US-China trade war has only minor implications for the UK - Capital Economics
UK Economics

US-China trade war has only minor implications for the UK

UK Economics Update
Written by Ruth Gregory

The impact of the trade war between the US and China on the UK economy has been small, even allowing for the indirect effects on investment and the financial markets. Admittedly, trade tensions will probably intensify further from here. Even so, the impact would probably be tiny compared to a no deal Brexit. And any potential drag should be offset by the boost to investment if there were a Brexit deal.

  • The impact of the trade war between the US and China on the UK economy has been small, even allowing for the indirect effects on investment and the financial markets. Admittedly, trade tensions will probably intensify further from here. Even so, the impact would probably be tiny compared to a no deal Brexit. And any potential drag should be offset by the boost to investment if there were a Brexit deal.
  • We had expected US-China trade tensions to reignite, albeit not quite this quickly. By mid-December, Chinese imports are set to be subject to an average tariff of 22%. (See our Global Economics service for more.) Since tensions are likely to build further, in this Update we revisit the effect the US-China trade war has already had on the UK economy and how it might do so over the next few years.
  • So far, the direct effect of the trade war on the UK has been small. UK steel and aluminium exports to the US were affected by the imposition of tariffs (of 25% and 10% respectively) in mid-2018. But these exports are worth just £1.2bn, or less than 0.1% of UK GDP, so this has had little impact on the UK economy. And Chart 1 shows that of the 8% and 17% of UK value added of final/intermediate goods that are sent to China and the US respectively (the blue bars), hardly any are then exported to the US or China (the black bars). (See Chart 1).
  • The trade tensions may have even been good for the UK for a few reasons. First, while the US and China have reduced the amount of exports they buy from each other, there has been a sharp pick-up in UK goods export growth to both countries – perhaps as some demand has been redirected to the UK. (See Chart 2.) Second, the trade war has been a key factor in holding down commodity prices, which is beneficial for a net oil importing country such as the UK. Finally, the UK could benefit if the reports that China is discouraging imports of education and tourism services from the US are true. After all, the UK is the second most-popular destination for Chinese students after the US, so it’s the obvious alternative.
  • That said, given that the direction of travel is towards more not less confrontation over trade, the risks posed to the UK by the trade war are rising. We estimate that the trade war has played only a small part in the global slowdown. (See Global Economics Update “The trade war is only likely to intensify from here”, 6th August.) But if the effects are bigger, then this would have knock-on effects on the UK. What’s more, there is a danger that a further escalation hits global financial markets and that lower equity prices and tighter financial conditions are imported to the UK.
  • Finally, a further escalation could affect the UK directly if President Trump were to press ahead with his threat of a rise in tariffs from 2.5% to 25% on vehicle imports from the EU. Until the UK is no longer in the EU, that would have a bigger impact on UK exporters given the £9bn or so annual car exports that go the US. Academic research suggests that each 10% rise in the price of cars reduces the exports of cars to the US from the UK by just over 15%. So a 25% tariff on UK cars would reduce annual UK GDP by 0.15%. On its own, this is small, but higher auto tariffs could be just an initial step in escalating tensions.
  • So while the trade war has had limited effects on the UK economy so far, the risks are rising. However, the far bigger immediate threat is, of course, a rise in tariffs on all UK exports to the EU in the case of a no deal Brexit on 31st October 2019 or 31st January 2020.

Chart 1: UK Final & Intermediate Goods Exported to US & China ( 2015 )

Chart 2: UK’s Export Values by Destination

(3m ave. % y/y)

Sources: OECD, Capital Economics

Sources: Refinitiv, ONS


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com