Trump’s VAT Tariff Threat Heightens Risks for the UK

Worries are mounting that the UK may face increased US trade tariffs following President Donald Trump’s recent announcement targeting VAT.

Trump has directed his administration to create tailored “reciprocal tariffs” – imposing equivalent charges to those levied on US exports – for each country.

The UK’s trading relationship with the US had indicated it would be relatively sheltered from tariffs compared to others, but the unexpected inclusion of VAT in calculating potential tariffs has raised concerns about the effects on British enterprises.

Analysts anticipate that tariffs of 20% or more could be applied to the UK and the European Union.

The British Chambers of Commerce (BCC) issued a warning that specific sectors, including automotive, pharmaceuticals, and food and drink, could be “significantly impacted” by the measures announced by the White House on Thursday.

The Trump administration’s latest announcement was broad-ranging, indicating potential retaliation from the US not only for trade tariffs but also for other “unfair or harmful acts, policies or practices”.

One of the justifications Trump has provided for imposing tariffs on countries relates to whether they maintain a trade surplus with the US, meaning they export more to the US than they import.

The use of tariffs aligns with Trump’s approach to safeguarding American companies and enhancing manufacturing.

Both the UK and US assert that they have trade surpluses with one another due to variations in data collection methods. The prospect of Trump exempting the UK from tariffs remains unclear, especially with the introduction of Value Added Tax (VAT) complicating the situation.

The President’s recent statement labeled VAT as an “unfair, discriminatory or extraterritorial tax.”

VAT is a tax levied on goods and services bought. The standard VAT rate in the UK is 20%, applied irrespective of whether a product is imported.

George Saravelos, the global head of FX research at Deutsche Bank, noted that if the US were to impose taxes based on existing tariffs and VAT combined, UK businesses exporting to the US could incur charges of 21%.

“If reciprocal tariffs are imposed using a VAT basis, European countries would find themselves much higher on the impacted list,” he remarked.

William Bain, head of trade policy at the BCC, mentioned that the UK enjoys a “level of insulation” due to a lower volume of exports to the US compared to other countries.

However, he cautioned that Trump’s proposals would “introduce more cost and uncertainty” while “disturbing established trade norms.”

Paul Ashworth, chief UK economist at Capital Economics, believed that most would regard VAT as a non-discriminatory tax since it affects all goods regardless of their origin.

Nonetheless, he acknowledged that one of Trump’s advisors argued that VAT, given the US’s significantly lower average state sales tax, is a “form of discriminatory tariff.”

Mr. Ashworth commented that the US President seems to now favor tariffs being enforced on a “country-by-country basis” rather than his previous notion of applying a universal tax on all imports into the US.

A tariff refers to a tax imposed on imports that is collected by the government and paid by the importers. Countries typically establish tariffs to protect specific sectors from foreign competition.

However, while safeguarding local industries, consumer prices can rise if the importing company transfers the increased costs instead of absorbing or reducing imports.

Caroline Ramsay, a partner and international trade head at law firm TLT, expressed that it remains “difficult to predict” the implications of the latest announcement for the UK.

She noted that the term “reciprocal” may not imply what many initially expected, suggesting that an evaluation by the US would be needed to determine what it considers equitable.

“It does not indicate that the USA will simply match the UK tariff percentages for exports to the US from the UK,” she added.

Mr. Bain opined that it is “crucial” for the UK government to negotiate with Trump and avoid being drawn into a trade war of reciprocal tariffs.

Senior UK government minister Pat McFadden stated that the government would refrain from responding immediately.

“The most prudent approach concerning these announcements is to evaluate them, assess whether they come to fruition, and subsequently decide on a course of action,” he stated.