"Trump tariffs" – The impact on global trade and economy

President Trump has announced that the USA will impose import tariffs on Mexico and Canada and increase those on Chinese goods. He has also said that tariffs on products from the EU would “definitely happen”, while a deal could be worked out with the UK.

Canada and Mexico were facing tariffs of 25% on exports to the USA. However, on 3 February, it was announced that the implementation of tariffs on Mexico and Canada would be postponed for 30 days following agreements with the respective countries. However, a deal has not been reached with China, and from 3 February a tariff of 10% on Chinese imports came into effect. China has subsequently imposed several different tariffs on American products.

What are tariffs?

Tariffs aim to control the number of imports, protect domestic industries and generate income for governments. There are many countries around the world who impose tariffs as a protectionist measure, especially for agriculture products to help protect the domestic industries. However, tariffs can have subsequent impacts on the economy, markets and international relations. Trump has claimed these tariffs are being implemented due to the trade surpluses, as the countries sell more to the US than what they import from the US.

Once the tariffs are imposed these create trade barriers and make it more expensive to import into the US, which means that these products could be diverted from the US to other markets around the world.

Impact on the global economy

Although there are not any direct changes to trade with the UK, there could be knock on effects and this will impact the global economy.

Canada, Mexico and the EU are large agricultural exporters and if trade barriers into the US are increased it will likely mean that these products are diverted elsewhere in the world where it is less expensive to trade. There is a risk that more products could be diverted to the UK in this scenario.

Tariffs can also lead to inflation, as they make importing goods more expensive. This can have an impact on prices, especially on those cheaper products that may have been imported, or on countries who are dependent on imports to meet the needs and wants of the population.

Other impacts would include slower growth in the global economy. Monday 3 February saw stock markets down significantly with the announcement of the tariffs. Both the Canadian dollar and Mexican peso plunge and the US dollar strengthened. Imposing tariffs could slow down global trade volumes, which will slow global economic growth and will likely lead to higher prices. With higher inflation will come higher interest rates and, subsequently, higher cost of borrowing. The higher prices could also hinder demand and have a knock-on effect on businesses and consumer spending.

As this situation progresses over the coming weeks it is likely to be a turbulent period, and we will keep up to date on how this is impacting the UK market.