Research: Trade
in brief... How the Trump tariffs affect UK firms
How should UK exporters react to the tariffs imposed by President Trump? While some may start planning to increase production in the United States to avoid the tax, others whose US customers are less price-sensitive may prefer to continue producing in the UK. Catherine Thomas writes that, either way, firms’ first step to managing the impact is finding the right initial price response.
Firms in the UK sold goods and services worth £183bn to the United States in the year to the end of September 2024. This makes the United States the UK’s largest single export destination, at around 22% of all exports. Physical goods accounted for about a third of this (£59bn), equivalent to around £900 per person in the UK. The Trump tariffs announced on 2 April 2025 will directly affect these exporters. The tariffs mean that buyers in the United States will have to pay a tax to the US government whenever they make a purchase, of the tariff level multiplied by the total they pay to the UK firm. While the 2 April announcement put the UK tariff at 10%, this rate is likely to vary by sector and is not yet set in stone. Each UK firm selling in the United States must decide how to respond. Because any change in production location will take time to organise, the most urgent decision should be to reconsider what price it charges its US buyers in the short term.
For the vast majority of goods-exporting firms, maintaining the same unit price for US buyers would be a mistake. The optimal pricing strategy will differ for each firm, depending on how sensitive US buyers are to its price (the firm-specific elasticity of US demand). Let’s say the tariff is 10%. The unit price a US buyer will have to pay will be 110% of the unit revenues the UK firm will receive. Because demand is sensitive to price, firms will find it optimal to pass on only a share of the full tariff rate to their buyers. This means UK firms will generate lower revenues per unit, at between 91% and 100% of current levels. Since the price to US buyers will increase to 110% of the current price, UK firms are also likely to sell lower quantities.
Taxing US imports will dampen demand for all firms, not just those directly involved
The percentage quantity reduction from US buyers after a price increase tells the firm how much of the tariff it should pass through. The products that UK firms export include cars (15% of total UK goods exports to the United States), pharmaceutical and medicinal products (11% of the total), mechanical power generators (8%) and scientific instruments (4%). For some of the products these firms sell, US buyers will absorb an increase in the price they have to pay without much reduction in the quantity they buy. These are products for which it’s hard to find any reasonably-priced alternative. At the other extreme, US demand for some products may fall by a large amount in response to any tariff pass-through to prices.
As an aside, the price elasticity and tariff pass-through rate showed up in the formula the Trump administration used to calculate the 2 April country-specific tariff rates. They are represented by the epsilon and phi symbols, respectively.
When the administration used the formula, they plugged in the same values for all countries. But, for a UK firm choosing its post-tariff price, it is important to consider its own firm-level demand from US buyers. The elasticity measure used in the tariff formula assumed that a price increase of 10% would lead to a 40% decrease in quantities bought and that firms would pass one-quarter of the tariff rate through to consumer prices.
Making sense of demand
Estimating elasticity of demand is challenging for any firm at the best of times. In uncertain times like these, to understand how demand will respond to any price change, a firm first needs to forecast various market factors that shift overall demand.
First, all non-UK firms exporting goods to the United States are also likely to change their prices in response to their tariffs, which affects the demand for UK goods. But the countries facing the highest tariff rates tend to export different goods to the United States than those the UK exports, so it’s unlikely that a large share of their US customers will easily switch to UK suppliers. Second, under any tariff pass-through, US buyers will be paying more and thus buying less. This effect serves as a recessionary force that will reduce demand levels in general. Third, even firms which have long-term relationships with trusted trading partners will find these ties put to the test as buyers reassess all their supply chain logistics.
Estimating how much more customers are willing to pay is challenging for firms
Once a UK firm has a good sense of its overall US market under the new set of global tariffs, it should choose a post- tariff price so that its own unit revenues optimise the trade-off on the margin between passing through the tariff and limiting the quantity decline. For the firms selling products with few available substitutes, such as specialised scientific instruments, their US demand is likely to remain relatively resilient to a higher post-tariff price. For other small manufacturing firms that would otherwise have grown via exporting, it will now be harder to find US buyers for their products at higher price levels. In other words, the tariffs are expected to constrain growth in the UK economy.
When the dust starts to settle a little, firms should move to the next stage of their tariff response and revisit how they organise production across country borders. The UK producers hit by tariffs are often manufacturers that produce relatively high-end products within their global sector. For example, Jaguar Land Rover (JLR) accounts for more than two-thirds of all the car exports to the US. While it has a research and development centre in Oregon, it does not currently assemble vehicles there. The Indian firm that owns JLR, Tata Motors, may choose to shift more stages of production within US borders.
Move, merge or wait
Similarly, while BMW Mini currently manufactures all the cars it sells in the United States in its UK production facilities, its parent firm, BMW, does make other car models in plants in South Carolina. In contrast, the several Japanese car manufacturers in the UK export from the UK only to EU markets. These comparisons suggest that serving the United States from the UK now makes sense, cost-wise, only for relatively premium cars. These products may fare better under the new tariff regime as they are likely to have less elastic demand, and their optimal tariff pass-through could be reasonably high.
In many manufacturing exporting sectors, production tends to be located in the UK because it has a relatively skilled research and product-development workforce. This is the case for pharmaceuticals, engineering products and scientific materials. Firms in these sectors include large public companies such as AstraZeneca as well as many privately-owned smaller firms. These organisations’ incentives to “tariff jump” by relocating production to US plants will vary. It is quite possible we are heading for an increase in global merger and acquisition activity as each sector reallocates production assets across firms, matching production locations with destination markets to reflect new costs of trading across country borders.
Capital investments to re-organise global production, either within or across firms, are costly and time consuming, and firms will require more clarity and certainty about the new regime before making any big changes. Uncertainty about the global trading system is contributing to the ongoing volatility in the prices of stocks and other financial securities, as well as in currency exchange rates. Stock prices tumbled globally after the tariff announcement because taxing United States imports will dampen demand for all firms, including those not directly involved in goods trade. But for any individual exporting firm, finding the right price response given its current production footprint will help manage the new tariffs’ immediate damage to its bottom line.
20 June 2025 Paper Number CEPCP710
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This CentrePiece article is published under the centre's Trade programme.
This publication comes under the following theme: Trade Policy and barriers to international economic integration