Tariffs, trade and Trump

Since his election, Donald Trump has shown a willingness to use tariffs as a weapon of both economic and geopolitical policy. This explainer looks at tariffs generally and then recent developments. 

What are tariffs and why do they exist?

Tariffs are taxes charged on the import of goods from foreign countries. While historically tariffs were used as a source of revenue for governments, they are now used mainly to protect domestic industries from foreign competition. They do this by increasing the price of imported goods in order to persuade consumers to purchase domestic products instead.

Who pays tariffs?

In general, the importer pays the tariff. Tariffs are collected by the national customs authority of the country into which the goods are being brought (so tariffs on goods entering the UK are paid to HMRC). 

Exporters do not usually ‘pay’ the tariff as such – rather, they experience adverse effects from their product being made more expensive on the foreign market. This means they may have to cut their prices to remain competitive, for example or move production inside the country to enable them to continue to supply without bearing the tariff.

How are tariffs charged?

Almost all tariffs are set as a percentage of the value of the goods in question. For instance, the current UK tariff on cars is 10% – so if a car imported from outside the UK costs £10,000, the tariff will be £1,000.

Some agricultural tariffs are set in relation to the weight of the product, rather than the value. For example, the UK tariff on butter is £158 per 100kg. So if a UK-based importer were to import a single kilo of butter from a country with whom the UK does not have a free trade agreement, regardless of the price, they would pay a tariff of £1.58. 

There are also more complex tariffs that combine a percentage and a per-kilo charge. These apply to highly sensitive agricultural products such as beef. Others still are based on the weight of a specific ingredient used in the product – for example, the tariff on chocolate is based in part on the weight of its sugar content.

Are there any restrictions on tariffs?

The ability of national governments to set tariffs is restricted by international commitments. Most major trading nations are members of the World Trade Organization (WTO) and so are subject to the obligations in its General Agreement on Tariffs and Trade.

The first of these is the ‘most-favoured nation’ (MFN) obligation: WTO members must charge all other members the same tariff unless they have a free-trade agreement (FTA) with them. This is often referred to as trading ‘on WTO terms’.

The second is that WTO members must not exceed the tariff rates they have committed themselves to in their schedules (essentially long tables of tariffs, itemised by type of goods, which members submit on joining the WTO). These maximum tariff rates are called ‘bound tariffs’. Some WTO members choose to apply tariffs below their ‘bound rate’ because they consider that a lower tariff rate would benefit their economies by encouraging trade. Countries  can though use tariffs as a form of trade defence if they think another country is dumping goods on them, or use them to protect national security and president Trump has used this as a rationale for tariffs in the past.

Many countries also choose to sign FTAs to sit on top of their WTO commitments. Once a country has signed an FTA, the tariffs it can charge on imports from its partner (or very occasionally partners) are limited to the levels prescribed in that agreement. But to count, FTAs need to cover substantial amounts of trade rather than focus on individual sectors. 

Countries or trading blocs can also form customs unions. The European Union’s (EU) customs union is one example. In general, there are no tariffs on the movement of goods between members of a customs union, and a common tariff is placed on the import of goods from outside the union. In the case of the EU, this is the ‘common external tariff’.

What is the UK policy on tariffs?

Since the UK left the EU, it sets its own tariffs. Under the Taxation (Cross-border Trade) Act 2018, UK tariffs are set in statutory instruments made by the Treasury. The Treasury is required to consider a number of factors before it sets tariffs, including the interests of producers and consumers in the UK. It must also have regard to any recommendation made by the Department for Business and Trade (DBT).

The ‘UK Global Tariff’ applies to all countries with which the UK does not have an FTA. The rates in the Global Tariff broadly follow EU tariffs with some exceptions for goods where the UK has no domestic production. 

Does the UK have tariff free trade with the EU and other countries?

Yes. The Trade and Cooperation Agreement, which came into force on 31 December 2020, removes tariffs from goods traded between the UK and the EU, as long as they have sufficient local content to qualify. But exporters/importers have to prove that goods do qualify by meeting the rules of origin test for that good set out in the TCA. Evidence suggests that many exporters simply prefer to pay the tariff instead to avoid the complex paperwork involved. Those rules of origin could be eased for some goods if the UK joined the Pan-Euro-Mediterranean Convention (PEM) which would allow content from a wider range of countries to be counted as local.

The UK also rolled over many of the FTAs it inherited from the EU and has negotiated new FTAs, most notably with Australia, New Zealand and India which remove many tariffs and quotas.

How is president Trump using tariffs?

Since taking office president Trump has (as he did to a lesser extent in his first term) shown a willingness to use tariffs seemingly both for trade policy objectives (to boost US manufacturing at home and correct what he sees as unfair trade balances which he sees as countries taking advantage of the US), but also other policy objectives. 

