
The Trump Tariffs and the UK Economy
Ethan Ilzetzki and Marta Grzana
Thursday, May 17, 2025
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Summary
The April 2025 CfM survey asked the members of its UK panel on the effects of Trump’s Liberation Day tariffs on the UK economy, and the policy response. A majority of panelists believe that the tariffs will have a net deflationary effect on the UK economy, while roughly a sixth of the panel believes the effect to be inflationary. A majority of the panel believes that the most impotant thing the UK can do in response is to enhance trade relations with other countries. A fifth of the panel believes that monetary policy is the main policy tool that the UK should implement in response to the tariffs.
Background
The April 2025 CfM-CEPR survey asked the panel about the impact of the Trump tariffs on the UK economy. Members of the panel were asked to evaluate the net effect of the tariff implications for the UK economy. The panellists were also asked to specify the main policy tool that the UK should focusing on, aside from negotiating lower tariffs, in order to best address the impact of the tariffs.
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Impact of Trump’s tariffs on the UK economy
On April 2nd, 2025, Donald Trump imposed a set of tariffs, believing that the measures are necessary to address trade imbalances and will allow the American economy to prosper. All countries are subject to tariff rates calculated based on the country’s trade surplus with the United States as a percentage of exports to the United States, or 10%, whichever is greater. Thus the United Kingdom faces a tariff of 10% while the European Union is subject to a 20% tariff, and China faces a 145% tariff. The imposition of the tariffs sent shockwaves throughout global markets (Wong & Epstein, 2025).
The Bank of England’s financial policy committee warned that the tariffs are adding pressure on government finances and contributing to a significant rise in risks to inflation levels and global growth. J.P. Morgan finds a 60% likelihood that the global economy will enter recession by the end of the year as a result of the tariffs (Makortoff, 2025). One study suggests that the tariffs will cause up to an estimated 0.5% drop in long-run GDP and 7% drop in exports for the United Kingdom, prompting significant concerns about the UK’s market outlook (Barata da Rocha et al., 2025). These emergent concerns decimated investor confidence, increasing the chances of a further sharp correction in the markets, which, in turn, could make government borrowing more expensive going forward (Carlsson-Szlezak et al., 2025). Higher bond yields could limit the government’s ability to respond to market shocks in the future, and rising unpredictability in global trade might have a negative impact on international cooperation, and by extension, the resilience of the global financial system (Makortoff, 2025).
A recent poll by the Financial Times suggests that the UK economy is expected to grow by 0.8%, down from the 1.2% forecasted in January (Romei & Fleming, 2025). The most direct impact of the tariffs will be felt by British businesses that sell to the United States. Nevertheless, compared to other economies, the implications of the tariffs will not be as large for the UK given that two-thirds of British exports to the US are services, such as banking, insurance, and advertising, which are not subject to tariffs. Some service exports remain connected to goods, demand for which could be weaker as a result of the tariffs (David, 2025). Therefore, the main impact on UK growth will be indirect, and come from weaker demand for British exports in the United States and globally, and elevated trade policy uncertainty. Weaker growth might result in the need for a re-evaluation of UK fiscal policy in the next Autumn Budget (Oxford Economics, 2025). On the other hand, prices of commodities and oil have been decreasing which could signal lower inflation. Likewise, the Bank of England may cut rates four more times by the end of the year (David, 2025). As a result of the tariffs, the UK government may seek to make good on its commitment to improve economic relations with the EU, yet it is also possible that in an attempt to appease Trump and strike a trade deal, the UK may choose further isolation (Kane et al., 2025).
