US tariffs: Background, perspectives and impact on the UK

Approximate read time: 10 minutes

1. US tariff announcements

Donald Trump’s victory in last November’s US presidential election as a self-styled “tariff man” has triggered a major shift in US trade policy.^[1] The president was quick to live up to his nomenclature, signing within the first 100 days of his office orders to impose additional tariffs, or import taxes, of 25% on imports from Canada and Mexico (with some exemptions subsequently applied), a 20% tariff on imports from China over and above existing US tariffs, a 25% import tax on all steel and aluminium entering the US and 25% tariffs on cars and car parts from the rest of the world.^[2]

Tariffs were expanded further on 2 April 2025, a date dubbed “Liberation Day” by the president. The US administration announced a baseline additional tariff of 10% on imports from all countries outside Mexico and Canada and an “individualised reciprocal higher tariff” on what the US called the 60 “worst offenders”—countries with which the US said it had the largest trade deficits.^[3] The reciprocal tariffs will range from 10% to 50%. According to the president’s Council of Economic Advisers, the exact levy is based on what it thinks is the sum of tariffs and non-tariff barriers on US goods. Half that level will be applied to imports from the 60 countries.^[4] However, in reality, the new US tariffs appear to be based on a formula reflecting the US’s trade deficit with a particular country and the level of US imports from that country.^[5]

Financial market turmoil triggered by the “Liberation Day” announcement was followed by President Trump declaring on 9 April 2025 a 90-day pause on reciprocal tariffs for all countries except China, but with a 10% levy on most imports from around the world in force. Following retaliatory moves by China, US tariffs on imports from that country were raised to 145%.^[6] On 12 April 2025, the US exempted imports of smartphones, computers and other electronics from reciprocal tariffs, including those from China.^[7] It is estimated that all tariff announcements as of 12 April 2025, allowing for the 90-day pause, will lift the effective US tariff rate, measured by import duty revenue as a proportion of goods imports, to around 25%. This would be the highest in over a century.^[8]

Figure 1. Effective US tariff rate, historic and estimated (%)

The US’s shift towards more protectionism has been met with consternation by many economists, who argue that higher tariffs will be bad for the US economy and the rest of the world. But some economists think that higher tariffs could eventually deliver some positives, at least for the US economy.

2. Background to tariffs

Tariffs are taxes levied on imports and have a history stretching back to ancient Greece, when the city state of Athens enforced a system of levies to raise revenue for the Athenian government.^[9]

In the present day, almost every country imposes tariffs. The most common kind of tariffs are ad valorem, which are levied as a fixed percentage of the value of the imports. Other types of tariffs include ‘specific tariffs’, which are charged as a fixed amount on each imported good (for example, £2 per shirt) and ‘tariff-rate quotas’, which are tariffs that kick in or rise significantly after a certain level of imports is reached (eg 50,000 tonnes of sugar).^[10]

2.1 Suggested rationales for tariffs

Tariffs can have several motivations. One might be to provide a source of government revenue. Tariffs can be used to protect home industries, with the aim of sheltering local firms from foreign competitors and encouraging domestic production and job creation. Governments sometimes also impose tariffs in reaction to what they argue are unfair practices used by other countries to make their exports artificially cheap, and as a bargaining tool to encourage those countries to pursue a more level playing field. These motivations have all been cited by President Trump in support of his tariff policy.^[11]

In general, wealthy countries maintain low tariffs compared to developing countries. One reason for this is the perception that industries in developing economies are more fragile and so need greater protection. Poorer countries may have fewer sources of government revenue available to them. And there is an influential school of thought which argues that high tariffs were an important factor behind rapid industrialisation in countries such as Japan and China, protecting so-called ‘infant’ industries in their formative stages.^[12]

3. Economics of tariffs

3.1 Potential economic costs of tariffs

Surveys of economists tend to find a strong consensus against tariffs and in favour of free trade.^[13] One criticism of tariffs is that they raise prices for consumers and firms buying goods from abroad, so fuelling inflation. Another is that tariffs mean domestic firms face less competition from imports, reducing their incentive to become more productive. Higher import taxes may invite retaliation from trading partners, compounding the economic harm from higher barriers to trade. And if consumers respond to tariffs by purchasing fewer imported goods, trade-dependent economies like China and Germany could be pushed into recession.^[14]

3.2 Depending on who pays, tariffs could promote domestic industry

Some economists take a less pessimistic view of the impact of tariffs, at least from the perspective of the country applying them. In the opinion of Michael Pettis, a professor of finance at Peking University, tariffs are “neither a panacea nor necessarily injurious”.^[15] This view is based partly on the observation that the economic impact of tariffs will depend on their incidence—in other words, the extent to which the cost of tariffs is absorbed by foreign suppliers or passed on to domestic consumers.

At one extreme, the cost of tariffs might be absorbed entirely by foreign suppliers via lower profit margins. In this case, the tariff raises revenue for the government, enabling higher public spending or lower taxes, but domestic consumers do not face higher prices. However, since foreign suppliers do not raise prices, there is no incentive for consumers to switch demand towards domestic producers, frustrating any ambition to use tariffs to boost domestic industry.

At the other extreme, foreign suppliers could pass 100% of the cost of the tariff to their customers. In this case, consumers pay higher prices, the government raises revenue from the tariff, and there may be some shift in demand from imports towards (now more competitive) domestic producers.

