Donald Trump has been inaugurated as the 47th President of the USA, on arrival he has announced a raft of immediate measures and made a series of threats too.
One of these threats is the imposition of new trade tariffs. He has warned both Canada and Mexico they could face 25% import tariffs to the US – unless they come to an agreement with the US.
There is also the likely threat that the US will impose even heftier tariffs on imports from China – seen as Trump’s real target in his trade war.
But how could this affect us here in the UK? The impact is definitely not direct, but there are a number of ways it could play out and touch the UK’s economic fortunes.
Trump’s tariffs
Trade tariffs increase the cost of importing products into an economy. While this is meant to reduce trade from the export country (or make them pay more for the privilege) in practice it is usually consumers in the importing nation that are affected. This is because importers and manufacturers hike their prices to make up the difference.
Trump has (as of yet) made no threat towards the UK in terms of hiking import tariffs. The UK enjoys relatively benign trading relationship with the US and now it is outside of the EU is free to set its policy in bilateral terms with the world’s largest economy.
But there are number of indirect ways that new tariffs for the US economy could ultimately affect consumers and investors here in the UK.
How consumers could be impacted
UK consumers are most exposed to US tariffs by the fact that many essential goods and commodities are priced in dollar terms.
This includes major everyday products – from oil to coffee, chocolate, grain and a whole myriad of other internationally traded goods.
The imposition of trade tariffs on US imports would have the effect of creating new inflation in the US economy. This in turn would force the US central bank, the Federal Reserve, to keep its base rate higher – or even force it to increase the rate again.
Higher rates in the US would attract more money from abroad thanks to better rates of interest on savings on offer to savers and investors. This in turn would strengthen the dollar as more people choose to base their money in the currency.
This is a bit of a winding route to how UK consumers are affected but essentially a strengthening dollar is bad for the UK because it makes the aforementioned goods more expensive for us to import.
This in turn will increase inflation in the UK economy and likely create more need for higher interest rates too.
Of course, this is relatively speculative. And it is highly dependent on how Trump’s tariff regime actually plays out in practice. Remember at the moment we’re only seeing threats – not action.
How investors could be impacted
Investors will also likely be impacted by a potential new tariff regime in the US.
As mentioned before, with higher interest rates we could see renewed weakness in the global bond market. This has already been happening for some time thanks to global inflationary pressures since 2021.
This would also ultimately impact equity market valuations as more investors choose to stay in interest-bearing cash products rather than investing the money.
However, there are some important caveats to this.
Firstly, this effect is less definitive in equities. Equity markets have seen volatility in the years since the pandemic but have not performed badly on the whole.
Secondly, the impact on equities is uneven. Different regions such as the US, UK or EU will be impacted in a variety of ways that aren’t always easy to predict.
Thirdly, those stocks that are affected by interest rates are seeing price cuts thanks to a temporary external force. This creates opportunities to buy equities at a relative discount.
What is really important here for any long-term investors to remember is that market volatility creates opportunities. But selling assets into such a market can be highly damaging for a portfolio and can crystallise losses at a bad moment.
It is essential to ensure you have a plan in place to cope with such market events, including having access to short-term cash if needed to cover income, or indeed to take advantage of the right opportunities.
Make sure you speak to your financial adviser before making any decisions, to ensure the best outcome possible for your portfolio.