THE OBR AND FREE TRADE

The OBR made some comments about the disruption to growth that might be caused by the USA imposing tariffs on imports. The extent of the impact this would vary with how the UK responded. The OBR constructed ‘three stylised scenarios for trade policy … drawn from a range of models, empirical estimates, and trade scenarios from other institutions’.

In the first scenario, the USA imposed a 20 per cent tariff on imports from China, Canada and Mexico – all of which retaliate with their own tariffs. Consequently:

‘This leads to UK GDP being around 0.2 per cent lower than in our central forecast in 2026-27 as demand for UK exports slows and uncertainty weighs on UK economic activity. However, after the initial disruption, this is broadly offset by trade diversion, where demand for UK goods rises as they are relatively cheaper. Overall, UK GDP is largely unchanged from our central forecast by 2029-30.’

The second scenario is the same as the first, save that this time the USA imposes 20 per cent tariffs on imports from all countries, including the UK. Consequently:

• ‘Initially, higher US tariffs would increase the cost of imported goods to US consumers relative to US-produced goods. This is likely to decrease demand for UK exports and dampen UK economic activity. Using a price elasticity of -0.4 implies that for a 20 percentage point increase in prices of US goods imports (assuming the tariff rise is fully passed through to consumer prices), demand for goods exports to the US would fall by 8 per cent, all else equal. In the UK, where goods exports to the US make up 2 per cent of GDP, this is equivalent to a little under 0.2 per cent of GDP. Higher US import tariffs would also reduce US demand for foreign currency which could cause a moderate depreciation in sterling, mitigating some of this effect. Overall, UK GDP in this scenario is 0.6 per cent lower than in our central forecast in 2026-27, the peak year of impact as lower demand for UK exports from the US, weaker global GDP growth, and heightened uncertainty dragging on investment weigh on UK GDP.

• In the medium term, reduced trade openness leads to a permanently lower GDP level by around 0.3 per cent. This is only partly offset by the opportunity for trade diversion (for customers in the UK to find alternative sources for goods and for firms to seek markets where tariffs are not significant) and the fading impact of uncertainty.

• We assume that UK inflation peaks at 0.3 percentage points higher than our central forecast in 2025-26. But it is below our central forecast in 2027-28 and 2028-29 as weaker UK GDP growth means spare capacity opens up. It then returns to the 2 per cent target. Economic outlook.’

The third scenario is the same as above, except this time all countries, including the UK, retaliate and also impose 20 per cent tariffs on US goods. Consequently:

• ‘UK inflation rises by 0.6 percentage points above our central forecast in 2025-26 as the price of UK imports of US goods increases. Goods make up around half of the CPI basket with roughly 3 per cent of these imported from the US. Therefore (all other things equal) the 20 per cent increase in US goods import prices could add around 0.3 percentage points to CPI, if it is fully passed through to consumer prices. However, the size and direction of overall the inflation impact is very uncertain, for example due to the impact of movements in the exchange rate and trade diversion.

• We assume tariffs on imports from the US lowers imports (and therefore trade intensity), while the impact of higher inflation on real incomes and slowdown in global growth is likely to mean GDP quickly falls below our central forecast. Alternatives to US goods may be more expensive which could lower living standards further. The peak impact on GDP is around 1 per cent in 2026-27. As GDP growth weakens, there are limited secondround effects on inflation, which then falls to 1.8 per cent in 2027-28.

• Even higher global barriers to trade and reduced global productivity in this scenario mean medium-term UK GDP is around ¾ per cent lower than in our central forecast.’

In a section entitled ‘Sources of uncertainty around these effects’, to summarise, the OBR admit that they are just making it all up (putting it politely). For completion, the three paragraphs state:

‘The effects of these channels are highly uncertain in both magnitude and even direction. The impact of tariffs crucially depends on the ability of importers and consumers to substitute away from goods whose prices increase due to tariffs. For example, in a scenario where the UK imposes tariffs on US imports, the impact on UK output and inflation would be smaller if domestic or non-US substitutes were more readily available.

There will also be frictions as new trading regimes are implemented. In the short term, sudden increases in trade barriers could disrupt supply chains, causing shortages and price volatility, but predicting these effects is challenging due to the complexity of global value chains. Uncertainty about future changes in trade policies may delay investment, hiring decisions, and output, potentially reducing not just activity in the near term but potential output in the medium term.

Our scenarios incorporate estimates consistent with the static effects of increased trade barriers on the medium-term productivity level. But in the long term, dynamic effects on productivity (longer-lasting effects on growth rates) are likely to further weigh on UK and global output. Reduced openness to trade would hinder access to the new technologies and knowledge sharing that support innovation. However, the size of these effects remains uncertain.’

Silly terms such as ‘trade intensity’ are presumably supposed to impress. As is the forecast of ‘reduced global productivity’. This is all nonsense. There is no mention of practical terms such as ‘trade deficit’ or ‘multiplier effect’ or ‘tax income’ or ‘increased/reduced unemployment’. There is no explanation or reconciliation as to why India and China, both highly protectionist, are booming and performing far better than the UK.

The OBR should be abolished. They are peddling propaganda and are a positive hindrance to the proper governance of the UK.

Tariffs are a tax on imports and a tool. They raise money and, due to increased prices for those imports subject to the tariffs, reduce demand for those imports. They are a means of eliminating a trade deficit.

The USA has such a deficit, along with a massive government spending deficit. President Trump is determined to eliminate both and the use of tariffs is a part of this. He is also using tariffs to bully Canada which he wants to annex – which is wrong and a misuse of tariffs.

The UK needs to focus on its own trade deficits with the EU and China, and its own government spending deficit.