The "Lessons from the Past" of Trump's Tariff War: Nine Years Ago's "Brexit"

Nine years ago, "Brexit" foreshadowed the economic challenges that the United States might face—warnings of a financial market crash, followed by the risk of economic recession.

On April 5, renowned British writer David Luhnow pointed out that Trump's tariff policy could replay the Brexit scenario. After the Brexit referendum in 2016, the financial market's predictions about Brexit were accurate. The prices of British assets, especially the pound, plummeted significantly and have remained weak since, with business investment once stagnating.

Now, the U.S. financial market is also sending warning signals through the sharp decline in U.S. stocks and the weakening dollar, as the economy may be mired in uncertainty. If businesses are uncertain about how long these tariffs will last, the reduced willingness to invest could undermine some of Trump's established goals: attracting factories and manufacturing investment back to the U.S.

Financial Market "Warnings": Weakness of the Dollar and Stock Market

The S&P 500 fell more than 9% in a single week, and the dollar dropped about 1%—this is a rare moment when both the stock market and the domestic currency are declining simultaneously, which could signal future problems.

Traditional economic theory suggests that imposing tariffs on other countries usually strengthens a nation's currency. But in this case, the weakening dollar may indicate that currency traders believe the impact on demand and growth could be greater than expected.

Multiple economic models estimate that if the UK had not left the EU, its economy could potentially be 2% to 5% larger than it is now, with trade volumes with the rest of the world possibly 15% higher, and the current economic malaise is precisely due to weak investment.

Meanwhile, according to investment bank forecasts, the impact of tariffs on the U.S. economy will range from 0.4% of GDP in the next year to 1.5% by 2030. Although this is smaller than the impact of Brexit, it is still significant.

Uncertainty: The Biggest Enemy for Investors

Although there are differences between Brexit and U.S. tariff policies, with the UK economy being more reliant on trade and the U.S. having a larger domestic market, the most obvious alarm that the Brexit experience sounds for the U.S. is the cost of uncertainty.

British business investment has stagnated almost completely from the 2016 referendum to 2023, with the pandemic and the chaos of the UK government further exacerbating the situation. Weak investment means a reduction in funds flowing into manufacturing and technology sectors, which are precisely the key areas that drive productivity and output in the long term.

Unlike Brexit, Trump seems intent on using uncertainty to achieve various political and diplomatic goals. Sussex University economist Alan Winters stated:

For Trump, uncertainty is clearly part of the game. He likes to keep everyone guessing. In Brexit, uncertainty was merely collateral damage.

Researcher John Springford also pointed out this investment dilemma; if a company decides to build a T-shirt factory in Mississippi and then tariffs are lowered, that factory loses its economic rationale.

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