Would Donald Trump's tariffs hurt the UK? Effect of new import taxes as threats made to EU, Canada, China and Mexico

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The economic buzzword of the early days of Donald Trump’s second presidency is “tariffs” - with the price rises used as a negotiating tactic by the US with trading partners.

But what are they, how do they work - and do they work? As the threat still hovers over the UK, the EU and China, and Mexico and Canada see tariffs delayed by a month, this is what the introduction could mean for the global economy.

What are tariffs?

Tariffs are a tax on imports. They are typically charged as a percentage of the price a buyer pays a foreign seller. In the United States, tariffs are collected by Customs and Border Protection agents at 328 ports of entry across the country.

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US tariff rates vary: they are generally 2.5 per cent on passenger cars, for instance, and 6 per cent on golf shoes. Tariffs can be lower for countries with which the US has trade agreements. For example, most goods can currently move among the US, Mexico and Canada tariff-free because of Mr Trump’s US-Mexico-Canada trade agreement.

Mainstream economists are generally sceptical of tariffs, considering them a mostly inefficient way for governments to raise money and promote prosperity.

President Trump has mooted setting up an External Revenue Service to collect tariffsPresident Trump has mooted setting up an External Revenue Service to collect tariffs
President Trump has mooted setting up an External Revenue Service to collect tariffs | Getty Images

Who pays tariffs?

Trump, a proponent of tariffs, insists that they are paid for by foreign countries. In fact, it is importers - American companies - which pay tariffs, and the money goes to the US Treasury. Those companies, in turn, typically pass their higher costs on to their customers in the form of higher prices. That is why economists say consumers usually end up footing the bill for tariffs.

Still, tariffs can hurt foreign countries by making their products pricier and harder to sell abroad. Foreign companies might have to cut prices - and sacrifice profits - to offset the tariffs and try to maintain their market share in the United States.

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Yang Zhou, an economist at Shanghai’s Fudan University, concluded in a study that Mr Trump’s tariffs on Chinese goods inflicted more than three times as much damage to the Chinese economy as they did to the US economy.

What would be the effect of tariffs?

Those sceptical of tariffs say they could be disastrous. Some estimates reckon that a 25 per cent tariff on Canadian and Mexican goods could cut US GDP by $200bn, while a 10 per cent China tariff could reduced it by $55bn. The proposed tariffs could cost the average US household $3,000 a year in 2025.

But supporters think that adding tariffs to imports would boost home-grown manufacturing and production.

However, the knock-on effect would be to harm UK exporting companies. A blanket tariff on UK exports to the US it would affect around £60bn of goods sent in 2023, according to UK figures. The BBC reckons pharmaceutical products accounted for £8.8bn of the UK's goods exports to the US in that year, cars £6.4bn and power generation machinery £6.4bn.

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The obvious effect would be to make those prices higher for US consumers and businesses as they would have to absorb the extra tariff cost - but this would obviously likely lead to a drop in demand and therefore reduced trade for UK firms exporting to the US. Any UK firm with a US market - from Jaguar Land-Rover to pharmaceutical firms - would take a hit.

What has Donald Trump said about tariffs?

Trump has said tariffs will create more factory jobs, shrink the federal deficit, lower food prices and allow the government to subsidise childcare.

“Tariffs are the greatest thing ever invented,” Trump said at a rally in Michigan, during his presidential campaign. As president in his first term, Trump imposed tariffs with a flourish - targeting imported solar panels, steel, aluminium and pretty much everything from China.

“Tariff Man,” he called himself. Trump has promised even more and higher tariffs in his second term.

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The US in recent years has gradually retreated from its post-Second World War role of promoting global free trade and lower tariffs. That shift has been a response to the loss of US manufacturing jobs, widely attributed to unfettered free trade and an increasingly powerful China.

How would tariffs help the US?

By raising the price of imports, tariffs can protect home-grown manufacturers. They may also serve to punish foreign countries for committing unfair trade practices, such as subsidising their exporters or dumping products at unfairly low prices.

Before the federal income tax was established in 1913, tariffs were a major revenue driver for the government. From 1790 to 1860, tariffs accounted for 90% of federal revenue, according to Douglas Irwin, a Dartmouth College economist who has studied the history of trade policy.

Tariffs fell out of favour as global trade grew after the Second World War. The government needed vastly bigger revenue streams to finance its operations.

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In the fiscal year that ended on September 30, the government collected around $80bn (£64.5bn) in tariffs and fees. That is a trifle next to the $2.5 trillion(£2.02 trillion) that comes from individual income taxes and the $1.7 trillion (£1.37 trillion) from Social Security and Medicare taxes.

Still, Trump wants to enact a budget policy that resembles what was in place in the 19th century.

Tariffs can also be used to pressure other countries on issues that may or may not be related to trade. In 2019, for example, Trump used the threat of tariffs as leverage to persuade Mexico to crack down on waves of Central American migrants crossing Mexican territory on their way to the United States. He even sees tariffs as a way to prevent wars. At an August rally in North Carolina he said a possible conversation would be: “We’re going to charge you 100% tariffs. And all of a sudden, the president or prime minister or dictator or whoever the hell is running the country says to me, ‘Sir, we won’t go to war’.”

What do economists think of tariffs?

Tariffs raise costs for companies and consumers that rely on imports. They are also likely to provoke retaliation, and so are largely seen as self-defeating.

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The European Union, for example, punched back against Trump’s tariffs on steel and aluminium by taxing US products, from bourbon to Harley-Davidson motorcycles. Likewise, China responded to Mr Trump’s trade war by slapping tariffs on American goods, including soybeans and pork in a calculated drive to hurt his supporters in farming areas.

