Trump’s trade war could pose ‘substantial’ threat to UK economy, says Bank

A full-blown trade war would pose a “substantial” threat to the British economy, Bank of England governor Andrew Bailey has warned.

Donald Trump struck Canadian and Mexican imports with new duties of 25% at midnight on Tuesday, and also levied extra 20% tariffs against Chinese goods, triggering retaliatory moves. He also threatened to place sweeping 25% tariffs on EU imports last week.

Speaking to MPs on the Treasury select committee, Bailey said that a US-led attack on trade with the UK and other countries posed a big risk to the economy.

US retailers have warned that prices were likely to rise almost immediately in response to the new levies.

“The risks to the UK economy and the world economy are substantial,” Bailey said. He agreed with MPs that this could mean, in practical terms, that people in Britain would have less money in their pockets.

“It really is a big episode,” in terms of economic history, he added. “We have to take it very seriously. We have to address it.”

During Keir Starmer’s visit to Washington last week, Trump indicated a trade deal with the UK “where the tariffs wouldn’t be necessary”, was increasingly likely.

However, it is unclear what impact tit-for-tat tariffs between the world’s biggest economies could have on UK inflation.

Countries could divert goods to the UK if fresh US tariffs made importing their wares uncompetitive there. This could make some goods on the global market cheaper, by stripping out US demand.

Still, a harsh and fast-paced bargaining approach from the Trump administration made it hard to determine what the wider economic fallout would be, rate-setters at the Bank told MPs.

Soon after the new trade barriers came into force, a senior US official suggested that the tariffs could be watered down.

Trump was considering giving “relief” to “sections of the market”, Howard Lutnick, the US commerce secretary, said on Wednesday. This could include cars, he suggested.

Ultimately, the biggest impact of a trade war could be on productivity, a measure of economic efficiency, according to Bank rate-setters. For example, increases in productivity through the introduction of new technologies allow the economy to expand without boosting inflation.

A breakdown in transatlantic “information sharing” could have a major impact on productivity growth, said Huw Pill, chief economist at the Bank of England.

“All these disruptions are disruptions to information sharing and capital across the world, those types of things are what are going to undermine productivity growth,” Pill added.

Economists at the Bank are closely monitoring a range of data to try to decipher the likely impact of trade disruption to the UK. This includes import prices, MPs heard.

Separate written testimony from interest rate-setters at the Bank included expectations that upcoming national insurance rises for employers will raise their costs by nearly 2%. The increase “might cause a shake-out of the labour market”, Megan Greene, an external member of the rate-setting committee said.