Trump’s tariffs: what they mean for business

Despite being well trailed, the scale and speed of the proposed tariffs took many observers and financial market participants by surprise. The announcement was notable for being the first time emergency powers have been used by a US president to impose tariffs - and with almost immediate effect - in contrast to more conventional processes involving US trade authorities.

Key points to note are as follows:

• China in the crosshairs: as under the first Trump Administration, China has remained focus of the US tariff escalation, with a 10% tariff on all Chinese imports becoming effective on 4 February.
• Mexico and Canada reprieved: the US president also announced tariffs of 25% on all imports from Mexico and 25% on imports from Canada, with the exception of energy products, which would face a 10% tariff. On 3 February, President Trump agreed to delay their imposition for 30 days following talks with his Mexican and Canadian counterparts over border security measures.
• Expanded scope: unlike the tariffs imposed on China under the first Trump Administration, the new tariffs do not include any exclusions or product exemptions, thereby extending them to major imports like smartphones, laptop computers, toys and game consoles. President Trump also scrapped the $800 “de minimis exemption” applying to low value shipments (which will hit Chinese e-commerce platforms selling into the US).
• US tariff rates double: with around 45% of imports from China previously having no tariffs, the imposition of an additional 10% tariff on all Chinese imports implies a doubling of the average tariff rate on Chinese goods (which account for around 13% of US imports). Analysts estimate that this would push up the US’s global average tariff rate from 2.4% to around 5%.
• And could double again: if tariffs against Mexico and Canada are eventually implemented, this would in turn expose a further 26% of US imports (11% from Canada, 15% from Mexico) to an overall increase in tariffs of around 20% (taking account of the lower rate for energy imports). Analysts calculate that this would push up the US’s average weighted tariff rate to 10.5%—an increase the likes of which hasn’t been seen since the 1930s.
• China reacts: while the proposed Canadian and Mexican tariffs were more aggressive than many analysts had expected, the tariffs on Chinese imports are so far more moderate than many of the proposals floated by President Trump. Similarly, the response from China has been restrained so far, including tariffs on some US energy and industrial exports, export bans on critical minerals and measures targeting specific US companies. (For example, Goldman Sachs estimates China’s actions equate to an additional 12% tariffs on $14bn of US goods, compared with the 10% additional tariffs on $525bn on Chinese shipments to the US).
• Escalation risk: the executive orders include a clause allowing the President to increase tariffs if the targeted countries retaliate. Analysts at Barclays Capital note that the intensification of trade competition between the US and China in recent years, against a backdrop of rising geopolitical tensions, suggests there is a small prospect of a “Phase Two” US-China deal. And even if an agreement were reached, it is likely that existing tariffs would remain in place.

The suspension of tariffs against Canada and Mexico was conditional on improvements in tackling illegal immigration at the US border and disrupting trade in fentanyl, although no specific goals were given, suggesting uncertainty over trade policy will persist. Similarly, reducing trade deficits with China to secure the removal of the tariffs is not something that can be achieved quickly. Further escalation in trade tensions is a clear risk.

• Tariffs mañana? The rationale for the tariffs against Canada and Mexico was primarily political, suggesting they may remain suspended so long as the White House can point to commitments from Mexico and Canada that can be sold as a political win. With Canada and Mexico also promising to retaliate in kind, the most plausible scenario still seems to be that the new March 4th deadline is extended to a future date, prolonging uncertainty. The threat could even be maintained until the review of the USMCA trade deal is completed in mid-2026. However, there remains a risk that President Trump ultimately follows through and imposes the tariffs.
• Not done with China: analysts widely assume that the tariffs on Chinese imports will remain in place. Additional tariff increases are also possible in the months ahead, most likely focussed on non-consumer products (to minimise a direct impact on US households). For example, Goldman Sachs predicts further tariff increases on a range of intermediate goods equivalent to another 10% point rise in the average US tariff rate for China. More extreme scenarios are also possible in view of President Trump’s previous calls for a 60% tariff against China. However, achieving this would imply extending these measures to a wide range of consumer goods.
• Targeting products: tariff increases on specific products may be forthcoming, motived by strategic economic or security aims. These could include a number of “critical imports” recently cited by President Trump such as semiconductors, pharmaceuticals, industrial metals, and oil & gas. Supplies of “critical minerals” may also be targeted (to force US supply chains to diversify away from China). Trade in automotive products will also remain high on the US agenda, particularly how to treat rising imports of products made by Chinese firms based in Mexico.
• Action against the EU: additional tariffs on automotive products from the EU are a significant risk. This would affect around 15% of the EU’s exports to the US. Broader tariffs on EU products could also be threatened or implemented, given President Trump’s dissatisfaction with EU policies on value-added taxes, the taxation of US companies (particularly tech companies) and the level of defence spending by some of the US’s European NATO allies. If tariffs were also extended to “critical imports” such as pharmaceuticals, electronics and oil, that could expose around 40% of total EU exports to the US to additional charges.
• EU retaliation: in response to the threat of US tariffs, the EU could consider reimposing tariffs on US imports that were suspended under the EU-US deal with the first Trump Administration. Without action, the tariffs are already scheduled to enter force in March 2025 (targeting products such as orange juice, peanut butter, Harley Davidsons and bourbon). The EU might extend tariffs to a range of intermediate goods to mirror any action by the US. Or it could seek to use new trade remedies such as its “anti-coercion instrument” to target US services exports (notably technology), or introduce new preferential rules for public procurement.
• A global tariff? President Trump has previously floated the idea of a 10% “global tariff” that would apply to all countries across a broad range of products. This would potentially be more effective as a means of generating revenues than actions targeted against specific countries or products, which seem primarily motivated by political considerations (like border security) or promoting domestic production or long-term security interests. The actions taken to date suggest revenue motivations are currently less important in driving US trade policy than these other considerations, suggesting a global tariff is not the most likely scenario.