A study by economists at the Massachusetts Institute of Technology, the University of Zurich, Harvard and the World Bank concluded that Trump’s tariffs failed to restore jobs to the American heartland. The tariffs “neither raised nor lowered US employment” where they were supposed to protect jobs, the study found.

Despite Trump’s 2018 taxes on imported steel, for example, the number of jobs at US steel plants barely moved. They remained around 140,000. By comparison, Walmart alone employs 1.6m people in the United States.

Worse, the retaliatory taxes imposed by China and other nations on US goods had “negative employment impacts”, especially for farmers, the study found. These retaliatory tariffs were only partly offset by billions in government aid that Trump doled out to farmers. The Trump tariffs also damaged companies that relied on targeted imports.

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What’s going to happen to the UK?

Downing Street is trying to keep relations on an even keel with Trump’s government. The UK’s trading relationship with the US is “fair and balanced”, Downing Street insisted this week after Donald Trump said that the UK was “out of line”.

The Prime Minister trusts Trump to keep his word, No 10 said after the US president suggested he thinks a deal can be “worked out” to avoid slapping tariffs on the UK.

Trump has suggested that he is poised to expand his tariff regime to both the UK and the EU, but added that he thinks a deal can be done with Britain. The looming prospect of a trade war with the US threatens to overshadow Prime Minister Sir Keir Starmer’s meeting with EU chiefs.

Asked by the BBC early on Monday if he will target the UK with tariffs, Trump said: “UK is out of line but I’m sure that one… I think that one can be worked out.”

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The US president also said discussions with Sir Keir have “been very nice”, adding: “We’ve had a couple of meetings. We’ve had numerous phone calls. We’re getting along very well.”

UK ministers have previously suggested the UK could avoid US tariffs because America does not have a trade deficit with Britain. Downing Street said the US is an “indispensable ally” to the UK.

“We’ve got a fair and balanced trading relationship which benefits both sides of the Atlantic,” No 10 said. “It’s worth around £300bn and we are each other’s single largest investors, with £1.2 trillion invested in each other’s economies,” the spokesman said.

What will happen with the EU?

The US president said tariffs will “definitely” be placed on goods from the EU, saying America’s trade deficit with the bloc is “an atrocity” that means “they take almost nothing and we take everything from them”.

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EU officials have started drawing up contingency plans for the threat of US tariffs, and representatives of the bloc are bullish about the prospect of a face-off with America, the Telegraph reported.

What has Donald Trump proposed for the rest of the world?

Trump has announced he will impose 25 per cent trade taxes on goods coming from America’s nearest neighbours and largest trade partners – Canada and Mexico – as well as a 10 per cent levy on Chinese goods.

All three nations vowed to respond in kind, sparking fears of a global trade war, but the Mexican and Canadian plan was deferred by 30 days.

Canada's Prime Minister Justin Trudeau addresses media following the imposition of a raft of tariffs by US President Donald Trump against Canada, Mexico and China. The Canada and Mexico plan has been paused for 30 daysCanada's Prime Minister Justin Trudeau addresses media following the imposition of a raft of tariffs by US President Donald Trump against Canada, Mexico and China. The Canada and Mexico plan has been paused for 30 days
Canada's Prime Minister Justin Trudeau addresses media following the imposition of a raft of tariffs by US President Donald Trump against Canada, Mexico and China. The Canada and Mexico plan has been paused for 30 days | AP

What’s happening with Mexican and Canadian US tariffs?

The 30-day pause was brought in as America’s two largest trading partners took steps to appease his concerns about border security and drug trafficking.

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The pauses provide a cool-down period after a tumultuous few days that put North America on the cusp of a trade war that could have crushed economic growth, caused prices to soar and ended two of the United States’ most critical partnerships.

“Proposed tariffs will be paused for at least 30 days while we work together,” Canadian Prime Minister Justin Trudeau posted on Monday afternoon, saying his government would name a fentanyl tsar, list Mexican cartels as terrorist groups and launch a “Canada-US Joint Strike Force to combat organised crime, fentanyl and money laundering”.

The White House confirmed the pause, which followed a similar move with Mexico that allows for a period of negotiations about drug smuggling and illegal immigration. There is a risk that the tariffs could still come into effect, leaving the global economy uncertain about whether a crisis has been averted or if a possible catastrophe could still be coming in the weeks ahead.

What has China said about 10 per cent tariffs?

China’s Ministry of Commerce announced on Tuesday it was implementing counter-tariffs against the US on multiple products while announcing other trade-related measures, including an investigation into Google. The government said that it would implement a 15 per cent tariff on coal and liquified natural gas products, as well as a 10% tariff on crude oil, agricultural machinery and large-displacement cars.

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“The US’s unilateral tariff increase seriously violates the rules of the World Trade Organisation,” a statement said. “It is not only unhelpful in solving its own problems but also damages normal economic and trade co-operation between China and the US.”

The 10% tariff that Trump ordered on China was set to go into effect on Tuesday, though he planned to talk to Chinese President Xi Jinping in the next few days.

What was the effect on the stock market?

The FTSE 100 finished in the red on Monday after a turbulent day for markets. London’s blue-chip index dropped 90 points to finish the day at 8,583, or a one per cent fall, marking its steepest one-day drop of 2025 so far.

British and European markets were rocked earlier in the day following the imposition of tariffs over the weekend. Shortly before the close of trading, Trump announced that he would pause 25 per cent tariffs on Mexico for a month after a last-ditch call with the country’s president, Claudia Sheinbaum, and later announced similar for Canada.

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AJ Bell head of financial analysis Danni Hewson said: “It was dubbed Manic Monday by market watchers as indices right around the world tumbled a bit like dominoes as investors woke up to the news that Donald Trump would push ahead with tariff plans.”

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