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By National Federation of Builders

How Should The UK Respond To Trump's Tariffs?

Illustration: Tracy Worrall

7 min read

How should US trading partners react to its tariffs? Canada is in a strong position, but the UK and Europe are not, writes Tim Leunig. The solution: ignore Trump and wait it out

US President Donald Trump’s tariffs have no coherent rationale. US treasury secretary Scott Bessent wants to negotiate them away for reductions in other countries’ anti-US tariff and non-tariff barriers. Peter Navarro, the President’s trade and manufacturing senior counselor, sees them as permanent, raising revenue and re-industrialising America. Trump says “they can both be true”, which is nonsense: tariffs can’t be both temporary and permanent.

The market dislikes Trump’s economics. The US dollar is down, and US bond yields are up – a rare combination showing investors are fleeing America. Conversely, the euro is up, and German bond yields are down – an equally rare combination suggesting investors like Germany’s economic orthodoxy. 

The world needs to stop looking for coherence. Trump likes to use power arbitrarily

Markets matter to politicians, whatever they say, because markets determine the cost of government debt. Just as bond markets forced Liz Truss to pull back, so Trump suspended most tariffs as US government debt costs increased. 

That said, it is easy to overstate market reactions. The Dow Jones remains roughly where it was a year ago and 10-year bond yields are lower than a year ago. The dollar is down seven per cent year-on-year, but it is about seven per cent higher than four years ago. The markets do not like what Trump has done, but there is no panic.

Without a market panic, Trump has leeway. He can play the king – or fool – in negotiations with other countries, favouring some and disdaining others with no obvious rationale. For example, given Italy’s low defence spending, his and his VP’s fawning attitudes make no sense.

But so what? The world needs to stop looking for coherence. Trump likes to use power arbitrarily, whether against individuals or nations.

For some countries, the trading relationship with the US is existential. A newly industrialised country like Bangladesh will for sure run a trade surplus in manufactured goods, and a deficit in services. That is a problem, since – for no good reason – Trump cares only about goods.

Unless Bangladesh lowers its goods deficit, tariffs will remain high. Its best approach – which it has already hit on – is to use American rather than West African raw cotton. Other countries will try to do likewise, so American raw cotton will rise in price. That price rise will be worth Bangladesh paying to get tariffs down. At first sight, this is a win for America – except that the extra cost paid by Bangladesh will increase the price of t-shirts sold in the US. American farmers gain at the expense of American consumers. Ironically, Trump will make American leftie country singer Willie Nelson, one of the founders of the Farm Aid concerts, happy. 

If Bangladesh and similar nations have no option but to bend the knee, Canada is in a remarkably strong position. It exports two items America really needs: oil and electricity. The US imports over four million barrels of Canadian crude daily, about a quarter of US consumption. It comes down the Keystone pipeline, from Alberta through the Dakotas, Nebraska, Illinois, Oklahoma and Texas. Places close to that pipeline – including refineries – get oil at a price unavailable from any other source. That is because oil is cheap to move by pipe, and costly to move by other means. 

If we, or the EU, impose tariffs, we will raise the cost of living for our citizens. That is not sensible

Canada can, and should, impose a tax on oil it exports to the US. A US dollar a gallon tax would raise about $1.6bn a year. They can call it the Trump gas tax, and when Americans start paying a dollar more at the pumps, they will know why: because Donald Trump decided to be nasty to Canada. (Mexico – a moderate exporter of oil to the US – should do likewise if Canada does this.)

Canada also exports electricity to the US. In particular, the American North East – as far south as New York – is dependent on Canadian hydroelectric power. Some Canadian politicians have threatened to “flip the switch” and leave the US dark and cold. That is not necessary – an export charge is a much better idea. Electricity costs around 24 cents per kWh in New York state, a third more than just five years ago. Trump criticised Joe Biden for high prices and promised to bring them down. A six US cent export tax would take prices to an all-time high, and 12c would take them to double 2019 levels. 

Both oil and electricity are what economists call “inelastic goods” – that is, a rise in price does not reduce consumption by much. These tariffs would raise a lot of money for Canada, and would cause a great deal of pain for Americans. Canada’s offer would be simple – end your tariffs on us, and we will end ours with you. Canada would, of course, allow Trump to declare his U-turn as a personal victory. Promising more border patrols looking for fentanyl smugglers or some such seems an ideal approach.

Illustration: Tracy Worrall
Illustration: Tracy Worrall

The position for the UK and for Europe is harder. We are not as dependent on exporting to the US as are emerging economies. Unlike Canada, we have no ace in our hand. We are, bluntly, neither here nor there. For sure, we should negotiate. The UK should lobby American senators, using polling to show that their voters do not think the UK should be hit with tariffs. It is not that likely that Trump will listen to his senators, but it is always possible. It is cheap, and we have nothing to lose. 

Beyond that, neither we, nor the EU, should do much at all. Retaliatory tariffs will not get Trump to change his mind. He does not care if Elon Musk cannot export Teslas – he has, after all, hit Musk already by abolishing Biden-era electric car incentives. He does not care if Jack Daniels can’t export bourbon. In fact, he doesn’t care about anything.

What we do know is that tariffs hurt the countries that impose them. If we, or the EU, impose tariffs, we will raise the cost of living for our citizens. That is not sensible. We should instead make lots of speeches about how we believe in international co-operation, in globalisation, and the rule of law. And we should wait Trump out. He only has four years, and his economic policy is so inept that unpicking it will be an easy win for any successor, Republican or Democrat. 

Keir Starmer will welcome EU commission president Ursula von der Leyen to London on 19 May. They should ignore Trump and instead concentrate on things that we and the EU can do.

A customs union, sensible provisions on food imports and exports, rights for touring performers, and young people’s travel – all of these will improve living standards in both places. We should also talk about defence. Italy may be a lost cause, but others are serious about Europe’s ability to defend itself and we need to go from good intentions to hard reality – and quickly. 

And as for China? The US is a big market for Chinese exporters, but closing US markets to Chinese toys, microwaves and so on will not cause economic collapse in China. It will cause first significant price rises and later real shortages in the US. America will blink first, as it has already done for mobile phones. Unlike us, the Chinese won’t even have to wait four years. 

Tim Leunig is chief economist at Nesta

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