In Wednesday’s Budget, Reeves is attempting to pull off the difficult trick of raising taxes while boosting investment spending to avoid crushing growth. However, Kaya’s estimates show a tariff war would cut the British economy off at the knees.
Without a trade war, NIESR predicts the British economy will grow by 1.2pc next year.
If Trump wins the election and immediately imposes across-the-board tariffs, with matching retaliation from Britain and others, growth would be just 0.4pc – meaning two-thirds of Britain’s potential would have been wiped out.
At the same time, a trade war would see inflation more than double – shooting back up to around 4.5pc – effectively re-starting the cost of living crisis just as families and businesses thought prices were starting to get back under control.
“Slower growth in the US, in China and in the global economy, as well as much slower global trade growth – these are the direct impacts,” says Kaya.
“There is an indirect impact coming from interest rates because of higher inflation. Obviously the Bank of England would respond to high inflation by keeping interest rates even higher, which will dampen investment growth.”
Even if Trump opts for more selective tariffs, rather than across-the-board levies, Britain could still be vulnerable.
“While the UK would theoretically be more insulated from more selective tariffs given its economy poses less of a competitive threat to US manufacturing relative to the EU, [the Trump] campaign’s row with the Government over Labour activists campaigning for Kamala Harris could encourage Trump to keep the UK in its sights when drawing up a list of places with unfair trade practices or where extraordinary threats are coming from,” says Allie Renison, a former government adviser and now a trade expert at SEC Newgate.
Britain would also struggle to respond.
“Unlike the EU who have expanded their trade defence arsenal in recent years, the UK doesn’t have a huge range of unilateral ‘economic security’ mechanisms it can draw on to respond,” says Renison. Even if we did, “the impact of stand-alone retaliatory tariffs on the American economy would be less of a deterrent than the EU doing it”, she adds.
If Trump pressed ahead with across-the-board tariffs, which is technically more difficult, she suspects the UK might want to club together with others like the EU to fight back.
That is just one of the geopolitical shifts a tariff war could prompt. A US trade war could also push Britain into the arms of China.
Economists at French institute CEPII predict that US exports to almost every other nation would collapse over the course of this decade if Trump launches a tariff blitz – by more than one-fifth to the UK and almost 30pc to Germany. At the same time, the world will import from China, giving America’s great rival even more sway over the rest of the world economy.
The implications may be more than just economic.
A trade war on the whole world could prompt questions as to “whether trade policy objectives may supplant or undermine key US alliances with Australia and the UK (AUKUS), India, Japan and Australia (the Quad), Nato, and a coalition among the US, Japan and South Korea”, analysts at investment bank Morgan Stanley have noted.
The British Government could face a diminished economy and a wholesale shake-up of international relations, just as it launches an expensive set of tax rises at home. Unfortunately, the Chancellor can’t breathe a sigh of relief once she gets the Budget out of the way.