The duration and perceived permanence of tariffs will influence reactions in financial markets and the corporate sector, and hence the overall economic impact. If tariffs turn out to be limited in scope or temporary in nature, the impact would be less severe. Analysts’ current forecasts assume a fairly modest impact on US growth and inflation.

• Higher inflation, weaker growth: the tariffs are expected to increase US inflation and negatively impact GDP growth. A rule of thumb is that every 1% point increase in the average tariff rate would raise US core inflation by around 0.1% points. As things stand, the tariffs are unlikely to do more than prevent US inflation from falling back significantly in the coming months, with a slight, negative impact on GDP growth. If the tariffs against Canada and Mexico come in, inflation could rise nearer to 3% by end-2025, with the hit to US GDP growth more significant, at around 0.4% points.
• A more cautious Fed: reflecting the direct impact of higher tariffs on inflation, US financial markets have priced in a more cautious path for interest rate cuts in the near-term. In the medium-term, however, higher tariffs could drag on growth and prove deflationary, meaning the long-term outlook for inflation is more uncertain.
• Dollar appreciation: the US dollar is expected to strengthen due to the tariffs. First, by raising the cost of imported goods relative to domestically-produced goods, tariffs have a direct effect by reducing the demand for imports and foreign currency. The prospect of retaliatory tariffs work in the opposite direction, however, so the net impact via this channel is uncertain. Second, amid wider market volatility, the US dollar is likely to benefit from its “safe haven” status. Third, interest rate differentials between the US and other key markets are likely to favour dollar-based assets.

The UK has not (so far) been directly affected by higher tariffs. However, trade tensions between the US and key trading partners could lead to a slowdown in global trade. This could have a ripple effect on the UK economy, by reducing demand for UK exports, particularly if US-EU tensions increase. While tariffs are likely to weigh on UK GDP growth, the impact on inflation is less clear, as prices could face both upward and downward pressure depending on how other countries trade policies evolve, the potential for trade diversion and broader movements in interest rates and exchange rates.

• Supply chain disruption: the tariffs could disrupt global supply chains, particularly for industries that rely on components and raw materials from affected countries. UK
  businesses that are part of these supply chains may face increased costs and delays, affecting their competitiveness and profitability. Another potential channel of impact is greater competition from Chinese producers if less US demand for Chinese goods generates excess supply and additional competition in European markets.
• Inflationary pressure: on the one hand, tariffs could lead to higher prices for goods, both directly if any retaliation against the US raises import costs and indirectly through supply chain disruptions. On the other hand, greater competition from Chinese producers could put downward pressure on prices for some goods. Analysts’ forecasts imply the net effect would probably be a fairly modest inflationary impulse to the UK of just a few tenths of a percentage point.
• Economic uncertainty: economic uncertainty could affect business investment decisions in the UK, as companies may be hesitant to commit to new projects or expansion plans amid an unpredictable global trade environment.
• European malaise: hints from President Trump that Europe might be next in line for tariffs could weigh on already weak growth prospects. The EU in particular appears likely to be a target for President Trump, given its relative importance as a US trading partner (accounting for around 15% of US imports vs around 2% for the UK), and the fact that the EU enjoys a large surplus in goods trade with the US. Analysts estimate that measures to target the EU’s automotive sector and “critical imports” could shave around 0.5% points off EU growth, while a 10% tariff rate on all US imports from the EU could knock around 1% point off EU growth (assuming retaliation).
• UK concerns: given that UK-US goods trade is broadly balanced (statistical quirks mean both countries report a small surplus), the UK is not expected to be a target of US tariff escalation. However, assuming the US did seek to raise tariffs against the UK, some sectors would likely be more exposed than others. For example, analysis from Oxford Economics shows that exports of pharmaceuticals, mechanical power generators and automotive products display both above-average reliance on the US export market and are also large (accounting for more than 5% of UK goods exports).
• A limited macro hit: outside of directly affected sectors, the macroeconomic implications will be limited by the fact that 70% of total exports to the US are services exports, which should be largely unaffected by tariffs. Oxford Economics previously estimated a scenario in which the US imposes a global 10% tariff, finding that even these extreme measures would shave just 0.2% points off UK growth at its peak.