It seems inconceivable how one man, standing in the White House’s idyllic Rose Garden, can cause so much global tumult. Yet this is the situation we may soon face in a world without international trade and globalisation.
While President Donald Trump spent much of ‘Liberation Day’ showing off his chart of ‘reciprocal’ tariffs to the press, like a child with a new toy, stock markets across the US, Europe, and Asia slumped, triggering their worst day since the COVID-19 pandemic.
Mark Spitznagel, one of Wall Street’s most successful investors, says he ‘expect[s] an 80 per cent crash when this is all over,’ whilst other experts fear the global economy could be dragged into recession.
Taking Stock
But before examining the possible effects of Trump’s tariffs on the UK stock market, and how it could affect you, we should first define what ‘stocks’ and ‘shares’ are. If you are a Gen-Zer like me, you’ve likely had little to no financial education, so you can be excused if the only thing that comes to mind when you hear those terms is the infamous ‘stonks’ meme.
The UK’s stock market index, known as the FTSE 100, represents the 100 biggest firms in the UK, with each company having a certain weighting depending on its size. For example, the success of the UK’s largest firms (AstraZeneca, Shell, HSBC and Unilever), with the highest market capitalisation, will have a far greater impact on the overall health of the stock market than smaller firms.
Shares, on the other hand, represent the units of ownership in a particular corporation. People choose to invest in a company because, as a shareholders, they are then entitled to a proportion of that firm’s profits. Historically, only the wealthiest in society could be shareholders, but during the ’80s, amidst the dawn of the digital era and Margaret Thatcher’s mission to make ‘owning shares as common as owning a car,’ shares became more accessible than ever before, enabling ordinary people in the UK to accumulate wealth.
Immediate Impact
Because shareholders are entitled to a proportion of a firm’s profits, investors buy shares from successful companies that promise a high return. A company’s share value, therefore, reflects how profitable people believe the firm will be in the future.
Here’s where Trump’s tariffs come into play. Tariffs are essentially taxes on imports. So if UK businesses, on whom the president has imposed a 10 per cent tariff, wish to export goods to the U.S. and sell them to American buyers, they will now have to pay an additional fee in order to do so, increasing their costs and making their products less competitive.
The US is the UK’s largest trading partner, with the total value of the goods that we exported across the pond last year amounting to £72.33 billion. Consistently, the UK’s top exports to America are cars, pharmaceuticals, machinery and aircraft. But these once prosperous industries may buckle under the strain of Trump’s tariffs.
Higher costs for UK businesses translate to lower profit, which means falling share prices because investors fear they won’t get a decent return on their investment. The aforementioned AstraZeneca, our leading pharmaceutical company and one of the largest firms in the UK, is likely to suffer badly, considering the U.S. market generates 44 per cent of its total revenue. In addition, the UK businesses reportedly hit the worst by falling share prices are Rolls-Royce (who sell cars, aircraft and marine propulsion systems), Babcock (an engineering and defence firm) and Melrose (an aerospace manufacturing company). The correlation is uncanny.
Suddenly, these companies have become less valuable than they were just mere days ago, and may feel inclined to cut costs by downscaling investment plans, laying off workers and hiring fewer new employees to prove to shareholders that they are managing this economic crisis well. Particularly within the UK’s automobile and steel industries, experts have warned that Trump’s tariffs are putting thousands of jobs, including 2,700 from Scunthorpe, at risk.
Pranesh Narayanan, fellow at the Institute for Public Policy Research, explains: ‘Trump’s tariffs have huge potential to completely destabilise the UK car manufacturing industry, affecting tens of thousands of jobs.’
Falling share prices reduce the amount of profit shareholders receive, thereby reducing wealth creation. However, they also mean that the employees of firms who rely on the U.S. market may face further job insecurity or potential unemployment.
Long-Term Effects
Even those who do not own shares will still be vulnerable to changes in the stock market because of their pension plan. A pension is a long-term savings scheme designed to help people fund their retirement when they are no longer working. Approximately 30 million people in the UK are members of a defined contribution scheme, who will see their pension pots rising or falling with the financial markets. Luckily, most of this money is invested in safe assets like government bonds, and the closer to retirement age a member is, the higher the percentage of their pension pot which is invested in bonds.
So, those expecting to retire imminently, or in the next few years, will not be drastically affected by last week’s tumbling stock markets. However, younger people and those who are just beginning their contribution scheme will find that the value of their pension is lower than it would have been had President Trump’s tariffs never happened.
Ultimately, there are no benefits to be gained from Trump’s tariffs. Falling share prices will only make the UK poorer, either by reducing the opportunity for wealth creation, threatening job security, or meddling with people’s pensions. The only silver lining is that the tariffs stand at a respectable 10 per cent. Compared to the rest of the globe, we got off lightly. The same cannot be said for China, which has been slapped with 104 per cent tariffs.
Mike Johnson has said that we should ‘trust the president’s instincts on the economy.’ But I wouldn’t be so sure …a
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