Even before reaching the coast, ‘Hurricane Trump’ is already causing some fear, especially in the commercial aspect. His threat to impose aggressive tariffs left and right has sparked widespread fear. But in the midst of those fears, an unexpected refuge has appeared. After years of calamities and misfortunes – what can be said at this point about the digestion of Brexit, the Liz Truss collapse and the incendiary inflation crisis -, The United Kingdom appears as a potential shelter in the face of the always unpredictable phenomenon that is the newly elected president of the United States, something that has even been noticed lately in the price of the pound sterling. There are two pillars that support this unexpected role of refuge. On the one hand, what is known in the United Kingdom as the ‘boredom dividend’ in politics. On the other hand, more relevantly, the possibly best ‘umbrella’ in the face of the rain of tariffs: an economy focused on the export of services, a matter on which this commercial ‘punishment’ will not foreseeably fall.
Last week, analysts from large banks such as JP Morgan or Crédit Agricole published optimistic forecasts for the pound. They based their forecast on a Bank of England that is more restrained in monetary relaxation than other peers such as the European Central Bank (ECB) and the ‘noise’ that is coming from two leading economies: in USAfor obvious reasons, and in Germany due to a political instability that has blown up the coalition government between social democrats, greens and liberals, complicating the board of national governance in the midst of a pressing economic morass in the European ‘locomotive’.
There is potential demand for the pound to buy gilts (British sovereign bonds), after the collapse of the ruling coalition in Germany and the scenario of early elections pave the way for regulatory changes that could lead to a rebound in the issuance of bundles. “The German elections are weighing on sentiment, Trump is weighing on Treasury bonds,” summarizes Kathleen Brooks, research director at XTB. “The UK is the least ugly sovereign bond in the short term.”
In his analysis supporting the pound as a safe destination right now, Sam Zief, head of global currency strategy at JP Morgan, highlighted that, after the elections that ended almost a decade and a half of conservative power, the arrival to power and with Labor’s forcefulness is causing the United Kingdom to benefit from what is known as the ‘boredom dividend’ or ‘monotony’.
Coined by City economist Simon French, the ‘monotony dividend’ is the value investors place on a vaguely competent, even boring, prime minister leading a stable government with economic policies that add up, explains the business editor. Evening Standard’s Jonathan Prynn. Although Keir Starmer’s cabinet has barely been able to take the reins and present its first fiscal roadmap, more ambitious in spending but without great fanfare, after years of scandals tories (You just have to go back to the headlines that gave Theresa May, Boris Johnson either Liz Truss), the perspective of a ‘normal’ government provides added value. As pointed out in a relevant column of the Financial Times Soumaya Keynes, columnist for the financial media, Labor should have chosen as its campaign slogan ‘Make Britain Boring Again’ (‘make the UK boring again’), in a shrewd allusion to the ‘Make America Great Again’ of Trump.
But, beyond this political benefit of the doubt, the positive aspect on which the analyzes focus is the commercial one. The US and the UK have always had a “special” relationshipas they themselves always say, both in political and commercial terms. Upon coming to power for the first time, Trump encouraged Brexit and promised an ambitious free trade agreement with the United Kingdom that faltered along the way. Substantial differences with the successive and shaky conservative cabinets left an agreement in the air that the Biden Administration later tried to modulate in its own way and that also did not come to fruition due to disagreements, especially with the famous Protocol for Northern Ireland. Now, Trump’s return generates suspicions, but also hope. Between these two sensations, a compelling argument seems to prevail: with Trump promising tariffs to friends and enemies alike, the fact that the United Kingdom is the second largest exporter of services in the world suggests to some that the economy is less vulnerable to restrictions commercials.
The United Kingdom will not be a target of Trump
The most fearful warn that sales of automobiles, Rolls-Royce aircraft engines, whiskey and medicines They could be at risk with the universal tariffs of between 10% and 20% that Trump intends. One only has to remember the 25% retaliatory tariff on single malt Scotch whiskey that Trump imposed in 2019. Some studies show worrying figures: the United Kingdom could face a hit of 22 billion on its exports if Trump imposes a generalized tariff on the 20% on all US imports. British exports could fall by more than 2.6%, warn economists at the Center for Inclusive Trade Policy (CITP) at the University of Sussex.