The announcement of the tariffs caused the U.S. dollar, U.S. Treasury bonds, and U.S. equities to be sold off with the dollar falling below a 20-month low, and the S&P 500 sharply dropping by 3.5% intra-day (Financial Times, 2025). The global trade war and the resulting market volatility will also push back the long-awaited rebound in UK equity issuance, with large fintech firms and clothing brands, such as Revolut, Monzo, and Shein, rumoured to have been waiting for the right moment to go public on the London Stock Exchange. In light of the tariff announcements and the resulting market conditions, Shein’s valuation has reportedly fallen. Similarly, Prada has allegedly negotiated an over $200m discount on their acquisition of Versace. An unfriendly environment for acquisitions and market transactions is likely to translate into lower demand for banking services and therefore, lower profits for financial institutions. Moreover, overall decreasing revenues for other industries might prompt banks to build reserves for potential loan defaults (Inman & Makortoff, 2025).
More broadly, the tariffs may threaten the dollar-domination of the global financial system. Trade uncertainty and the possibility of high tariff rates in the long term have made investors less interested in U.S.-based, and dollar-denominated assets. Whereas the dollar and Treasury bonds were traditionally treated as safe haven for investors, in the days following the announcement of the tariffs, the yield on 10-year notes rose by 50 basis points while the dollar index continued to decline. These changes compound existing debt repayment issues facing the U.S. government, which pays more in debt servicing than defence. Additionally, falling confidence in the U.S. dollar as the global reserve currency might erode the Fed’s ability to control the currency and exacerbate concerns about inflation. However, these might not be as big of a threat, given that there does not exist a clear alternative to the dollar as a reserve currency (WSJ, 2025).
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​Question 1: Will US tariffs on net have inflationary or deflationary implications for the UK economy?

Eighteen panellists responded to this question. The majority of the panel (over 50%) believes that the US tariffs will have a net deflationary impact on the UK economy. Over 15% of the panellists believe that the net implication of the tariffs will be inflationary. A minority (slightly over 10%) believes the tariffs will be neither inflationary nor deflationary.
Some panellists attribute the deflationary impact to reduced demand. Michael Wickens (Cardiff Business School & University of York) thinks that: “The reduced demand for UK goods (and services) are bound to have a deflationary impact, though probably only a small impact for the economy as a whole”.
Some panellists believe that the tariffs will have a net deflationary effect because they will reduce global economic growth. Patrick Minford (Cardiff Business School) explains that: “The Trump tariffs if carried out will depress the world economy, driving down world prices via deflation, while boosting US inflation via the tariff effect. For the UK inflation will be reduced”.
On the other hand, Roger Farmer (University of Warwick) believes the tariffs will have neither a deflationary, nor inflationary effect. He claims that: “Tariffs will change relative prices. As Milton Friedman famously said: inflation is always and everywhere a monetary phenomenon”.
Question 2: Aside from negotiating low tariffs, what is the main policy tool that the UK should use to address the tariffs?

Eighteen panellists responded to this question. The overwhelming majority of the panel (over 65%) believe that aside from negotiating low tariffs, enhancing trade relations with other countries is the main policy tool that the UK should use to address the impact of the tariffs. Over a fifth (over 20%) of the panellists believe that monetary policy should be what the UK focuses on in order to address the implications of the tariffs. A minority of just over 10% of the panel believes that the UK should focus on industrial policy to address the impact of the tariffs.
Most panellists believe that the UK should work with other countries to support the rules-based trading system. Thomas Sampson (LSE) believes that: “As a medium-sized, open economy, the UK benefits from a rules-based trading system. It should work with other countries to support the rules-based system and ensure countries other than the US continue to abide by WTO rules”.
Some members of the panel believe that the UK should improve trade relations with the EU. Martin Ellison (University of Oxford) states that: “Assuming US tariffs are to stay, we should promote trade with other countries. A large group of countries immediately to the [east] of the UK is willing to trade with us if we can agree to reduce trade barriers. History tells us it's been done before”.
Some panellists emphasise the importance of industrial policy as a tool that the UK could use to address tariffs. Roger Farmer (University of Warwick) explains that: “The same reasons that generated U.S. concern for loss of strategic industries -- steel and aluminum production come to mind -- apply equally to the UK. It is also worth noting that free trade does not just generate benefits to nation states -- it redistributes income within nation states. UK manual workers in the midlands and the north lost out from competition with China as did American manual workers in the midwest”.
