The U.S. reciprocal tariffs announced recently were not a surprise, as the President has made changing trade terms and negotiating deals to leverage changes in other countries’ tariffs a priority since his inauguration.
The CPA has been briefing members and Government about how these policy changes may damage UK manufacturers and construction. The quick answer is that it all is complicated.
The short-term issues associated with reciprocal tariffs include increased uncertainty over global trade and global economic growth prospects. The rise in uncertainty means increased risk, which must be factored into the pricing of firms worldwide, leading to further inflation, and this is already bad news. The tariffs also add to price rises in the U.S.. Most U.K. exports of products and services to the U.S. tend to be of higher value and higher quality, making them less price-sensitive than some other countries’ exports to the U.S. However, this clearly impacts some U.K. exports to the U.S. Our members have particularly highlighted concerns around steel and aluminium products, given that they are sizeable exports to the US, have a higher than 10% tariff and so are disproportionately facing losses.
In the medium-term, this means that global trade will change in response to the tariffs, with the U.S. becoming a less attractive destination for exports. Consequently, countries that previously exported large quantities to the U.S. may find ways to circumvent the tariffs by rerouting their exports through other countries. Or, we may see some countries exporting more to Europe rather than to the U.S., which may ease some of the price pressure. The tariffs also raise medium-term uncertainty, as we don’t know how other countries will react to the reciprocal tariffs from the U.S. Increased uncertainty needs to be priced in. However, consumption tends to respond to price rises in the medium-term, so falls in demand and changes in exchange rates may offset some of the inflationary impact.
In terms of its implications for UK construction, it is likely to mean higher uncertainty, volatility in pricing, and a shift, over time, towards different trade routes. Only around 15% of UK construction materials and products are exported, but for those materials and products that are exported to the U.S., then the tariffs short-term will make a significant difference. In terms of imports, the majority of materials and products used in U.K. construction are sourced locally (around 76%), as proximity is a key factor. Even when the U.K. imports, most imports come from the E.U. (around two-thirds of imports); proximity is a key factor. Outside of the E.U., the country from which the U.K. imports the most construction is China; however, it is far too early to determine the direct impacts of the U.S. tariffs and subsequent changes in global trade routes. However, the higher uncertainty levels are likely to mean that if contractors are not sourcing locally made materials and products, then there is likely to be more risk and volatility in prices, which may be an issue for firms on fixed-price contracts signed up to 12-24 months ago when these potential risks wouldn’t have been on most firm’s lists of key risks. This is particularly the case for larger projects, where investor confidence is critical and where the projects are large upfront investments for a long-term rate of return.
The CPA will be monitoring these developments and assessing the impact as things become clearer. This policy issue may also feature in our Spring Forecasts, due for publication on 28 April. Non-members can purchase CPA economic research here or alternatively contact our membership team to discuss options to join and access such expertise directly.