UK Concerns Rise as Trump’s Tariffs and VAT Threat Loom Large

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Concerns are escalating regarding the potential exposure of the UK to US trade taxes following President Donald Trump’s latest announcement. In his recent move, Trump has directed his team to develop custom “reciprocal tariffs” for individual countries based on trading agreements that include imports and exports with the United States.

The UK’s trading relationship with the US had initially suggested it would be less vulnerable to tariffs compared to other nations. However, the unexpected inclusion of Value Added Tax (VAT) in the calculations has raised questions about its impact on British businesses. Analysts have posited that tariffs as high as 20% or more could potentially be imposed on both the UK and the European Union, but their exact implications remain unclear.

The British Chambers of Commerce (BCC), a leading business group, issued a warning about sectors such as cars, pharmaceuticals, food and drink. They highlighted that these industries might suffer significantly from any new tariffs announced by the White House on Thursday.

Trump’s latest announcement is extensive in scope and threatens retaliation not only for trade-related issues but also against “unfair or harmful acts” by other countries towards the US. A justification provided by Trump to date for imposing tariffs has been whether a country maintains a trade surplus with the US, meaning it sells more products to America than imports from there.

The implementation of tariffs is part of Trump’s efforts to safeguard American businesses and boost domestic manufacturing industries. The UK government has not indicated any plans for retaliatory measures in response to steel tariffs imposed by the US. However, complications arise due to the inclusion of VAT as an “unfair, discriminatory or extraterritorial tax,” according to a statement made on Thursday.

Value Added Tax (VAT) is a tax levied on most goods and services consumed within a country. The standard rate in the UK stands at 20% and applies uniformly across imports as well as domestically produced items. George Saravelos, global head of FX research at Deutsche Bank, posits that if tariffs were to be based on existing tariffs combined with VAT, British companies exporting goods to the US could face charges amounting up to 21%. He also suggests that under this scenario, European countries would likely bear a higher impact.

William Bain, head of trade policy at BCC, points out that while the UK has some level of insulation due to its lower exports compared to other nations in relation to America’s imports, Trump’s proposals will introduce more costs and uncertainty. He emphasizes the need for upending established trade norms as a result.

Fiona Conor, managing director of Trust Electric Heating—a Leeds-based radiator manufacturer with plans to expand into the US—expresses concerns over potential tariffs applied to her products but sees advantages in manufacturing within America due to significant tax breaks offered there. She advocates that strong negotiations are necessary and urges Prime Minister Sir Keir Starmer to strengthen ties between the UK and the US.

Paul Ashworth, chief UK economist for Capital Economics, notes while most individuals consider VAT a non-discriminatory tax because it applies equally regardless of domestic production or import status. However, he acknowledges that one of Trump’s advisers has argued that since the US imposes lower average sales taxes at state levels compared to global rates like VAT, such a levy could be interpreted as discriminatory by America.

Mr Ashworth also points out what appears to be a shift in policy from universal taxation on all imports towards tariffs applied on a country-by-country basis according to individual assessments of fairness. Caroline Ramsay, partner and head of international trade at the law firm TLT, cautions that it’s “difficult to predict” exactly how these new measures will affect the UK. She notes that the term “reciprocal” may not mean what is commonly assumed; instead, an assessment by US authorities would determine what they deem as fair tariffs.

Mr Bain stresses the importance of proactive negotiation between the UK government and Trump to avoid falling into a cycle of retaliatory tariffs. Senior UK government minister Pat McFadden has stated that their course will be one of careful evaluation: “The most sensible thing is to digest these announcements, see if they actually come to pass, and then decide what you do.”