A part of the panel believes that both approaches, enhancing trade relations with other countries, and implementing appropriate industrial policy, are preferred, but they will only have an effect in the medium to long term. This segment of the panel thinks that the main policy to address the tariffs in the short term should be a looser monetary policy response. Michael Wickens (Cardiff Business School & University of York) argues that: “It is always beneficial to enhance trade relations and stimulate industry but the main short-term policy instrument should be a monetary policy response to lower inflation due to lower demand, i.e. a cut in interest rates”. He also adds that: “It should be noted that the Fed is likely to raise interest rates to combat higher US inflation. This might cause the dollar to appreciate which could add to UK import costs”.
Charles Bean (LSE) supports this thought: “The imposition of tariffs by the US ... represents a significant adverse demand shock to the UK, both directly and indirectly through its wider impact on global growth, heightened uncertainty, etc. In the short-run a looser monetary policy represents the most appropriate response, although the Government should also be willing to let the automatic fiscal stabilisers operate implying higher public borrowing temporarily”. He also comments on the remaining policy options: “Enhancing trade relations with other countries is desirable in any case, but along with a suitably created industrial policy, is only likely to yield results over the medium to long run”.​
References
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Barata da Rocha, M., Boivin, N., & Poitiers, N. (2025, April 17). The economic impact of Trump’s tariffs on Europe: an initial assessment. Bruegel. https://www.bruegel.org/analysis/economic-impact-trumps-tariffs-europe-initial-assessment
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Carlsson-Szlezak, P., Swartz, P., & Reeves, M. (2025, April 10). Understanding the Global Macroeconomic Impacts of Trump's Tariffs. Harvard Business Review. https://hbr.org/2025/04/understanding-the-global-macroeconomic-impacts-of-trumps-tariffs
David, D. (2025, April 9). How exposed is the UK to Trump's tariff chaos? BBC. https://www.bbc.co.uk/news/articles/cgm88w7mjw4o
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Financial Times. (2025, April 10). Dollar and Treasuries sell off as Donald Trump's China tariffs spook investors. Financial Times. https://www.ft.com/content/4dff2bf4-fa89-4dc9-bfb5-3eb99be03435
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Inman, P., & Makortoff, K. (2025, April 10). Trump's tariffs may be reduced but their impact will be felt in the UK and beyond. The Guardian. https://www.theguardian.com/us-news/2025/apr/10/donald-trump-tariffs-impact-uk-beyond
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Kane, J., Rutter, J., & Pope, T. (2025, April 10). Trade: tariffs. Institute for Government. https://www.instituteforgovernment.org.uk/explainer/trade-tariffs
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Makortoff, K. (2025, April 9). Trump tariffs threaten global growth and raise risk of 'severe shocks', says Bank of England. The Guardian. https://www.theguardian.com/us-news/2025/apr/09/trump-tariffs-threaten-global-growth-and-raise-risk-of-severe-shocks-says-bank-of-england
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Oxford Economics. (2025, April 7). Trump tariffs will cut UK growth as global demand weakens. Oxford Economics. https://www.oxfordeconomics.com/resource/trump-tariffs-will-cut-uk-growth-as-global-demand-weakens/
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Romei, V., & Fleming, S. (2025, April 8). UK growth forecasts hit by Trump's tariffs - Economy. Financial Times. https://www.ft.com/content/3a2f29ca-13c0-480c-a0d1-9d2a09142fb6
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Wong, T., & Epstein, K. (2025, April 2). Donald Trump's tariffs on China, EU and more, at a glance. BBC. https://www.bbc.co.uk/news/articles/c1jxrnl9xe2o
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WSJ. (2025, April 13). Opinion | Is There a New U.S. Risk Premium? Wall Street Journal. https://www.wsj.com/opinion/is-there-a-new-trump-risk-premium-tariffs-trade-policy-bonds-us-dollar-investing-9bee401d