FTI Consulting UK Public Affairs Snapshot: Tariff: ‘The most beautiful word in the dictionary’

When President Trump did not follow through on his election pledge to impose tariffs on US trade partners on “day one”, there was a sense of hope that the President’s threats had been political bluster. That optimism was put to rest on 1 February, when Trump imposed 25% tariffs on most imports from Canada and Mexico, as well as tariffs on 10% of products from China.

As governments from Beijing to Brussels scramble to adapt to announced or anticipated tariffs, FTI Consulting’s UK Public Affairs trade experts assess the possible tariff threat facing the UK and how the government may respond. 

Trade wars: A new menace

On 1 February, President Trump imposed tariffs of 25% on almost all US imports from Canada and Mexico. An additional 10% has also been imposed on all goods from China, lower than the 60% suggested during the election campaign, likely due to fears of stoking inflation in the US. These decisions have sent political shockwaves around the world.

Trump’s failure to follow through on his threat of “day one” global tariffs had led to cautious optimism among US trade partners, but it is now clear that Trump is willing to risk international outrage and domestic inflation to pursue his tariff agenda. Notwithstanding the suspension of tariffs on Mexico for a month, every indication is that the North American and Chinese tariff moves are just the beginning, with the President stating tariffs on imports from the EU will “definitely happen”.

On the UK, although Trump suggested the country has been “out of line”, he struck a more conciliatory tone, suggesting that a deal can be “worked out”.  Nervous officials will be latching on to this comment in the hope of protecting the £182 billion of UK exports to the US. 

MAGA strikes back: Tariffs as a foreign policy lever

Less than two weeks ago, the Secretary of State for Business and Trade, Jonathan Reynolds, took to the airwaves to emphasise his view that the UK’s lack of a trade surplus with the US – unlike other jurisdictions, such as the EU and China– should provide a safeguard from Trump’s tariffs.

While Trump has pledged to address the US’ trade deficit, worth over $1 trillion according to the White House, tariffs on Canada, Mexico and China are not officially motivated by economic factors. The White House has instead cited “halting illegal immigration and stopping… fentanyl and other drugs” from entering the US as the justification for the measures.

The President and his team see taxing access to the US market as a powerful diplomatic lever, as evidenced the previous weekend when Colombia was forced to accept deportation flights in the face of US tariff threats. It is likely this example served to confirm to the new administration just how much power tariffs confer on the US.

In fact, Trump’s Presidential Memorandum on American First Trade Policy, issued on 20 January, identifies “trade policy as a critical component to national security”. By invoking national security, the President has given himself a blank cheque to use tariffs as a tool of foreign policy with very little that the other branches of the US government can do about it, even if they were of a mind to do so.  

Return of the Special Relationship: Where does the UK stand in Trump’s calculus?

The UK’s relatively even balance of trade with the US may offer some political protection from Trump’s tariffs. While the EU was promised tariffs “pretty soon” to deal with the “atrocity” of the large trade deficit the US has with the bloc, the UK seems to be in a more aggregable position. Conciliatory language from Trump suggests that the UK may be excluded from at least the first wave of a transatlantic trade war. In the long term, however, the trade-offs necessary to avoid US tariffs may be politically difficult to swallow.

Notwithstanding Trump’s positive comments about his relationship with the Prime Minister, Keir Starmer, there are ongoing flashpoints in the strategic relationship which may flare into casus belli for an Anglo-American trade war. While the more theatrical problems, such as Labour activists supporting Kamala Harris’ presidential campaign or the past statements of Ambassador-Designate Lord Mandelson, seem easy enough to overcome, substantive policy issues will prove more of a challenge.  

The Chancellor of the Exchequer, Rachel Reeves, hailed the first Economic and Financial Dialogue with China since 2019 in January as a new opportunity to grow UK-China trade and investment. The UK has a difficult path to tread if it seeks to strengthen economic ties with Beijing while avoiding a collision course with a Trump administration for whom competition with China is the guiding principle of its foreign and trade policy. It is hard to see the Trump administration happily accepting a scenario where its closest security partner pursues closer ties with its biggest adversary without more than a raised eyebrow.

Defence spending, the UK’s support for a two-state solution to the Israeli-Palestinian conflict and its ambition to cede sovereignty of the Chagos Archipelago to Mauritius are all other potential flashpoints. With any of these differences on diplomatic and trade policy, it is likely tariffs will become an increasingly attractive tool for a US president determined to have his own way on global affairs.

Perhaps most concerning for Downing Steet is the possibility that Trump may use tariffs in the more old-fashioned way and seek UK concessions on trade policy. While relatively insignificant as an economic issue, the question of access for US agricultural products to UK markets is a major area of concern for important constituencies on both sides of the Atlantic.

US farmers, who backed Trump in large numbers in the past three elections, have long argued that UK bans on various American agricultural products is unscientific and unfair. In the UK, by contrast, “chlorinated chicken” and “hormone injected beef” have become emotive points of reference for a farmer lobby determined to keep out American competition. The UK government will be desperately hoping that the US does not make concessions on agriculture or other sensitive products the price of avoiding a trade war.

Revenge of the protectionists: Towards a global trade war?

Even if the UK is not targeted in the first wave of US tariffs, the interconnectedness of global trade means that UK firms will feel the second and third-order consequences of tariffs on US trading partners, particularly the EU. Canada and Mexico have pledged to retaliate with 25% tariffs on US exports, and if the EU is targeted by US tariffs, the bloc is certain to respond in kind, which could hit UK firms with supply chains reliant on third countries.

The imposition of tariffs by the US and its trading partners in response therefore has the potential to spark a global trade war, which will hit cross-border supply chains, with risks including sudden increases in the prices of key inputs, the potential imposition of quotas or loss of access to markets. Such disruption is likely to fuel inflation, making the UK government’s ambition to stimulate economic growth even harder. Tariffs and retaliation are also likely to result in trade being redirected, and the UK may become an attractive market for the dumping of cut-price goods as foreign firms seek to cut their losses or find new opportunities.  

Global Britain awakens: How could the UK respond?

As well as fighting back with its own tariffs, Canada is suing the US at the World Trade Organisation (WTO) and bringing a dispute under the US-Mexico-Canada Agreement (USMCA), the free trade agreement (FTA) which Trump himself negotiated during his first term in office and has now breached.

With the WTO rendered toothless by the failure of successive administrations to appoint judges to its appeal court, and with no means of forcing the US to comply with the terms of the USMCA, these legal mechanisms are little more than symbolic gestures of resistance against a US on the offensive.

More meaningful responses are likely to come in the forms of the agreements the EU and China negotiated during the first Trump administration, in which they agreed to buy a certain amount of US exports in exchange for tariff relief. Rather than a return to talks on a full UK-US FTA, the UK government is also likely to pursue such a route should tariffs be imposed on UK firms, which will involve ministers having to pick the winning and losing sectors.

As Jonathan Reynolds has said in recent months, as an island nation dependent on global trade, the UK is uniquely exposed to the direct and indirect impact of tariffs. It is inevitable that others will follow the US’ lead on tariffs, and navigating this new environment will require firms to understand the full extent of their exposure and the political and legal means of protecting their licence to operate.  

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