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The UK's strong services export base and deficit in the trade of goods with the U.S. means Donald Trump's trade agenda will have a limited impact.
Trump wants to impose a blanket 10% tariff on all imports, which is expected to have a negative impact on the economies of those countries that export to the U.S., most notably China and the Eurozone.
However, it is services that dominate the UK's trade relationship with the U.S. as the UK ran a trade surplus with the U.S. in services, worth 2.5% of UK GDP or £69BN, in 2023.
Services are typically exempt from trade tariffs. "Trump’s desire to boost America’s industrial rust belt means he’s focused on goods. As a result, it seems likely that services will be exempt from US tariffs," says Paul Dales, Chief UK Economist at Capital Economics.
"How exposed is the UK economy?" he asks. "It's not that exposed."
In the four quarters leading to the end of Q2 2024, UK exports of services to the U.S. amounted to £129.2BN, representing 68.7% of total UK exports to the country.
This marks a 2.7% increase compared to the same period in 2023.
This trend is consistent with data from 2023, where services again took the lead in both UK exports (67.6%) and imports (49.8%) with the U.S. This underscores the significant role of services in the overall trade dynamics between the two countries.
"The UK's services exports to the U.S. are twice the size of its goods exports to the US and will probably be exempt from higher tariffs," explains Dales.
If anything, a strengthening U.S. economy under Trump would bolster the UK if it raises the value of services exports.
Capital Economics points out that the recent weakening in the pound against the dollar would also reduce the prices of the UK’s services exports in the US market.
In addition, the UK imports more manufactured goods from the U.S. than it exports, making it unique as being one of the few nations that runs a goods trade deficit with the U.S.
Trump's trade hawks will take this into account, pushing the UK down the list of tariff priorities.
"We expect the new administration to take a targeted approach to tariffs and the UK will be well down the list of Trump's priorities. The US has a goods trade surplus with the UK," says Andrew Goodwin, Chief UK Economist at Oxford Economics.
Above: This image from Citibank shows the composition of trade between the U.S. and European countries. The UK's exports of services are notable.
The UK's position contrasts with the Eurozone, where exports of manufactured goods to the U.S. exceed the import of goods from the U.S.
EU goods exports were worth 3.1% of EU GDP in 2023, with a trade surplus worth 1.1% of GDP.
Germany and Italy would be more exposed than the EU average; France and Spain less.
"A second key proposal is a 60% additional tariff on imports from China, which could hit Europe via the shock to the Chinese economy, but also divert Chinese exports from the US to the EU," says Christian Schulz, an economist at Citibank.
"In the medium-term, Trump’s return may accelerate the fragmentation of the global economy, which is likely to hurt the globalised EU economy disproportionately," adds Schulz.
"We think the UK is less vulnerable than other economies (e.g. Eurozone) to tariff risks under Trump’s presidency. That may leave the market positioned short EUR/GBP," says Daria Parkhomenko, a market analyst at Royal Bank of Canada.
An original version of this article can be viewed at Pound Sterling Live