Donald Trump’s plans to impose tariffs on US imports will shrink the British economy, Rachel Reeves has been warned by Britain’s top economists.
In a blow for the chancellor, members of the Bank of England’s interest rate-setting committee said the implications of the US president’s plans “are fairly clear” for economic growth.
“Tariffs would push down growth,” Megan Greene, an external member of the monetary policy committee told MPs on Wednesday.
Ms Greene said the impact on inflation of the tariffs would be less clear, but warned Mr Trump’s plans would leave less money in Britons’ pockets.
The UK is seeking to avoid damaging tariffs, which have already seen Canada and China hit with an extra 25 per cent cost on their goods entering the US.
But, despite Sir Keir Starmer confirming on Wednesday that trade talks have begun with the US on a deal which would see Britain avoid similar penalties, tariffs on UK steel and aluminium are scheduled to take effect next week.
After months of stagnant economic growth under Labour, any further economic shock would be a blow to Sir Keir and Ms Reeves after they made boosting the economy their number one mission.
Asked by Labour MP John Grady how Mr Trump’s tariffs would impact his constituents in Glasgow East, Ms Greene said they would lead to downward pressure on demand for British goods, while fragmentation of the global economy leads to less knowledge sharing and competition – another source of downward pressure on growth.
Addressing parliament’s Treasury committee, she added: “It seems likely the implications for growth are fairly clear, tariffs would push down on growth.
“The implications for inflation… are much less clear.”
The warning came as it emerged Ms Reeves is planning billions of pounds of cuts to Britain’s welfare bill to balance the books after “the world changed” following her autumn Budget. In her spring statement this month, the chancellor will outline major changes to the benefits system alongside a civil service cost-cutting drive.
In October, the chancellor had £9.9bn of wiggle room within her self-imposed fiscal rules. But higher inflation and borrowing costs, the stagnant economy and a looming global trade war have wiped out her fiscal headroom.
On Wednesday, Bank of England governor Andrew Bailey gave an impassioned defence of free trade, telling Mr Grady that “Glasgow became a great city in the 19th century on the back of trade and the industrial revolution”.
“I very strongly agree with my colleagues on the effects of this; I would say to your constituents that trade supports growth,” Mr Bailey added.
He said: “Openness supports the spread of innovation and ideas… around Glasgow you see the evidence, you see the buildings this led to, so trade supports growth.”
He encouraged Britain to try to solve any problems caused by the tariffs in multilateral international alliances, such as at the G7 and G20. And he said if Mr Trump leaves international bodies such as the International Monetary Fund (IMF) or World Bank, it would be “very damaging for the world”.
He added that he was encouraged after hearing that the new US Treasury secretary Scott Bessent "believes in multilateralism, and I strongly welcome that".
Ms Reeves on Tuesday admitted that Mr Trump’s tariffs will harm the UK economy, even if Britain is exempted, adding to the squeeze facing the public finances.
But, responding to her plans to slash the welfare bill, left-leaning think tank the Institute for Public Policy Research (IPPR) warned there are “significant risks” to Ms Reeves’s planned cuts.
“Some public services are already in crisis, and further cuts could undermine government commitments on health, education, crime and more,” associate director Avnee Morjaria said.
She added: “Waiting lists in the NHS are stubbornly high, councils are on the verge of bankruptcy, backlogs in the criminal courts are at record levels and prisons are at bursting point.
“Welfare changes could deliver real savings over time by supporting people into work, but a ‘cuts first’ approach is likely to undermine efforts to reform the system and worsen child poverty just as the government sets out its new child poverty strategy.”
