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?