Pity the garment workers of Lesotho. As a result of a crude formula that economists said would fail a basic exam, the small, landlocked African country was hit with the highest level of American tariff — 50 per cent — on Donald Trump’s “liberation day” last week.
The impact of the 47th president’s trade war on a nation he recently dismissed as one “nobody has ever heard of” is indicative of the arbitrary and thoughtless nature of his measures. Lesotho’s factories make denim far more cheaply than their American counterparts, and its mines supply diamonds that cannot be found in the US. Lesotho exported $240 million to America last year. But, with an annual per capita income of $975, it imported just $3 million. Its government borrows in dollars. The idea that Lesotho is ripping America off — rather than supplying it with products it can’t make as efficiently, or can’t obtain at all, while being unable to afford to buy very much, and tapping the dollar’s reserve currency status — is ludicrous.
But Trump is committed to reordering the world economy, trying to bring manufacturing back to America and revert to a 19th-century, zero-sum mercantilism. Sir Keir Starmer has done the right thing in refusing to be drawn into short-term retaliation, although the prospects of a seriously negotiated UK-US free trade agreement — which would almost certainly include concessions to American farmers on chlorine-washed chicken and hormone-treated beef — must be counted as distant. We report today that some form of “tariff-mitigation” deal is more likely, but that is some way from the post-Brexit agreement repeatedly promised by Tory prime ministers.
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It is also worth remembering that, unlike the Canadian prime minister, Mark Carney, who has announced reciprocal 25 per cent tariffs on American-made cars and lorries, Starmer is not fighting an election. Britain, which was given the lowest tariff rate, 10 per cent, must continue to champion free trade and work more closely with the Commonwealth, the EU, Japan, South Korea and even China.
One of the more dangerous long-term effects of Trump’s revolution will be to empower the last of those. Beijing views the events of recent months as vindication of its warnings that countries traditionally friendly to America cannot rely on it. After the first three-way economic summit in five years between China, Japan and South Korea last weekend, the Global Times, a Communist Party outlet, said the participants had “acknowledged a crucial reality: it is time they take an active role in shaping their regional destiny rather than leaving it in the hands of external powers”. China is likely to deepen its economic ties with Africa, having eliminated all import duties on products from 33 countries in December, while America now imposes tariffs on $39 billion of goods from the same continent.
The other thing Britain must do is take control of its own destiny, in so far as it can. The Office for Budget Responsibility (OBR) estimated that tariffs along the lines of those announced last week would slice 0.6 per cent from UK GDP in this financial year. Professor David Miles, representing the OBR, has said that would “knock out” the £9.9 billion of “headroom”, or fiscal margin for error, engineered by Rachel Reeves in the spring statement. The chancellor clawed back that headroom, lost since last autumn’s budget mainly to rising government borrowing costs, only with a £4.8 billion annual cut to the welfare bill and a squeeze on departmental spending. She correctly decided that after £40 billion of tax increases announced in October, including £25 billion in the form of extra employer’s national insurance contributions, business could not stomach any more. Reeves must prepare to cut deeper if need be. The welfare savings should be viewed in the context of a bill that will pass £375 billion by 2030 — a quarter of all government spending.
• Starmer must defy Trump by hugging other tariff victims closer
Trump’s willingness to use America’s might to behave capriciously towards friend and foe alike brings volatility on a scale last seen in the Covid crisis, when financial statements and forecasts were repeatedly ripped up. He is inflicting widespread pain and undermining confidence in America’s public finances, as demonstrated by the weakening of the dollar. All this will bring intense challenges for British companies, and in some cases consumers. Starmer and the country should hope for the best — a sudden change of course by a president smarting from the economic harm he has inflicted on his own people. But we must also be prepared for the worst, and that will require facing up to the economic problems closer to home.
