Trade deals & trade wars: The regional impact

Since President Trump proclaimed “Liberation Day” on 2 April, uncertainty over US tariffs has continued to weigh on the global and national economy. What are the implications for UK regions and sectors? In this insight from NIESR, Deputy Director Prof Adrian Pabst talks to Dr Eliza da Silva Gomes about the sectoral and regional exposure to US tariffs.

Which sectors and regions are most exposed to US import tariffs?

The UK sector that is most exposed to US tariffs is manufacturing, notably automobile and aerospace. And the region that exports the highest share of its total exports to the US is the West Midlands, with about 25 per cent.

Examining the importance of exports to the US for the economic output of UK regions as measured by Gross Value Added (GVA), we find that exports from the West Midlands to the US corresponded to 4.1 per cent of its GVA in 2023, the highest across the English regions and devolved nations but small in terms of the economy of the West Midlands as a whole.

Wales also stands out, with exports to the US representing 3.6 per cent of its GVA in 2023, falling from 4.5 per cent in 2022. Most of the other regions present rates between 1.5 and 2.5 per cent, with the exception of East of England at 3 per cent, the East Midlands at 2.8 per cent and Northern Ireland at 2.7 per cent.

Why the West Midlands and Wales?

The reason is sectoral: the West Midlands is one of the main sites for manufacturing in the United Kingdom, housing some important companies in the automobile and aerospace sectors, such as Aston Martin and Jaguar Land Rover (both in Gaydon), Rolls-Royce (Birmingham and Derby) and Collins Aerospace (Wolverhampton). Broughton in Wales is also an important site for the aerospace industry, being one of Airbus’ manufacturing locations.

What are the main changes following the UK-US trade deal?

Initially, the US tariffs on UK goods included a 10 per cent baseline rate and higher levies of 25 per cent on specific UK exports such as automobiles, machinery and parts, as well as steel and aluminium. The new trade deal reverses the 25 per cent tariff for the first 100,000 vehicles imported into the US by the United Kingdom. This is particularly beneficial to West Midlands given that automobiles and parts/accessories constitute half of its exports to the United States.

The UK government has also negotiated lower tariffs on steel and aluminium. Provided that the United Kingdom meets security requirements in the supply chain of these goods, the agreement means that the United States grant a quota at most favoured nation (MFN) rates for UK steel and aluminium. While of course this is positive for steel and aluminium producers in the United Kingdom, for example at Port Talbot in Wales, these product exports to the US represent a small percentage of regional output – less than 0.3 per cent. Therefore, the benefit is likely to be very localised.

How do the tariffs compare with domestic drivers of the outlook for the UK economy?

The US tariffs will likely compound the cost pressures on businesses as a result of a number of domestic decisions at the time of the Autumn 2024 Budget. These include the above-inflation increases in the National Minimum Wage and the National Living Wage, the higher employer National Insurance Contributions rate, higher energy costs than in comparable advanced economies, and the expected reduction in labour market flexibility brought about by the Employment Rights Bill, currently being debated in the House of Lords.

Furthermore, car manufacturers in the United Kingdom have faced a rising percentage requirement on the sale of electric vehicles, being subject to substantial fines for non-compliance. Therefore, while the new US-UK trade deal might provide some relief relatively to its absence, the 10 per cent tariff floor remains and regional vulnerability might go beyond what exports to the US represent in output. Businesses which do not export to the US might be affected via supply chain links. And other industries such as services and retail activities might be affected if demand is considerably lower following potential business closures and layoffs. All this highlights the need to improve national economic resilience in the face of international uncertainty.

This Insight was originally published by the National Institute of Economic and Social Research and you can find the link here.