On the opposite side, other voices point out that The United Kingdom will not be a target of Trump in its ‘trade war’ and there is even some optimism that Washington will rescue the claim for a free trade agreement. The head of the British-American company, Duncan Edwards, is one of those who does not believe that Trump’s policy has been developed with the aim of attacking British exporters to the US: “His real concern is the countries that have a trade surplus with the US and yet they apply higher tariffs to imports than the US applies to imports from them. In the case of trade in goods from the United Kingdom, trade is more or less balanced. The United Kingdom is not. the goal in this case.”
Capital Economics speaks along similar lines. The well-known British analysis house works with the hypothesis that, by mid-2025, Trump will have imposed a 10% tariff on US imports from the United Kingdom. Even in that scenario, his calculation is that this would lead to a “minor and insignificant” drop in GDP of the United Kingdom than others believe. “This is mainly because the UK exports more services to the US (which are likely to be exempt) than goods, and furthermore, a potential fall in the pound would likely dampen the rise in UK goods prices for buyers. Americans,” certifies its chief economist for the country, Paul Dales, in a report for clients.
Just over 20% of all British exports are sold to the US. British exports of goods to the US represent around 7% of total British exports and British exports of services to the US account for around 15% of the country’s total exports and 68% of all those made to the US. In 2023, the UK will record a goods trade surplus with the US of £4bn (0.1% of UK GDP) and a much larger services trade surplus of £68bn (2.5% of GDP). . Overall, the United Kingdom recorded a trade surplus of 72 billion pounds (2.7% of GDP) with the United States.
In reports prior to the US elections, Capital Economics strategists were already advancing a minor impact of this new tariff policy, always assuming that the direct effect on the British economy would depend on the price elasticity of demand – an economic concept that measures the sensitivity of the quantity demanded of a good or service to changes in its price – of UK exports, of any change in the exchange rate, of whether London retaliates by imposing a 10% tariff on all imports from the US and whether the new US Administration agrees to some type of exception for the United Kingdom.
The US tariff would increase the cost of UK goods in the US by 10%, thus reducing US demand for UK goods. The magnitude of the fall in the latter would depend on the price elasticity of demand for UK goods exports. According to the Bank of England analysis, elasticity estimates range from 0.1 to 0.7. Because the U.S. tariff would be imposed on exports of goods from all countries, U.S. importers would not be able to buy cheaper goods from other countries instead. “As a result, we assume a relatively low price elasticity of 0.1. This would mean that the 10% tariff reduces UK exports of goods to the US by approximately 1% (600 million pounds or 0.02% of GDP) and both the UK’s goods trade surplus with the US and the US’s deficit with the UK would be reduced by 600 million pounds,” says Ashley Webb from the analysis firm.
He impact would be less if the US dollar appreciated against the pound to reflect the higher prices facing American consumers and the prospect of higher interest rates, Webb adds. This would limit the rise in prices of exports of British goods in the US and would partly offset the fall in US demand for exports of British goods. “If the pound fell by around 5% against the dollar and we assume the same elasticity of demand, exports of goods from the United Kingdom to the United States would fall by 0.5% less (300 million pounds or 0.01% of GDP),” adds Webb.
He trade surplus UK total including could increase even more so if the US tariff included some exception for the country, Capital Economics considers. If there were an exception for the UK, the dollar could still appreciate due to the prospect of higher interest rates in the US. The 5% fall of the pound against the dollar, they point out, would increase the UK’s trade surplus in goods with the US by 1.4 billion pounds (0.05% of GDP), the UK’s trade surplus in services with the US by 1.8 billion pounds (0.07% of GDP) and the total trade surplus of the United Kingdom with the US at 3.2 billion pounds (0.12% of GDP).
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