In practice, part of the cost of tariffs is likely to be borne by foreign suppliers and part by domestic consumers.^[16] If incidence is shared, tariffs, according to Dani Rodrik, a professor of economics at Harvard University, are effectively “a specific combination of two different policies: a tax on consumption of the imported good and a production subsidy for its domestic supply”.^[17]

Higher prices will weigh on consumer spending. But if tariffs shift consumer demand away from now more expensive imports and towards domestically produced goods, the profits of domestic firms will rise. Higher profits could boost production, employment and wages, raising consumer spending over time. In this case, the harm or benefit of tariffs will depend on whether consumption falls by more than production rises (so causing economic activity, or GDP, to contract), or vice versa (meaning GDP expands).^[18]

4. Impact of US tariffs on the UK

4.1 Goods exports to US account for a small share of UK GDP, but a more significant percentage of overseas sales

In 2023, the UK exported £60.4bn of goods to the US, equivalent to 2.2% of UK GDP.^[19] However, since some goods exported from the UK to the US include components manufactured outside the UK, the actual contribution to GDP from UK goods sales to the US will be smaller. According to data from the Organisation for Economic Co-operation and Development (OECD), around two-thirds of value-added in UK exports to the US is derived domestically, with one-third coming from imported components.^[20] This suggests that the share of UK GDP derived from US demand for UK goods is around 1.4%.

Internationally, the US is the largest buyer of UK goods, accounting for 15.3% of total UK goods exports in 2023.^[21] Germany was the UK’s second largest market, buying 8.6% of UK goods exports, followed by the Netherlands (7.9%) and Ireland (7.1%). The major categories of goods which the UK exports to the US include machinery, transport equipment, and chemicals. UK imports from the US are mainly machinery, transport equipment, and fuel.^[22]

Figure 2. Percentage of UK goods exports by country

4.2 UK goods trade with the US is broadly in balance

Data from the Office for National Statistics (ONS) suggests the UK’s trade in goods with the US is broadly in balance. According to the ONS, in 2023, the UK imported £59.7bn of goods from the US, only slightly less than the value of UK goods exports to the US.^[23] Timelier US data suggests that the US ran a small trade in goods surplus with the UK in 2024.^[24]

The reasoning provided by the White House’s Council of Economic Advisors for the tariff rates announced by President Trump on 2 April 2025 implied that it was this broad balance in goods trade which accounted for the UK being subject to the US’s new 10% baseline tariff, but not any reciprocal higher tariff.^[25] In contrast, countries which run significant trade in goods surpluses (in other words, exporting more goods to the US than they import) with the US will, assuming the 90-day postponement does not result in any change in US policy, be charged reciprocal tariffs, reaching as high as 45–50% for Vietnam and Cambodia.^[26]

Figure 3. US goods trade balance in 2024 and new US tariffs announced on 2 April 2025 for selected economies*

4.3 US tariffs could weigh on UK economic activity, but there might be some upsides

The UK economy could be affected by the new US tariffs through several channels. Some of these channels are likely to have a negative impact on UK economic activity. However, other potential effects are more ambiguous, or even positive. Negative channels include:

• US consumers and firms switching spending from UK goods, reducing demand for UK exports and weighing on UK activity and inflation
• potential retaliatory tariffs by the UK and other countries on imports from the US causing further distortions to trade flows and prices, lowering global demand and weighing further on demand for UK exports

More ambiguous, or positive, effects include:

• Trade diversion as exporters in other countries lower prices to try to gain alternative consumers for goods they can no longer sell as profitably in the US. This would reduce UK import costs, benefiting the real incomes and consumption of UK households. However, lower relative prices for imported goods could reduce demand for UK-produced substitutes.
• Absent any changes in other countries’ trade policies, a rise in value of the US dollar against the pound and other currencies. Higher import costs would reduce US demand for foreign goods, resulting in lower US demand for foreign currencies to purchase these goods. A lower sterling exchange rate would make UK exports cheaper in dollar terms, offsetting the fall in US demand for UK exports to some extent. But it would also raise the cost of UK imports, increasing inflation and reducing UK consumers’ purchasing power.^[27]
• Assuming the US chooses to ultimately go ahead with the reciprocal tariffs announced on 2 April 2025, since the new US tariff on UK goods would be much lower than that on many other economies, UK exports to the US would become cheaper relative to US imports from those other countries. In cases where the main alternative to an import from the UK is not a US product but, instead, a product from the EU, China, Vietnam or some other country with a much higher tariff rate, UK exports to the US could therefore increase.
• If higher US tariffs are implemented and maintained for some time, firms in countries facing high reciprocal tariffs may relocate business activities to the UK to be better placed to export to the US. So the UK may see more foreign investment as a consequence.^[28]

In practice, the extent to which these effects materialise will depend on the actual, or expected, duration of the new US tariffs. At present, judging this is highly uncertain. Some argue that the Trump administration’s primary motives for tariffs are as means of raising revenue and encouraging the reshoring of economic activity to the US. This would suggest that higher tariffs may well persist. But in the view of others, increased trade protectionism is more of a negotiating tool, and could be relaxed if other countries offer the US sufficient concessions in lowering trade barriers.^[29] This interpretation, it is argued, has been supported by the financial volatility triggered by the US administration’s announcements on 2 April 2025 and the president’s decision to subsequently postpone reciprocal tariffs for 90 days.^[30]

5. Read more

• Financial Times (£), ‘Donald Trump escalates global trade war with sweeping tariff blitz’, 2 April 2025
• Anshu Siripurapu and Noah Berman, ‘What are tariffs?’, Council on Foreign Relations, 1 April 2025
• Matthew Luzzetti et al, ‘Tariffs primer’, Deutsche Bank Research, January 2025

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This briefing was first published on 8 April 2025. It was updated on 14 April 2025 to reflect the US announcement of a 90-day pause on the implementation of higher reciprocal tariffs on countries other than China and the exemption of some electronic goods.

Cover image from Freepik.