While questions have been raised about some of President Trump’s nominations for office, this has not been the case in the area of economics and finance. There, his nominations have been received well, with Scott Bessent as Treasury Secretary and Howard Lutnick as Commerce Secretary, both seen by Wall Street as heavyweights and credible.
Although the general perception is that the disruptors among his nominations are not in economics, but in other areas, that does not mean that his economic agenda is not radical, and in addition to tariffs, tax and regulatory change is inevitable. Paul Atkins, the nomination for Chair of the Securities and Exchange Commission, and who was a commissioner there in 2002-08, will oversee a different regulatory approach with a pro-cryptocurrency agenda.
Peter Navarro, who is seen as a hardliner on addressing trade imbalances, will head a new trade office within the Dept of Commerce. Elon Musk, meanwhile, who will have a desk in the White House, will aim to improve productivity in the public sector through his Dept of Government Efficiency. This will likely involve cutting jobs and spending on the Federal budget, and embracing technology, which if successful could be adopted globally.
In my view, President Trump’s economic agenda will have one good, one bad and one big uncertainty.
The good is already evident in how the business community and equity market have reacted in recent months. US business confidence is high, as they expect Trump’s tax and regulatory policies to boost US competitiveness and growth.
The bad is tariffs. The impact of these depends on many factors, including how high and widespread they are, and who they are targeted at. If they are uniform and across the board they will impact all imports into the US, but certain countries such as China will be the main target. During his first term, Trump imposed some tariffs, but that was presented in the context of fair trade. Now, tariffs are part of a much wider agenda and thus even Mexico and Canada have been singled out in recent weeks.
Also, important regarding tariffs is the response of firms in terms of their pricing policy and how this will impact US inflation. What is critical, too, is the reaction of other countries. If they were to react with tariffs of their own then such ‘beggar my neighbour’ policies will be seen as negative for global trade.
The big uncertainty is financial market conditions. If the US budget deficit remains high then this will keep US bond yields elevated, with an impact on bond yields elsewhere. As we have seen in the UK in recent weeks there can be significant contagion on UK gilt yields from US Treasury yields. Alongside this, if the US Federal Reserve is less keen on cutting US interest rates, then this will impact emerging economies, particularly across Asia, who have played an important role in world growth.
Tariffs are a tax on imports and their effectiveness depends upon making imported goods more expensive and thus less attractive. This results in a one-off increase in the US price level. But there are other factors to consider. If higher tariffs trigger a rerouting in trade, then US price levels may not rise. For instance, higher taxes on Chinese goods previously led to an increase in imports from Vietnam, not hit by tariffs. Also, the reaction of US firms is important, too.
Ironically, when tariffs were imposed previously on certain goods, US manufacturers stepped in but prices rose. In some areas they argued that tariffs have made imported inputs more expensive, but their goods may have been more expensive anyway or they may have raised their profit margins. It is hard to quantify fully the impact, but in qualitative terms the markets believe tariffs will raise prices. In turn, this, plus the resilience of the US economy, has dampened expectations about US policy rate cuts.
How will this impact UK trade?
Last Friday the latest bilateral US-UK trade data was released by the Office for National Statistics (ONS). It related to 2023 and showed a UK trade surplus of £71.4 billion. Such a high bilateral surplus might be seen as attracting attention, but there may be two mitigating factors.
One, as the ONS pointed out, the US data, from the US Bureau of Economic Analysis, shows a far smaller surplus of $14.5 billion, equivalent to £11.6 billion – explained by a range of conceptual and measurement variations. A second factor may be that the tariff debate in the US appears to be focused primarily on goods traded and the bulk of the UK surplus is in services.
In 2023, the UK imported £57.9 billion of goods from the US and exported £60.4 billion to them. Meanwhile, the UK’s imports of services from the US were £57.4 billion while our exports of services were a sizeable £126.3 billion.
The current scale of UK-US trade highlights that one does not need a trade deal to trade. Under the previous Government the UK signed a number of memorandums of understanding with individual US states to remove barriers to trade. But until the details of the tariff policy are outlined it is unclear how the UK will be impacted.
A UK-US free trade deal is not currently being talked about but in a couple of years it may be a focus, either out of need or opportunity. The need then being in response to the impact of tariffs, especially if global protectionism escalates. The opportunity, in turn, being in response to buoyant US growth.
Please note, the value of your investments can go down as well as up.
