British Businesses at Greater Risk

In the complex web of international trade, the relationship between the United Kingdom and the United States stands out for its significant impact on various sectors, particularly in manufacturing and pharmaceuticals. The UK has emerged as a substantial importer of notable American exports, including Land Rovers, machinery, chemical products, and a plethora of best-selling pharmaceuticals. This economic connection, however, is under threat as the US government considers implementing tariffs that could reach up to 20% on imports from a majority of countries, which would include the UK.

Research conducted by McKinsey Global Institute, in collaboration with the United Nations Conference on Trade and Development, reveals that among 15 key industries contributing to UK goods exports, nine primarily target the US market. In contrast, Germany and France show a significantly lower dependency on the American market, with only four and one industry respectively exporting predominantly to the US. This suggests that the UK is particularly vulnerable to changes in US trade policy.

Tera Allas, a director at McKinsey UK & Ireland, emphasizes the dominance of the US in various export categories from the UK, stating, “The US plays a more substantial role in the UK’s export mix than it does for major eu economies.” This assertion is critical as it highlights the unique position of American demand for British goods, which could be threatened by the imposition of tariffs. Although the UK boasts a massive service sector that could cushion some of the financial blow, the impact on physical goods exports is undeniable and significant.

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In fact, the official statistics released earlier this year indicate that large manufacturing firms, specifically those employing over 250 staff members, generated revenues of around £68 billion (approximately $86 billion) for the manufacturing sector. One of the standout areas is the transportation equipment sector, which is the UK’s second-largest export segment at $89 billion. Notably, nearly 20% of this revenue is attributed to sales in the United States. Renowned names like Rolls-Royce Holdings are key players here, as they generated about a third of their global sales from North America in 2023. The company has established a considerable footprint in the US, with operations spread across states such as Indiana, Michigan, and South Carolina.

Moreover, Jaguar Land Rover reported that nearly a quarter of its £29 billion income in the previous fiscal year came from the American market. This is crucial as the car manufacturing industry relies heavily on transatlantic trade. Within the pharmaceutical sector, companies like AstraZeneca and GlaxoSmithKline derive a staggering 42% and 52% of their sales from the US market, respectively, which further underscores the reliance on American consumers. Both companies are actively working to bolster their production capabilities in the United States, driven by this significant market share.

As of March this year, trade between the US and UK surpassed £300 billion, making the US the UK's largest trading partner. It’s worth noting that nearly two-thirds of this trade value is derived from tariff-free service exports, while tangible goods comprise only a small fraction of the UK’s GDP. This scenario could soften the overall impact of tariff plans on the economy. Nevertheless, newer trade protection measures are likely to target a select few dominant firms within the UK manufacturing sector, potentially sending shockwaves through employment, income levels, and overall economic growth.

Bloomberg Economics has issued warnings indicating that in the worst-case scenario, the trade policies under consideration could drag the UK's GDP growth rate below 1%. Even if a more cautious approach is taken, the uncertainty surrounding these plans could exert pressure on market demand. This situation is further complicated by the intricate dynamics of supply chains and how shifts in trade agreements can ripple through economies.

Emily Fry, a senior economist at the Resolution Foundation, shares her insights, stating, “The exposure of UK goods exports to potential tariff policies looks quite stark. The US stands as the largest goods export market for the UK, with several industries like pharmaceuticals facing significant risk.” This exposure primarily comes from the pharmaceutical, medical and scientific instruments, machinery, and transport equipment sectors, which have approximately 20% of their exports tied to the American market.

Maxime Darmet, a senior economist at Allianz Trade responsible for US, UK, and French affairs, elaborates on this vulnerability, noting that certain industries are likely to become focal points for tariff policies. Sectors such as machinery, equipment, and core manufacturing products can be noticeably impacted as the US strives to curb its trade deficits and shift production back onshore.

In an exchange regarding the implications of government and potential tariff policies, AstraZeneca CEO Pascal Soriot noted that traditionally, pharmaceuticals have been exempt from such measures. This statement highlights an expectation among UK businesses that the essentials of public health should remain shielded from trade disputes, a hopeful sentiment amidst growing anxieties about broader economic repercussions.

Since the Brexit vote, hopes had been high for the UK to secure a favorable trade agreement with the US, with the ruling Labour Party emphasizing its commitment to free trade in recent weeks. However, officials have cautioned that previous efforts to reach a deal have encountered significant obstacles, largely due to differences over climate change policies, tariffs, and governmental procurement practices.

As the economic landscape shifts, both the UK and US will need to navigate these rocky relations with care to ensure that both countries can benefit from their longstanding partnership. The unfolding story of tariffs and trade could very well reshape the economic future for multiple industries across the Atlantic. Ultimately, how policymakers strategize in this new era will be pivotal in ensuring sustainable growth and prosperity for both nations.