A few decades ago, there was a campaign to ‘Buy British’. Today, the US is encouraging its citizens to 'Buy American' by introducing tariffs, but with a stronger incentive: it will now cost more to do anything else.
Background
The US administration’s decision to increase tariffs on imported goods has had something of a tsunami impact on stock markets. It has created economic uncertainty for countries who rely on trade with the US, and for US businesses that rely on exports.
Tariffs have been around for a long time; they are a revenue measure to protect domestic businesses from overseas competition. In the UK, customs taxes were historically administered by HM Customs & Excise and predecessor departments. Former Customs & Excise officers include Robert Burns, Geoffrey Chaucer, Daniel Defoe, Richard ‘Dick’ Whittington and Adam Smith, the father of modern economics. It would have been interesting to get Adam’s view of recent developments.
The impact of higher tariffs
For US importers, the cost of goods will increase by the amount of the applicable tariff. For the UK this is currently a 10% increase on current tariffs. It means that this cost must either be passed onto the US customer or absorbed as a cost for the business.
If the UK chooses to respond with its own tariff increases, the cost of US goods entering the UK will go up. This will be due to higher Customs Duties and the added VAT, and someone — either the importer or the consumer — will have to shoulder that cost. While it might boost treasury revenues, it’s hard to see how this would translate into any real benefit for the UK economy.
The wider economic impact
Most businesses will need to pass the increased tariff cost onto their customers. This will drive up inflation, which has been an issue for the last few years, resulting in higher borrowing costs for businesses and individuals, increasing the risk of recession.
Falling share values will reduce the worth of companies and shareholders’ portfolios — driving down returns, reducing investment and shrinking retirement pots.
Any good news?
Tariffs only apply to goods, so the service sector should not suffer any direct costs. However, it will suffer indirect costs when interest rates increase, to counter inflation and the risk of an economic downturn.
This is perhaps the example of a Brexit dividend, which has been hard to identify or quantify. The UK is not going to suffer the same punitive rate as the European Commission, which is a positive. It will provide a competitive advantage over EU suppliers to the US.
There are rules relating to country of origin but there is the potential for the UK to assume a role in manufacturing that results in a more commercial result for businesses. This would be the reversal of some manufacturing businesses leaving the UK pre-Brexit.
Should the UK reciprocate with higher tariffs?
The introduction of reciprocal tariffs will increase prices for UK imports and drive inflation, increasing the risk of economic downturn. It will be seen as reciprocal only, which might have merit for specific sectors — for example, UK-made cars and whiskey.
It is difficult to see the economic rationale for a general increase of UK tariffs for US products. It will damage US businesses who will suffer as a result in this change of policy – and deny UK consumers access to products that become unaffordable. Perhaps taking the ‘adult’ approach — and looking for the advantage — might be the better path forward.
Closing thoughts
A key message during Brexit was the ability for the UK to have its own preferential trading arrangements. This might be the opportunity to deliver against that message, regardless of who it came from.
There is the potential to replace US suppliers in some markets and, even if at a small scale, this could significantly benefit the UK economy. It will require an informed approach from the UK government to achieve this ambition.
Ultimately, the UK’s autonomy in matters of trade and customs must come with some benefits — or else, what is the point of being a political and economic island? The global economy has changed. Now is the time to look for the opportunities.
