Trade wars have no winners: Trump's tarrifs mean another headache for Rachel Reeves

It appears likely that Trump will also impose tariffs on the European Union. Given that the UK, like the US, runs a large trade deficit, and following Starmer's recent obsequious performance at the White House, the UK may be spared for now.

Avoiding direct tariffs will only partially limit the economic pain felt in the UK. One of the few things that economists agree on is that trade wars have no winners: the outcome will be higher inflation, weaker growth and higher interest rates across the world.

As a relatively small open economy, the UK is vulnerable to any disruptions in global trade. Tariffs on the EU will be particularly harmful because lower European growth will reduce demand for UK exports from our largest trading partner.

Chancellor Rachel Reeves is already facing an almost impossible balancing act: having promised not to increase taxes on 'working people' and to commit to self-imposed fiscal rules, she was boxed in before Trump's election. Higher than expected wage growth has led to bets on rapid rate cuts by the Bank of England being scaled back.

Starmer's commitment to raise defence spending – only partly funded by the shameful decision to reduce overseas aid – alongside likely forecasts of lower growth and higher interest rates from the Office for Budget Responsibility later this month will leave even less wriggle room.

Once the additional effects of higher global inflation, higher interest rates and lost export demand are added, it looks all but impossible that Reeves will be able to meet her self-imposed fiscal rules. European Union countries are already preparing to loosen their rules on government borrowing, activating an 'escape clause' which allows member states to increase borrowing without breaching EU rules.

In order to avoid cuts to domestic government spending, Reeves should follow suit and revisit her commitments on taxes and debt. Higher income taxes for those on upper middle incomes look increasingly hard to avoid. Further increases in borrowing may also be unavoidable in the short term. Although breaching her commitments will be politically difficult, Reeves now has the excuse that the upending of the post-war international order leaves her with no other options.

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Jo Michell is a professor of economics at the University of the West of England.

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