The stunning victory of Donald Trump and the Republicans in the US elections may have a significant effect on the UK economy. Certainly, the win for Trump brings the issue of tariffs to the forefront as one of Trump’s main campaign pledges was to impose tariffs on imports.
While China is likely to face the full force of Trump’s potential tariff policy, he has also proposed a 10 per cent flat tax on all imports to United States. The US is the UK’s largest export market: 25 per cent of all manufactured UK exports went to the US in 2023, which totalled more than £56bn. It is important for many UK businesses to maintain strong trade links with the US as it waits to see the detail of Trump’s plans for tariffs.
The FTSE 100 and the FTSE 250 are both internationally focused indices. The FTSE 100 derives 80 per cent of its profits from overseas. For the FTSE 250, it is more than 50 per cent. Thus, as a medium-sized economy with outward-looking equity markets, the UK is vulnerable to Trump’s isolationist and America First priority.
There are two ways in which tariffs can impact the UK economy. Firstly, it could weigh on the stock market. BAE Systems and Rolls Royce are two of the biggest companies in the FTSE 100, they are also large exporters to the US. Their stock prices could be vulnerable if Trump sticks to his campaign pledge.
Secondly, it could hurt the real economy through job losses. Land Rover Defenders were the most exported cars from the UK to America in 2022. Trump has threatened to slap100 per cent tariffs on imported cars, which would be bad news for Jaguar Land Rover.
However, in the immediate aftermath of Trump’s election win, the UK stock market has surged along with US and European shares. BAE Systems and Rolls Royce were both top performers on the FTSE 100 earlier this month. Stock investors may be relieved that Trump did not mention tariffs in his victory speech. They might also consider the upside to US growth on the back of a Trump win, which may cancel out any impact from potential tariffs.
In the short term, as research director at XTB points out, tariffs are not worrying the market. Instead, the biggest impact of Trump’s win has been felt in the FX market. Sterling was down more than one per cent against the dollar on the back of the US election result. Trump is associated with a strong dollar, so if the dollar continues to rise, one could see a structural shift lower in the pound for the long term.
The aftermath of Trump’s victory has also seen a sharp sell-off in the price of oil. However, BP and Shell were higher recently Trump wants the US to use more oil and he is expected to reverse President Biden’s subsidies for renewable energy. Since the US is the world’s largest economy, Trump is supportive of the demand for oil in the long term.
Although there could be extra oil supply from the US during a Trump presidency, it is thought that the demand is more powerful for oil, and it may limit the fall for the oil price, and boost UK energy stocks. As research at XTB says, a big part of the Trump trade is also to sell bonds. In the aftermath of his election win, US Treasuries have sold off and yields have surged.
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