The Impact of Trumponomics: How tariffs could affect the US, UK, EU, China, and beyond

Some fear the possibility of another Donald Trump presidency, but what could be the economic implications?

Although no votes have been counted yet, the policies of a potential second Trump term have already impacted financial markets.

The cost of borrowing in the US and UK has increased as traders anticipate the price impact of a Trump presidency on the world’s largest economy.

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One of his signature policies, tariffs, could worsen the situation for US consumers, ultimately impacting the world economy, of which the UK is a part.

The specifics of the tariffs Trump would impose on various goods and countries are not yet clear. He has mentioned the possibility of a 10% tax on all goods entering the country.

Goods from China are expected to face a 60% levy.

Why tariffs?

The idea behind tariffs is that by increasing the cost of imports, goods made in the US would become more competitive and affordable. This would theoretically lead to increased consumer demand for US-made products, benefiting US producers and ultimately strengthening the economy.

Trump believes that a thriving US economy, driven by successful US companies, will lead to job creation and overall voter satisfaction.

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Some parts of America have been severely affected by factory closures as companies relocate to countries with lower wages and operating costs.

This trend accelerated after the North American Free Trade Agreement (NAFTA) in the 1990s made exporting to the US more cost-effective, reducing the incentive for domestic production.

Blue-collar workers, who are typically not college-educated, have been significantly impacted by plant closures. These are the voters that Trump is appealing to and who represent his support base.

It’s important to note that Trump is not the only advocate of tariffs, as the Biden administration has also implemented them on various Chinese goods to protect investments made in those industries from cheap, subsidized imports.

What will be the consequences?

It is expected that China will be hit the hardest and experience the most direct consequences.

According to the National Institute of Economic and Social Research (NIESR), this hit will have a “significantly negative” impact, leading to short-term pressures on manufacturing and trade, with a projected 1% annual decrease in China’s gross domestic product (GDP) for two years.

Economists at Capital Economics estimate the cost to be a reduction of about 0.5% to 0.7% in GDP.

The US

The most significant impact will be felt by those living in the US, who will face higher costs.

If imported goods become more expensive, this could lead to an overall increase in inflation rates.

Higher inflation could result in increased borrowing costs through higher interest rates as the US Federal Reserve, known as the Fed, acts to control inflation.

The adverse effects of high interest rates on the economy are well-known, as their purpose is to reduce purchasing power and withdraw money from the economy.

Fears of a US recession have unsettled stock markets and triggered a global stock sell-off just three months ago.

Although stock prices may seem abstract, they have an impact on the value of most people’s pensions.

A recession is not currently predicted, but NIESR suggests that the US economy will experience a slowdown.

According to NIESR, economic growth in the US, as measured by GDP, could decrease by 1.3 to 1.8 percentage points over the next two years, depending on the responses of trading partners who may increase tariffs on US goods.

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Global Impact

As tariffs make exports less attractive, exporters will scale back, resulting in reduced production and a slowdown in the global economy.

According to NIESR, the global economic output could decline by 2% of GDP after five years of Trump’s tenure.

NIESR predicts that the consequences of Trump’s tariffs will be long-lasting, with global GDP remaining lower than it would have been without the tariffs even 15 years later.

Specific countries will be disproportionately affected, with Mexico and Canada – where the US represents approximately 80% and 50% of trade, respectively – facing the most severe consequences.

The EU

The European Union (EU) may not be as negatively impacted compared to other regions and could even benefit from Trump’s policies, according to some experts.

NIESR suggests that the euro area will be less severely affected than the UK over five years, but the immediate impact could be more significant.

On the positive side, if Trump focuses on tax cuts rather than heavy tariffs, it could stimulate demand for European goods, despite the trade barriers. However, if the US economy suffers due to aggressive policies like high tariffs, it could lead to a significant decline in European exports.

Moreover, even if high tariffs are imposed, it is not expected to result in inflation in Europe, as reduced demand and lower prices would offset the increased import costs.

Another economic firm, Capital Economics, is also relatively optimistic about the European economy under a potential second Trump administration.

They describe the short-term macroeconomic consequences as “smaller than many fear.”