The impact of US global tariffs on Heligan's sectors of focus

Since Trump’s landmark announcement on his self-proclaimed ‘liberation day,’ where he unveiled a whole raft of US tariffs on imports, the global economy has been gripped by a cycle of rhetoric that has seen a reaction of frenzied rebuttals, counter-tariffs, and counter-counter-tariffs. The mood and reality was summed up by Darren Jones, the UK Treasury Minister, who said the era of globalisation “has come to an end.” Now, more than a week on from the announcement, the matter is still being hotly debated within governments and parliaments across the globe, providing an indication of the impact it has had on global trade with the World’s largest economy. Heads of state[WA1] , feeling the strain placed upon their economies, have flocked to Washington to kowtow to the US President as they work to agree urgent concessions, with China adding fuel to the fire with their own counter-tariff response, followed swiftly by additional US tariffs on Chinese imports amounting to 145% on some products.

To say global markets have been impacted by this ‘tariff merry-go-round’ would be an understatement, with the S&P 500 experiencing its largest drop since the Covid pandemic. The overwhelmingly negative market reaction saw Trump announce a 90-day pause on some tariffs (a baseline tariff of 10% on most imports to the US remains) for all countries except China, as well as granting further exemptions on products such as smart phones, laptops and memory chips. How the narrative of a trade war between the US and China plays out is uncertain, although we at Heligan assess such an endeavour to have a disproportionately larger negative impact on the US, who lacks the strength of a domestic market which China can fall back on.

After the initial market turmoil, and before the next inevitable upheaval of 21st Century world order, Heligan takes a look at the impact these future tariffs will have on the UK’s critical national security and defence sectors.

Our Exposure
So what tariffs did the UK receive? Well, compared to other global economies, the UK received a relatively lighter tariff of 10% on all imports into the US, however, is still subject to the higher tariffs on steel and aluminium imports (25% for both). This means that while the additional 10% tariff on the UK is less than ideal, and will of course have an adverse effect on businesses to an extent, we feel that this lighter measure, coupled with the government’s intentions to invest more in national security and defence over the coming years, will ensure the survival of the national security and defence sectors[WA1] . In addition, analysis of the tariffs levied on each country by Trump appear to show proportionality to the US’ relative trade balance with each, which from 2023 trade data (see the figure below), shows the UK as a surplus trader (i.e. the US exports more to the UK than it imports from us), which may go some way to explaining the relatively lighter tariff received. As of yet, there is little indication of exemptions from the tariffs for the national security and defence sectors, although in the past ‘airworthy goods’ have been given concessions, but whether this is to be retained is not yet known. More positively, in the past 24 hours the Trump Administration rhetoric offers a glimmer of hope for the UK economy, with a UK-US trade deal appearing to be on the horizon.

Figure 1. Absolute figures for total imports and exports for the US by country (2023). Source: Who are the US’s top trade partners? | USAFacts

Impact on UK Defence & National Security

We assess that specific to the national security and defence sectors, tariffs and associated equipment cost volatility will strain transatlantic defence partnerships such as the AUKUS [WA2] submarine and F-35 fighter jet programmes (note: the EU was initially hit with a higher 20% levy on all imports). The impact on such programmes range from best case - specific exemptions are granted for the import of equipment, minimising the overall impact; to worst case – the increase in cost causes the programmes to spiral out of cost control, jeopardising their very existence.

In addition, the higher tariffs of 25% imposed on all imports into the US of aluminium and steel, as well as electronics and rare earth minerals, will disproportionately hit those national security and defence companies with manufacturing footprints in the US. These are likely to include arms and munitions manufacturers, as well as manufacturers of large land, sea and air mobility platforms. In short, any UK national security and defence businesses with supply chains in the US are at risk from Trump’s heightened tariffs on raw materials.

All of this said, there is hope that the impact on UK businesses will be muted due to a number of additional factors. Firstly, when we look specifically at defence sector exports from the UK (see the figure below), North America, and by extension the US, is a relatively small trading partner, sitting behind both the Middle East and Europe. Secondly, UK national security and defence businesses have typically struggled to penetrate the US market, with US-based firms such as Lockheed Martin and Northrop Grumman dominating US Department of Defence (DoD) contracts. Therefore, hope remains that the impact of tariffs on UK firms will be softened as a consequence of this inadvertent isolation of the UK national security and defence markets.

Figure 2. UK defence exports by destination (5-year moving average). Source: UKDSE survey of UK defence exporters.

What Next?

Whilst there is some optimism that UK businesses will prove resilient in the face of economic pressures from the US, there are some additional longer-term implications to consider. In the context of a wider geopolitical pivot from the US away from Europe, towards the Indo Pacific region, moves are already underway to develop sovereign defence industries in the EU and UK, reducing the reliance on the US for strategic military capabilities. Whilst this will strengthen the EU and UK’s ability to take security into their own hands, it will continue to erode the interconnectedness of their economies to the US, which remains the largest global economy.

This US retreat from globalisation will render fewer collaboration opportunities, and UK businesses may start looking elsewhere to collaborate on and develop the national security and defence technologies of tomorrow, reducing the US’ global influence. This ‘influence vacuum’ could be filled by nations such as China, who has its own ambitions for global influence, backed by a substantial defence and technology sector to rival that of the US.

In addition, the immediate impacts of price hikes on importing into the US will adjust the calculus of those UK-based businesses with a substantial customer base in the US, who will naturally be looking for ways to mitigate the impact of these tariffs. As a result, we could see these firms moving towards having an increased presence in the US, particularly those that are agile enough to move elements of their business, such as manufacturing, across the Atlantic. Longer-term, we could see UK-grown companies shift additional parts of their business which risks the permanent loss of sovereign national security and defence capability. This is made even more plausible by the perception of a much more favourable US defence market for SMEs which has seen greater business valuations and more readily available investment.

But, all of this hypothesising, less our assessment on the impact on manufacturing firms importing aluminium and steel into the US, could be a moot point. That is because Trump has it within his power to exempt [WA1] US national security and defence imports, as he has done with pharmaceutical and consumer electronic products (although there are early indications to suggest these exemptions may cease in the short-term)[WA2] . Such a move would be welcome respite for the UK national security and defence markets, but as of yet, we’ve seen no indication from the Trump Administration as to their thinking. Watch this space.

Conclusion

Trump’s tariff regime will without doubt hit the earnings of UK businesses operating in the national security and defence space in the short-term. However, despite the turmoil, the UK national security and defence markets appear relatively resilient, isolated from the negative effects on the wider economy, owing to their strong UK customer base and fewer contracts into US DoD. Longer-term, there is a risk that some UK businesses seek to establish and expand their US footprints in order to avoid importing more than they need to into the US, but on a macro level, the UK and EU’s strategic shift away from America to develop a sovereign defence industry with increased government spending, will fuel the growth of businesses in the sector. 

Heligan continues to monitor developments across the Atlantic and their impact on our key sectors of specialism: national security, crime prevention and public safety. Strategic shifts in these markets are afoot, much of which is spurred by government direction, and we have yet to see the longer-term impacts of these play out.

Sources: Trump's tariffs threaten US weapons production - POLITICO ; Who are the US’s top trade partners? | USAFacts ; UKDSE survey of UK defence exporters

 [WA1]Key points to highlight are in yellow - could be shown as pull quotes or by emphasising the text in the finished product?

 [WA2]Exclusive: AUKUS nuclear submarine sale under scrutiny as Trump tariffs rattle Australia | Reuters

 [WA3]Trump signs executive order to ease US weapons exports | Reuters