Those objectives are not wholly consistent but they appear to be:

1. To re-shore manufacturing jobs into the US. This requires him to levy tariffs for long enough for businesses to decide to move production into the US, and for US manufacturers to be confident enough to expand manufacturing capacity. In that case tariff revenue should fall over time as the US becomes less import dependent. This is the justification for the high tariffs being imposed on steel and aluminium. 
2. To achieve better access for US goods to overseas markets and to secure changes to regulations that he thinks impact US business. In theory, tariffs are a temporary tactic and should be removed if the target country meets US demands.  Since the announcement of the so-called “reciprocal” tariffs on “Liberation Day” some countries have struck deals with the US allowing US producers better access to their markets in return for some alleviation of US tariffs on their exports. 
3. As a revenue source to allow the US government to cut other taxes – that means tariffs need to be permanent but there also needs to be relatively little import substitution. The baseline tariff of 10 per cent, which applies across the board (even where the US runs a goods trade surplus) is a revenue raiser. This conflicts with the first two objectives outlined above.
4. To achieve wider policy goals.  This has been evident from the first use of tariffs to pressure Colombia into accepting a deportation flight, to the use of tariffs against countries to stop the trafficking of fentanyl to the US, to the most recent use of tariffs as a way of pressurising European countries over Greenland. 

Does the president have the power to use tariffs in this way?

President Trump is imposing these tariffs using various emergency and national security powers which means he can act without Congressional authority – though Congress could in theory revoke those powers.  But Congress has been compliant so the main action has been in the courts. 
In May 2025, the U.S. Court of International Trade ruled that president Trump lacked the authority to impose certain sweeping tariffs under the International Emergency Economic Powers Act (IEEPA). ²⁹ What to Know After Trade Court Rules Against Trump’s Tariffs | TIME   Although a U.S. appeals court later found most of these tariffs to be unlawful, it allowed them to remain in place while the White House appeals the case to the Supreme Court. That decision is imminent, but most commentators expect that even if the Court finds against the president he will find other powers to by pass Congress and continue to use tariffs as an instrument of policy. ³⁰ Trump tariffs: Trump tariffs on the line: Supreme Court decision may spark $1 trillion refund crisis - The Economic Times  

What has the UK done about Trump's tariffs?

On Liberation Day, the UK was subjected to the 10 per cent baseline tariff.  The UK also was due to be subjected to the steel and aluminium tariffs and later a tariff on pharmaceutical exports.  The UK – like many other countries – reacted to these announcements by seeking trade deals with the US. 

That “deal” was unveiled on 8 May 2025. While it leaves the 10 per cent baseline tariff in place on almost all UK exports, the deal sees the sectoral tariff removed on up to 100,000 car exports a year to the US (just under current export levels), though they are still subject to the 10 per cent tariff, and an additional 17.5% to any additional car imports. ³⁸ UK-US tariff deal: Cars, steel and beef - what you need to know - BBC News  The UK currently imposes a 10% tax on US cars.

The UK has agreed to reduce tariffs on a range of US manufactured and agricultural products which the US claims will offer $5bn of new “opportunities”. But the UK has notably maintained its insistence that beef imports have to meet UK standards.

Despite this deal appearing to exempt UK steel from sectoral tariffs, this has not happened in practice because UK steelworks do not make virgin steel. ³⁹ K hopes for 0% tariff on steel exports to US dashed - BBC News  Having missed the July 9 2025 deadline to reach an agreement with the United States on the future of punitive tariffs, UK steel and aluminium exports remain subject to a 25% tariff, under the terms of the UK–US Economic Prosperity Deal.

The UK also reacted to the threat of tariffs on pharmaceutical exports (the UK’s second biggest goods export to the US after cars) by agreeing a deal on 1 October 2025.  As part of that deal, the UK agreed both to raise prices that the NHS pays for drugs and to raise NHS spending – both longstanding demands of the US pharmaceutical industry. ⁴⁰ https://www.gov.uk/government/news/landmark-uk-us-pharmaceuticals-deal-to-safeguard-medicines-access-and-drive-vital-investmentfor-uk-patients-and-bu…  

Who else has done deals with the Trump administration?

