Bailey: UK could escape the worst of Trump tariffs

The UK could escape the worst impact of Donald Trump’s threatened tariffs due to the dominance of its trade in services rather than goods exports to the United States, the governor of the Bank of England has said.
Economists have warned of higher consumer prices for American households from Trump’s import levies and a potential global inflationary spiral if other countries react in kind with their own tariffs.
Andrew Bailey, who has called himself a “dyed-in-the-wool free trader”, said the inflationary impact of proposed tariffs — up to 60 per cent on Chinese exports to the United States and up to 20 per cent for the rest of the world — was “not straightforward”.
Bailey said that the ultimate inflationary impact of tariffs would “depend on how other countries react and how exchange rates react. The [inflationary] effect is not straightforward to predict,” he told the Financial Times.
His comments come after Swati Dhingra, a trade economist and external member of the Bank’s monetary policy committee, said last week that the “textbook” response to global tariffs was disinflationary, as producers often slash prices to maintain market share in large economies like the US. This has the effect of lowering global prices and exerting a downward force on consumer price inflation, she said.
Bailey said the UK’s dominance in services rather than goods could protect the economy from the worst of Trump’s tariffs, which are targeted at goods entering the US.
“The UK is an open economy, but it is also true that more of our trade is in services rather than goods — tariffs don’t work in the same way on services,” Bailey said.
The UK is not as economically exposed as countries such as Germany, Italy, Ireland and Belgium to Trump’s threats as it has a smaller trade deficit with the US than they do.
The president-elect has signalled his intention to hit Canada and Mexico, the US’s closest trading partners, with tariffs of 25 per cent on all goods, plus an additional 10 per cent on China.
Services make up a majority of the UK’s exports to the US at 54 per cent of its total exports and the selling of services such as finance, insurance and education from Britain to America has tripled since the Brexit vote in 2016, according to the Resolution Foundation.
Unlike goods, which can be hit with customs levies, services are subject to non-tariff barriers, such as diverging regulations and standards across jurisdictions.
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“We have far more of our trade in services so the impact of [tariffs] will be different in that sense,” Bailey said. The UK government has said that it would not retaliate with tit-for-tat measures if the economy is subject to import levies in the US, which could range from 10 to 20 per cent.
Other central bankers have also indicated that the inflationary impact of tariffs may not be as significant outside the US. Christine Lagarde, president of the European Central Bank, has said there could be a small price impact, while France’s central bank governor said the inflation consequences would be “relatively limited” for the eurozone.
Bailey’s comments come after a small rise in the UK’s inflation rate to above 2 per cent last month. The governor said he still expected price growth to settle at the Bank’s target, but the biggest “uncertainty” was how businesses would respond to the government’s raising of national insurance contributions on employers from April.
“How companies balance the mixture of prices, wages, the level of employment, and what is taken on their margins, is an important measure for us,” he said. “You have to give companies a chance to sort out what their strategy is going to be. As we go into spring, we will have a better sense of where it is going.”
Financial markets are expecting about three rate cuts from the Bank next year, lowering the base rate from 4.75 per cent to 4 per cent.
The governor repeated that monetary loosening would be carried out at a “gradual” pace after two rate cuts this year and expectations for the base rate remained unchanged at the MPC’s next meeting on December 19.
“We’ve been looking at a number of potential paths ahead. Some are better than others,” Bailey said. “The disinflation process is well embedded [but] there is still a distance to travel.”