to decrease as a result. Comments from our recent poll highlight a mix of strategies: the favourite was to wait a while longer before changing tack, but here is a nice selection of quotes from participant companies:

“Aside from running a business I’m an investor and I will not be looking at investing in start ups who see USA as a large part of their future strategy if it involves product export in the current environment as US is now too unstable and unreliable.” (Scotland, Education, 10-49 employees)

“The majority of our exports to the US are not sold on price, so the net victims of this will be people in the US – all the other talk is fluff.” (South East England, Real estate, 250+ employees)

“We are looking to develop more clients in the US as uncertainty increases. It’s good for service industries like marketing and design as clients want to market themselves out of problems and be seen above all the political noise.” (London, Administrative and support services, 2-9 employees)

“We have acquired a company in the United States to provide local manufacturing services.” (North West England, Manufacturing, 100-249 employees)

“Move with caution; ultimately, tariffs will weaken us all.” (South East England, Real estate, 2-9 employees)

“I am refocusing my business on non-US markets. If they don’t want our business I can pivot and do business elsewhere.” (London, Other services, 2-9 employees)

“…it will impact my client’s wealth, the time I have to take to explain and comfort their fears and will likely lower my turnover as people hesitate on investing or see their portfolio growth stunted.” (Wales, Financial services, 0-1 employees/sole trader)

So far, the larger proportion of IoD members (42%) are satisfied with the government’s trade negotiation strategy which favours no one trading partner. But there’s a sizeable proportion (34%) who would prefer the UK to align more closely with the EU, which accounts for a far higher value of exports of goods and services than the US (£356bn vs £187bn).

It is helpful to compare the US and the EU markets when considering how the UK will be impacted by tariffs. Looking at exports of goods, UK exports to the US of £60 billion (16% of total goods exports) are dwarfed by UK exports to the EU at £174 billion (48% of UK goods exports). For the US, 45% of UK goods exports were machinery and transport equipment (including cars and mechanical power generators), 23% chemicals and 14% miscellaneous manufacturers. Car exports to the US are worth £6.4 billion (16% of UK exports of cars) vs £11 billion for the EU and chemicals exports are worth £16 billion (24% of UK chemicals exports) vs £28 billion for the EU.

But in thinking about how the UK will be affected, we need to look at the exposure of the UK’s other markets to the US. Around a fifth of the EU’s goods exports go to the US and our goods exports to China are worth £17 billion. Lower growth prospects in those economies will affect the UK.

Trade diversion presents interesting implications for the UK. We may yet see more European and Chinese products diverted into the UK market at lower prices – good for consumers, difficult for struggling companies. The UK government will be keeping a watchful eye on this to ensure that competition is fair. Policy instability in the US is also pushing governments to enhance their relationships with other economies: for example, the UK has recently relaunched its trade negotiations with India. Instability in the US may bring the rest of the world closer together.

In the near-term however, the UK’s growth outlook – already sluggish – has been dealt another blow by this escalation in global policy uncertainty and the imposition of tariffs.

What to expect?

The one thing to be sure of is that uncertainty is here to stay. Global tariff policies and markets have yet to stabilise, and this will suppress activity and stoke volatility for the foreseeable future. It is to the credit of UK and EU governments that they have been measured in their response: setting our own tariffs risks damaging our own growth further. While a new equilibrium for global tariffs is found, price and availability of raw materials, components, intermediate inputs and final products are likely to move around, as are exchange rates, stock markets, commodities and other market prices. The global economy has been hit by a significant confidence shock and which will have lasting repercussions. Until policy and markets settle, forecast accuracy will be significantly impaired.