As the postponed deadline of 1 August 2025 approached several major trading partners have done deals with the US to cushion the impact of tariffs:

• Japan – on 23 July 2025 Japan and the US reached agreement which in effect cut their reciprocal tariff to 15 per cent from 25 per cent in return for Japan agreeing to buy aircraft and more defence equipment from the US; the 15 per cent also applies to cars which were subject to a 27.5 per cent tariff. However, the FT is reporting that there are emerging differences in interpretation between Japan and the US on provisions on who benefits from Japanese investment in the US;
• EU – on 27 July 2025, the US and the EU announced they had concluded a deal that would again see reciprocal tariffs cut to 15 per cent.  Again the quid pro quo is that the EU has agreed to energy and defence purchases from the US. The EU deal leaves them with a higher base tariff than the UK, but because the UK deal imposes the baseline tariff on top of existing tariffs whereas the EU deal includes those tariffs there are some goods (e.g. cheese) where the EU faces lower tariffs.
• China took a noticeably harder line than other countries and for a time there was an escalating trade war between the US and China.  But on November 4, following a US-China summit, president Trump signed two executive orders: one suspending increases to China’s reciprocal duty rate for one year ⁴¹ Fact Sheet: President Donald J. Trump Strikes Deal on Economic and Trade Relations with China – The White House   and another reducing the fentanyl tariff on Chinese imports beginning November 10. ⁴² Modifying Duties Addressing the Synthetic Opioid Supply Chain in the People's Republic of China – The White House  The deal is intended to curb the flow of chemical precursors used to manufacture fentanyl in the United States—one of the most contentious and security-sensitive issues in the bilateral relationship. In return China agreed to:
  • take significant measures to halt shipments of certain fentanyl-related precursor chemicals and strengthen joint enforcement efforts;
  • pause for one year the enforcement of export restrictions on key materials—including rare earths, gallium, and graphite—that are essential to modern technologies and cease retaliatory actions previously imposed on U.S. semiconductor manufacturers and other major American companies in response to Trump-era tariffs.
  • cease retaliatory actions previously imposed on U.S. semiconductor manufacturers and other major American companies in response to Trump-era tariffs.

China also agreed to  open its market further to U.S. agricultural exports, committing to purchase at least 12 million metric tons of soybeans in the final two months of 2025, and 25 million metric tons in both 2026 and 2027, along with other goods such as sorghum, hardwood, and softwood logs.

The US has yet to conclude a new deal with Canada ⁴³ https://www.bbc.com/news/articles/czj0wjvjm4po  and the US-Canada-Mexico deal negotiated in his first term to replace the North American Free Trade Agreement is up for review this year.  President Trump has described this as “irrelevant”, though Canada and Mexico would want to see it continue. ⁴⁴ https://www.wskg.org/2026-01-16/trump-says-new-trade-deal-with-mexico-canada-doesnt-matter
 

What happened over Greenland?

In mid-January 2026, president Trump announced a 10 per cent additional tariff on eight European countries, including the UK, to take effect from the beginning of February 2026, with a rise to 25 per cent in June if he had failed to secure Greenland for the US by then. This was in response to measures taken by those countries to increase their security presence in Greenland. On 21 January, he reversed that decision after discussions which he said had produced a “framework” for the future management of Greenland. ⁴⁹ https://www.bbc.com/news/articles/cgezx40r7d7o

What has been the economic impact of Trump’s tariff policy?

The IMF World Economic Outlook in September downgraded global growth performance marginally to take account of trade policy developments until then, though noted that the world economy had proved more resilient than expected. The OBR forecast in November 2025 that UK export markets would grow more slowly in the next four years and global trade intensity would fall. 
The impact on the US economy has been less marked in 2025 than was expected after the initial tariffs were introduced – partly because many tariffs were reduced in negotiation but also because importers have absorbed some of the costs. Those effects may start to show more in 2026 depending on the course of policy. ⁵⁰ https://www.theguardian.com/business/2025/dec/29/donald-trump-tariffs-us-economy-inflation-employment-2026

How will US trade policy affect the UK-EU reset?

Throughout 2025 Keir Starmer stressed that the UK did not need to choose between doing deals with the US and with the EU and through that year that broadly held true.  However recent reports suggest that US negotiators are pressing the UK to adopt US standards ⁵¹ https://www.politico.eu/article/donald-trump-administration-demand-uk-us-standards-trade-talks/  – and if that happens on agriculture to allow more access for US goods, it would prevent the UK from agreeing a sanitary and phytosanitary deal with the EU as foreshadowed in the Common Understanding agreed on 19 May last year. ⁵² https://www.instituteforgovernment.org.uk/comment/keir-starmers-eu-reset-deliver-2026  That would commit the UK to dynamic alignment with EU rules. The US may also try to get the UK to align more closely with the US on tech regulation, although the EU did extend the UK’s data adequacy agreement, allowing for easy data transfer, for five years in December.

And where does this all leave the world trading system?

The rules based world trading system looks less strong after a year of president Trump and reactions to it. Individual countries have reacted to Trump’s tariffs, which contravene WTO rules, mainly by offering deals which themselves do not look WTO compliant. China did initiate a case against the US reciprocal tariffs at the WTO but the WTO dispute settlement mechanisms are in a state of disrepair, and China eventually did a deal with the US as well.