US Tariffs and VAT Concerns Prompt Fears for UK Economy

Concerns are growing that the UK may be more exposed to US trade taxes after President Donald Trump announced plans to target Value Added Tax (VAT) in his latest move. Trump has directed his staff to develop custom “reciprocal tariffs,” charging the same amount as levies imposed on American exports, for each country. Initially, it seemed that the UK’s trading relationship with the US might shield British businesses from severe tariffs compared to others, but this perception was upended when VAT became a factor in determining potential tariff rates.

Analysts have speculated that tariffs of 20% or more could be levied on both the UK and the European Union. However, it is unclear how these measures will play out. The British Chambers of Commerce (BCC) has warned that certain sectors like cars, pharmaceuticals, food, and drink may be significantly affected by Trump’s proposed tariffs.

Trump’s latest announcement from his administration was wide-ranging and includes the threat of retaliation for not just trade tariffs but also “unfair or harmful acts,” policies, or practices. One common rationale behind imposing tariffs on countries is their perceived trade surplus with the US, meaning they sell more to America than they import.

Tariffs are part of Trump’s strategy to protect American businesses and boost manufacturing in his home country. Both the UK and the US claim to have trade surpluses due to differing data collection methods. The inclusion of VAT adds complexity because it is a tax on consumer purchases, applying uniformly across all goods regardless of origin.

George Saravelos, global head of FX research at Deutsche Bank, estimates that British companies exporting to the US could face charges as high as 21% if tariffs are imposed based on existing rates and VAT combined. According to him, such an approach would likely affect European countries more severely.

William Bain, from the BCC’s trade policy team, acknowledged a degree of insulation for the UK due to lower exports compared to some other nations. However, he warned that Trumps proposals could add significant costs and uncertainty and “upend established trade norms.”

Paul Ashworth, chief UK economist at Capital Economics, noted while VAT is generally seen as non-discriminatory because it applies uniformly across all goods, one of Trump’s advisors has argued that the higher average sales tax in the US makes VAT discriminatory. This shift towards country-specific tariffs rather than universal import taxes suggests a new approach from Trump.

Caroline Ramsay, partner and head of international trade at law firm TLT, emphasized that it is “difficult to predict” how these latest announcements will impact the UK. She pointed out that the term “reciprocal” does not necessarily imply matching tariffs; instead, US assessments will be based on what they consider fair.

William Bain argued for vital negotiation between the UK government and Trump to avoid being drawn into a trade war of tit-for-tat measures. Pat McFadden, a senior UK government minister, suggested that it was best to wait before reacting, advocating careful consideration of any further actions once actual policies are more concrete.

The ongoing global trade dynamics between the US and other nations highlight the potential for significant economic changes if such tariffs come into effect. The British business community is closely monitoring these developments and their impact on various sectors within the UK economy.