Published on 17th May 2025
Original article published by IREF Europe on 14th May 2025
Introduction
The recent major fall in global stock markets was too large to be solely attributable to Trump’s tariffs. It is an adjustment and possibly the introduction to a period of downwards adjustments for investors. The amount of profit available in the world economy is far lower than the valuations of quoted shares implied. Most of the lost ground has been regained, though, and false optimism has been restored. That serves only to postpone the reckoning.
Size and breakdown of UK exports
Taking the UK as an example, we can see that the potential damage from US tariffs is far smaller than the value lost in the initial fall in the FTSE 100, and indeed far smaller than what remains lost after the rebound from March’s lows.
The UK’s exports and the added value in them are trending strongly towards services and away from goods. Tariffs on goods would leave the majority of UK exports unaffected.
The UK’s 2023 GDP was around £2.7 trillion, of which 32% was exported.[1] That means a total of just under £870 billion exported. According to The House of Commons Library’s figures, services exports are 55% of the whole by nominal amount, and the Resolution Foundation claims that the UK is the ‘second biggest exporter of services in the world’. They go on to state that ‘Services industries already account for more than two-thirds of British exports by value added’.[2] By these figures, services exports account for a greater proportion of wealth creation than their nominal share and goods, by implication, a lower one.
Size and breakdown of UK exports to the USA
The UK’s services trade with the USA is important, the trade in goods less so.
The Office for National Statistics has issued figures for the proportions of the UK’s trade with the USA:[3]
- ‘In 2023, the UK…exported £60.4 billion of goods (15.3% of all goods exports).’
- ‘In 2023, the UK…exported £126.3 billion of services (27.0% of all services exports).’
Impact of tariffs on the UK
Tariffs will impact a value of goods exports equivalent to at most 2.2% of the UK economy (£60.4 billion out of £2.7 trillion), and cost the UK less than £1 billion per annum in wealth.
This damage assumes an average tariff percentage of between 10% and 25%, depending upon the type of goods, and that no mitigation is achieved:
- by a bilateral trade agreement;
- by the USA desisting from imposing these tariffs in full;
- by the exporter being able to move more of the supply chain onshore into the USA so as to reduce the export content – which would still result in a reduction of UK GDP but would lessen the loss of wealth created for the exporter and therefore for the UK.
The idea that the tariffs will result in an immediate, irreversible, and total loss of export sales is ill-founded. A volume decline in the order of 25% is more likely, which would reduce UK GDP by 0.55% unless alternative markets for the goods could be found and for the same price.
That is a decline of £14.9 billion in UK GDP and, assuming that the profit margin on these sales is 5%, a loss of pre-tax profit of £742 million.
Decline in the FTSE 100 Index in the wake of the announcement of tariffs
The FTSE 100 Index is taken as the most accurate token of the value of the UK’s private sector economy. Since doing foreign business has become the preserve of larger companies, it is a reasonable assumption that a majority percentage of the UK’s goods exports to the USA are made by FTSE 100 companies.[4] FTSE 100 companies would then take most of the hit to profits of £742 million annually. The entire market fell by 11% upon the announcement of tariffs, though, a value reduction of £280.8 billion across the index.
A common rule-of-thumb for the value of a company’s shares is the company’s Net Asset Value (its assets less its liabilities), plus the net present value of five years of future profits (based on the assumption that this year’s profits can be sustained for five years).
An 11% drop in value implies any or all of:
- assets having been over-valued;
- liabilities having been under-stated;
- a significant reduction in estimated future profits.
Value reduction in FTSE100 companies implied by the introduction of tariffs
As mentioned earlier, the value reduction in the immediate aftermath of Trump’s pronouncements was £280.8 billion. The total value of all the FTSE 100 companies (their ‘Market capitalisation’) at around 10:00 am on 30th April was £2.2 trillion, when the index itself stood at 8,459, compared to its highest ever level of 8,871 on 3rd March 2025.[5] Its lowest level this year was 7.679 on 9th April.[6] That was just after the announcement of tariffs, before which it had already dropped back to 8,635 on 1st April.
Based on those numbers, 1 point of the FTSE index equates to £262.4 million of value, so the immediate effect of Trump’s tariffs was a drop of 956 points or £280.8 billion.[7] The bounce-back of 780 points to the level on 30th April has added back £204.7 billion, or 73% of the loss, leaving a residual loss of £75.8 billion.
Relationship of FTSE 100 drop to damage from tariffs
The annual loss-of-profits from tariffs of £742 million per annum needs to be multiplied by five to extrapolate its effect on the company values, because share prices reflect five years of profit, not one. The damage to share prices should then have been £3.7 billion.
The actual damage to share prices was an immediate drop of £280.8 billion, mitigated now to a drop of £75.8 billion by the partial recovery. The relationship of the actual damage to the damage from tariffs is 7600% in the case of the immediate drop and 2050% in the case of the mitigated drop now. This is completely disproportionate and indicates that many more factors have been at work that have caused investor disquiet.
Other factors at work
Sluggish GDP growth, higher interest rates, and the amount of money being extracted by governments from the economy to pay their own existing debts were all being ignored: Trump’s threat of tariffs pulled markets up short, and they have over-reacted to that one element, but not to the accumulation of elements.
Now it looks as though the tariffs may be smaller in scope, delayed, reduced as percentages, mitigated by trade agreements and so on. False optimism reinstates itself.
By contrast the other problems persist and pose difficult questions for investors as to where to put their money. Real interest rates on bonds remain low as inflation is far from completely conquered, and bond income is becoming taxed at higher rates and on its entirety, not just on the excess over inflation. The competition amongst borrowers for new money could intensify, adding to the upward pressure on interest rates, just as governments and central banks would prefer them to fall. If investors have bought into bonds at the current level, they would face a loss if any or all of the above occurred.
Cash holdings have become subject to lower interest rates as central banks have responded to government pressure over the interest benchmarks they control. This has limited effect on medium-term interest rates but imposes a penalty on holding ‘cash’ i.e. short-term deposits. And whatever is earned on those deposits is taxed in its entirety and at higher rates, meaning its real value diminishes.
Conclusion
The Trump tariffs have been an unwelcome wake-up call to investors to take a good hard look at the prospects for growth and profits. The immediate panic upon the announcement of tariffs has given way to comfort that the reality may not be so bad after all on that issue, which serves only to bring the other issues into focus instead.
The upshot is that investors face a prolonged period of uncertainty, which is presenting a poor set of options amongst the traditional ones of shares, bonds, and cash. This may go some way to explaining why gold has increased in value, as it does in times of uncertainty. The money has to be put somewhere and gold is taking on the identity of the least worst option, for the time being at any rate.
[1] https://tradingeconomics.com/united-kingdom/exports-of-goods-and-services-percent-of-gdp-wb-data.html
[2] https://www.resolutionfoundation.org/press-releases/services-account-for-a-record-share-of-britains-exports-but-they-are-increasingly-concentrated-in-london/
[3] https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/uktradewiththeunitedstates2023/2023
[4] FTSE 100 companies will account for a goodly percentage of the 60% of UK GDP that is private sector, 40% of UK GDP being the public sector and involving no exports to the USA. FTSE listed companies will have non-UK turnover through their foreign subsidiaries, which contributes neither to UK GDP nor to UK exports to the USA.
[5] https://www.londonstockexchange.com/indices/ftse-100/constituents/table
[6] https://www.londonstockexchange.com/market-data/all
[7] Based on market capitalisation on 30th April of £2,219 billion and an index level of 8,459