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Will Trump impose his tariffs? They could reduce the UK’s exports by £22 billion.
Published 8 November 2024
Building on our previous analysis of the potential impacts of the tariffs proposed by Donald Trump during his campaign, this blog reviews the possible impacts on UK trade across sectors. The UK’s exports to the world could fall by £22 billion (-2.6%) and imports by £1.4 (-0.16%), with significant variations across sectors. Some sectors, like fishing and petroleum, are particularly hard-hit due to their high sensitivity to tariff changes, while others, such as textiles, benefit from trade diversion as the US shifts demand away from China.
With Donald Trump winning the presidential election in the US, his threat of imposing high tariffs on American imports has become a concrete possibility. Of course, this could end up being a negotiating tactic, but the possibility of these tariffs being imposed is certainly there.
The previous blog showed how the proposed tariffs could cost US consumers about $2,000 (£1,500) per capita. It also highlighted how aggregate UK exports of goods and services to the US could be severely affected.
In this post, the focus is on the effects of US tariffs on UK trade with the world by sector. The results are based on a scenario where the US imposes a 20% tariff on all imports and a more punitive 60% tariff on imports from China, with no retaliation from other countries. Retaliation would only make the numbers worse but may be hard to avoid. The simulations are based on a modern general equilibrium model of international trade including trade in intermediate inputs.
In this scenario, the results for the UK are largely negative, particularly for exports. UK Exports are expected to fall by £22 billion (-2.6%), or 0.8% of GDP, while UK imports would see a smaller decrease, estimated at £1.4 billion (-0.16%) or 0.05% of GDP.
The broad impacts, however, mask sector-specific variations, revealing how different industries respond to these tariffs. Figure 1 reports the percentage changes in UK exports and imports.
Some UK sectors would experience sharp export declines due to reduced US demand. The most negatively affected sectors for exports are Fishing (-21.5%), Coke and refined petroleum products (-20.9%) and Mining (-20.4%). Notably, the chemicals, metals, and electronics sectors also face substantial drops, with more than 10% reductions in export values.
UK imports face a lower overall impact but still experience changes in specific sectors. The hardest-hit sectors include support services for mining (-6.5%), utilities (-2.5%) and wood products (-2.3%).
The differences in the impact across sectors stem from two elements, mainly:
1. Percentage changes in tariffs: Although the simulated policy imposes a 20% tariff on all sectors, percentage changes in the tariffs depend on the base tariffs. For instance, a sector already facing a 20% tariff would not see any change, while a sector with a 10% tariff would see its tariff doubling.
2. Sectoral Elasticities: This sensitivity of trade (or “elasticity”) influences how much trade flows adjust with cost changes. For example, Coke and refined petroleum products have a high trade elasticity (51.08), resulting in a pronounced trade response. Conversely, sectors like motor vehicles and transport equipment, with lower elasticity (0.37), see much smaller reductions in trade volumes.
3. US share of UK exports: The higher the share of UK exports going to the US in any given sector, the higher the impact on trade. Figure 2 reports the share of the US in the UK’s exports and imports by sector. Here we see that a high share of UK exports in eg. Fish and pharmaceutical go to the US, and these are sectors with large negative export effects (cf. Figure 1)
Responses to increased or decreased competition from other countries as well as supply chain linkages across sectors also play a role in determining the final effects.
Peculiarly, UK imports of coke and refined petroleum products are predicted to rise, driven by increased imports from countries outside the US, notably the rest of the world aggregate (ROW), which includes Russia and Arab countries. The ROW region contributes around 9% of the UK’s consumption of these products, and their exports are projected to increase by 50%. Moreover, Canada’s exports to the UK in this sector are expected to rise by over 200%. This shift is an example of trade diversion, where third-party suppliers benefit from altered trade patterns.
The textile and clothing sector provides an interesting case where UK exports are actually predicted to increase slightly (by +1%). This positive change results from trade diversion due to the US imposing a 60% tariff on Chinese imports. With China less competitive in the US market, the UK and other countries can step in to fill the gap, gaining new opportunities in the US market.
Although services are not directly subject to tariffs, they still experience adverse effects via supply chain disruptions and overall economic shifts. In particular, exports of transportation services, crucial for international trade in goods, are expected to fall by 2.4%. Similarly, British exports of financial and insurance services to the world could fall by 2.4%.
These declines are driven by reduced demand for services that support manufacturing and trade, along with income effects that curb demand across sectors. These indirect impacts on services demonstrate how the impact of tariffs can ripple through the economy, affecting not only goods but also the services tied to those goods.
This simulation underlines the complexity of tariffs’ effects, with each sector’s outcome shaped by base levels of trade, elasticities, and global supply chains. The UK, along with many other nations, stands to experience significant sectoral disruptions from such tariff hikes, affecting both goods and services. It’s clear that while some industries may find new opportunities in a reconfigured global trade landscape, most will face steep challenges in adjusting to these changes.
New US tariffs could reduce UK exports by £22 billion, with key sectors like fishing and petroleum facing sharp declines. Textiles may see gains from trade shifts due to reduced Chinese competition in the US market. Most UK industries, however, will face steep challenges if the US goes ahead with the proposed tariffs.
Methodological note
In this analysis, I employ a modern quantitative trade model based on the framework outlined by Costinot and Rodriguez-Clare (2014). This model is widely used to study the impact of trade policies and has been adapted here to explore the effects of tariffs and trade adjustments across sectors and countries. Key features of the model include:
1. Perfect Competition and Balanced Trade: The model assumes that all sectors operate under conditions of perfect competition. Additionally, the model assumes balanced trade. Practically, this means that the trade matrix is “balanced” before running the simulation. Details of the procedure can be found in Costinot and Rodriguez-Clare (2014).
2. Trade in Intermediate Products: The model incorporates both final goods and intermediate products. Firms from different sectors in each country use intermediate inputs, which are sourced either domestically or from international markets.
3. Sectoral and Geographic Coverage: The model covers 31 distinct sectors, including both goods and services, across 10 countries plus an aggregate for the rest of the world.
The data required for this analysis includes the base inter-country input-output table, base tariff data and estimates of the trade elasticity to variable costs. The base trade data comes from the OECD Inter-Country Input-Output (ICIO) tables for 2020.
Tariff data is sourced from the UN TRAINS database, using the most recent available information for the year 2022. This allows the analysis to account for the latest tariff structures affecting international trade.
Following Costinot and Rodriguez-Clare (2014), I adopt trade elasticity estimates from Caliendo and Parro (2015), which quantify how sensitive trade flows are to changes in trade costs.
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