Expansion of US tariff policy

President Trump was an advocate of tariffs in his first presidency and this remains his view. He promised further tariffs in his second presidential campaign and has begun to deliver these.

New 25% tariffs were ordered on goods entering the US from Canada and Mexico, although these were later delayed after both governments made commitments on border management.

Tariffs of 10% were also ordered against goods from China and China has responded with similar tariffs on a number of US products.

China has also begun investigations of some US companies and banned exports of certain strategic materials to the US.

The President has ended tax exemptions for small scale personal imports from Canada, China and Mexico (the so-called “de minimis” provision, which has assisted online businesses like Shein in the US market).

He has also threatened to impose tariffs on the EU and the UK, although, based on recent comments, the UK may be seen as a lower priority. 

Direct tariff impact

The President’s policy on tariffs has attracted a great deal of media coverage and has already had an impact on financial markets around the world.

The direct impact on the UK may be quite limited, however. The UK’s single largest trading partner for goods is the EU, not the US. This explains Mr Starmer’s current diplomatic engagement with the EU. 

Relations with the EU are especially important in food and drink. The EU accounts for 71% of UK food and drink imports and 55% of UK exports. 

The US, by contrast, makes up about 2% of UK food and drink imports (mostly beverages, fresh produce, meat and fish) and 10% of UK exports (mostly beverages).

Tariffs are, ultimately, paid by consumers not producers, making them inflationary. If the US were to impose tariffs on UK goods, then the cost of these goods for US consumers would likely rise.

A tariff of 10% or even 25% on a bottle of whisky would add considerably to the retail price in US stores, with the US government benefiting from the extra revenue.

US consumers may be expected to buy less as prices rise and there may be some volume losses for UK exporters, especially makers of spirits (a major UK export).

Retaliatory tariffs levied by the UK government would have similar effects, but the UK is not reliant on the US for food and drink so the direct impact might be limited. Many US-sourced goods could be replaced from other countries, given time.

A greater threat may occur if the US were to levy tariffs or take other measures against UK services. The UK is a service-led economy and exports of services exceed exports of goods.

The US accounts for 20% of UK service imports and 27% of UK service exports, making this a much more important trade than the trade in goods. (The EU is still the major partner for services, however).

Note: The UK does not currently have a full free trade agreement with the US. Talks have been stalled for some years, partly due to US concerns over Brexit and the Good Friday Agreement. There are, however, agreements between the US and UK on specific items including wines and spirits. There is no current free trade agreement between the US and the EU.

Indirect tariff impacts

Direct impacts of US trade policy on the UK food and drink system may be limited, but indirect impacts could be more dramatic. Much depends on how far and how fast any tariff conflict escalates, but these might include:

• Changing trade flows - If tariffs reduce demand for goods in a large market (e.g. US soybeans sent to China), then exporters will look for alternative markets elsewhere. This might mean new international opportunities to buy and sell for UK businesses but also sudden changes in the competitive environment.
• Effect on global economy - The global economy is still struggling to recover from the impacts of Covid and the war in Ukraine. Any trade conflict would likely have a chilling effect, making economic recovery more difficult and damping-down prosperity across many countries.
• Multinational businesses - Many UK food operations are part of wider international organisations and parent companies may be impacted by international trade disputes, even if the UK is not.
  
• Currency changes – Changes in tariffs and trade tend to be associated with currency changes. Usually, the currency of the importing country (the tariff-setter) tends to appreciate. With the US Dollar already strong versus the British Pound, this could be an issue for many UK businesses, especially as many commodities are bought and sold in Dollars. 
  
• Higher borrowing costs - Tariffs will likely mean higher prices for US consumers, causing inflation to persist. This in turn would mean higher base interest rates in the US and around the world (since central banks tend to move in concert when setting rates).

For the UK, this could be the most damaging outcome, since it would drive up borrowing costs for households, businesses and – most important – the government.

What next?

This situation is developing very quickly and UK food and drink businesses should remain alert. For most, however, the EU remains the major concern and, hopefully, the UK government will have success in revising this trading relationship.

Download the new Viewpoint report: A shaky start to 2025, what’s next? to understand:

• Possible implications of a second Trump presidency
  
• How the UK economy and government finances are likely to remain under significant pressure in 2025
  
• An up-to-date analysis of Christmas trading
  
• That while consumer sentiment remains relatively muted, there are opportunities for growth
  
• How the stable UK political landscape provides the government with an opportunity to deliver against its strategic vision