Trump tariff VAT threat raises fears of hit to UK

Concerns are rising that the United Kingdom could be more vulnerable to trade taxes from the United States following President Donald Trump's recent announcement regarding tariffs. Trump has directed his team to create specific tariffs for different countries based on their trade agreements with the US. This development has raised alarms because it suggests that the UK, which was previously thought to be less at risk of tariffs, may now be affected due to the inclusion of Value Added Tax (VAT) in the calculations for potential tariffs. VAT is a tax that consumers pay when purchasing most goods and services, with the standard rate in the UK being 20%. The unexpected introduction of VAT into the tariff equation has led to questions about how British businesses will be impacted. Analysts have indicated that the UK could face tariffs of 20% or more, similar to those that may be imposed on the European Union, but the final outcome remains uncertain. The British Chambers of Commerce (BCC), a prominent business group, has specifically warned that certain sectors, including automobiles, pharmaceuticals, and food and drink, could be significantly affected by these new measures announced by the White House. The latest announcement from the Trump administration is extensive and includes threats of retaliation not only for trade tariffs but also for other actions deemed unfair or harmful. One of the reasons Trump has provided for imposing tariffs on other countries is based on whether those countries have a trade surplus with the US, meaning they sell more to the US than they import from it. The use of tariffs is part of Trump's broader strategy to protect American businesses and stimulate domestic manufacturing. Both the UK and the US claim to have trade surpluses with each other, but there are discrepancies in how each country collects trade data. It remains unclear whether Trump would exempt the UK from these tariffs, but the introduction of VAT complicates the situation further. The president has labeled VAT as an 'unfair, discriminatory, or extraterritorial tax. ' VAT is a tax that applies to most goods and services, excluding food and children's clothing, and is charged at a standard rate of 20% in the UK, regardless of whether the product is imported or produced domestically. George Saravelos, the global head of FX research at Deutsche Bank, has stated that if the US were to impose taxes based on existing tariffs combined with VAT, British businesses exporting to the US could face charges of up to 21%. He noted that if reciprocal tariffs are applied on a VAT basis, European countries would likely be more affected than the UK. William Bain, the head of trade policy at the BCC, mentioned that the UK has a certain level of protection due to its lower volume of exports to the US compared to other countries. However, he cautioned that Trump's proposals could lead to increased costs and uncertainty for businesses, disrupting established trade norms. Fiona Conor, managing director of Trust Electric Heating, a radiator manufacturer based in Leeds, expressed concern that if tariffs were applied to her products, she would be reluctant to pass on the costs to her customers through higher prices. She indicated that she is considering starting production in the US due to the significant tax breaks available for innovative companies. Conor emphasized the need for the UK government to be strong negotiators and suggested that Prime Minister Sir Keir Starmer should work to strengthen the partnership with the US. Paul Ashworth, chief UK economist for Capital Economics, pointed out that most people view VAT as a non-discriminatory tax since it applies to all goods, regardless of their origin. However, he noted that one of Trump's advisors has argued that VAT is a form of discriminatory tariff because the US has a lower average sales tax at the state level. It appears that the US president now favors imposing tariffs on a country-by-country basis rather than his initial idea of a universal tax on all imports to the US. Tariffs are essentially taxes on imports that governments collect, and they are paid by the companies bringing goods into the country. Countries typically impose tariffs to protect certain sectors from foreign competition. However, while protecting domestic businesses, tariffs can lead to higher prices for consumers if importing companies pass on the increased costs. Caroline Ramsay, a partner and head of international trade at the law firm TLT, stated that it is difficult to predict the implications of the latest announcement for the UK. She suggested that the term 'reciprocal' may not mean what people initially think, as the US will assess what it considers fair. Mr. Bain argued that it is crucial for the UK government to negotiate with Trump to avoid getting caught in a trade war characterized by retaliatory tariffs. Senior UK government minister Pat McFadden stated that the government would take a cautious approach, waiting to see how the situation develops before deciding on a response.