US president Donald Trump unveiled sweeping tariffs on Wednesday, on what he dubbed "Liberation Day", which included a 10% levy on the UK.
Stock markets fell on Thursday, following Trump's announcement, with the FTSE 100 (^FTSE) falling 1.6% and the pan-European STOXX 600 (^STOXX) sliding 2.3%. In the US, S&P 500 futures (ES=F) fell 3.3%.
The US president imposed a baseline tariff rate of 10% on countries that will go into effect on April 5. On top of that, additional tariffs are to be added for some countries that the administration considers to be the "worst offenders", which will come into place on April 9.
Trump slapped a 10% tariff on US imports of UK goods, and 20% on European Union. The UK has been engaging in talks with the US to attempt to reach a deal that would see it avoid tariffs, but an agreement has not yet been reached.
"Negotiations on an economic prosperity deal, one that strengthens our existing trading relationship – they continue, and we will fight for the best deal for Britain," he said.
"Nonetheless, I do want to be clear I will only strike a deal if it is in the national interest and if it is the right thing to do for the security of working people."
He emphasised that the government's "intention remains to secure a deal" but added "nothing is off the table".
Investors will now be keeping a close eye on developments around these negotiations, to see if the UK secures a deal or if it decides to retaliate.
A key concern around tariffs has been that they could drive already stubborn inflation higher and further slow economic growth. UK inflation has continued to stick above central bank target level of 2%, coming in at 2.8% in year to February, according to data released last week. Meanwhile, economic growth has been sluggish, with data showing a slight dip of 0.1% in January.
Given the situation is still unfolding, there remains uncertainty as to the extent of inflationary impact of these tariffs, though experts have suggested how this could feed through to UK consumers.
How tariffs could hit UK consumers
Jason Hollands, managing director at wealth management firm Evelyn Partners, said: "It seems certain that the US will see marked price rises, but how far these tariffs will raise prices in the UK and Europe depends in part on whether there is any retaliation. PM Starmer is currently giving out a very calm message but if his government feels forced by US intransigence into eventually retaliating then UK consumers would certainly see prices rise in some areas."
He pointed out highlighted that Trump sees value-added tax (VAT) – a domestic tax imposed on all qualifying goods and services in the UK regardless of where they come from – as a tariff, which Hollands said "could continue to cause friction".
"However, even without direct retaliation it seems very probable that all nations will see prices rise as generalised tariffs such as these will restrict global free trade, distort supply lines, and raise the prices of parts and components that cross several borders," Hollands said. "In a similar but less significant way to what occurred during the pandemic, it is likely that UK firms will see less choice and higher prices in goods that that they source from overseas."
Speaking to Yahoo Finance UK Andrzej Szczepaniak, vice-president of European economics at Nomura International, said that a key part of the inflationary impact would come primarily from if and how the UK retaliates.
"On the one hand, if you're raising tariffs on US exports to the UK that means some things are substitutable, in the sense of you can substitute to other countries where we aren't actually imposing those tariffs and so inflationary pressures may not be that bad," said Szczepaniak.
On the other hand, he said if those goods can't be substituted for those from other countries and need to still be bought from the US, then firms importing these goods in the UK need to decide what proportion of the cost is passed onto the consumer.
Szczepaniak explained that the UK consumer seems a bit more resilient, compared with the eurozone, with slightly more elevated wage growth. He added that UK firms have also have stronger pricing power and so would "likely pass those costs on. They probably feel consumers on the whole can bear the brunt of those costs."
When might UK consumers feel the impact?
If companies were to pass these costs on, Szczepaniak said that this could feed through "fairly quickly". That's assuming that the UK did retaliate with its own levies and it did so this month.
"It'll take some time but let's say everything happens in April, that means by the end the April UK companies are basically having to pay more to import US goods and so the question then becomes how quickly UK firms pass those costs onto consumers," said Szczepaniak. "You're talking this quarter, I think in reality."
Meanwhile, Joe Nellis, economic adviser at MHA and professor of global economy at the Cranfield School of Management, said that as a result of this latest escalation in the trade tensions, prices would "most likely rise almost immediately, particularly for goods such as electronics, so inflation is certainly a worry."
"However, we are likely to see some trade diversion," he said. "Goods that would have gone from China to US could instead be diverted to the UK to avoid heavy tariffs — cheap goods could reduce inflation in UK but would impact businesses as they are forced to compete with foreign businesses flooding the market with cheap goods. If this was to happen it would take some time for the effects to kick in, and it will not even necessarily happen."
In terms of retaliation, Nellis said that while the UK was "unlikely to take the US on head-to-head, the UK government cannot sit back and do nothing as the economy is disrupted — there must be some form of reaction in the coming days, although the prime minister has already declared that the country will keep a 'cool head' as they decide how to respond."
