LONDON — A full-blown trade war mounted by U.S. President Donald Trump would deliver a major hit to U.K. economic growth over the next two years, Britain’s fiscal watchdog has warned.
Setting out the U.K.’s latest fiscal statement on Wednesday, Chancellor Rachel Reeves acknowledged that “the global economy has become more uncertain, bringing insecurity at home, as trading patterns become more unstable and borrowing costs rise.”
As a result of Trump’s tariffs, there is “a growing realization that we could be in for a major blow to trade that wasn’t there,” added David Miles, an economist at the U.K.’s Office for Budget Responsibility (OBR) watchdog.
Trump plans to unveil fresh reciprocal tariffs against U.S. trade partners next week. While the U.K. is currently working on a trade agreement to swerve those tariffs, Trump’s global trade measures will still impact Britain’s economy even if it is spared.
“If global trade disputes escalate to include 20 percentage point rises in tariffs between the USA and the rest of the world, this could reduce UK GDP by a peak of 1 per cent,” the OBR forecasts in its latest assessment.
Amping up U.S. tariffs on all goods imports would slash 0.6 off the OBR’s forecast of 1.9 percent GDP growth in 2026.
Forecasting of a more extreme scenario predicts that 1 percent would be shed from Britain’s growth figures if it and other nations like China, the EU and Canada retaliate against Trump’s tariffs, resulting in an all-out global trade war.
“In addition to the direct impact of higher tariffs, there is an increase in trade policy uncertainty which further dampens economic activity in the first few years of the scenarios,” the fiscal watchdog finds. Transitory inflation from the shock of tariffs would also weigh on the economy.
“Both U.S. and other countries’ trade policies have been subject to frequent changes over recent weeks and the future direction for trade policy is highly uncertain,” the OBR said.
“Economic theory and empirical evidence suggest that higher tariffs reduce the trade intensity of output and so reduce productivity and real GDP over the long run.”
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