Concerns are mounting among British businesses after former U.S. President Donald Trump announced plans to target Value Added Tax (VAT) in his latest tariff strategy. The move could significantly impact UK exports to the United States, with potential tariffs of 20% or more being discussed.
Trump has instructed officials to develop “reciprocal tariffs”, meaning the U.S. would impose the same levies that its trading partners apply to American exports. The inclusion of VAT in tariff calculations has raised fresh concerns for the UK, which had previously been considered less vulnerable to U.S. trade taxes compared to other nations.
UK Businesses at Risk
Analysts warn that key UK industries—including automobiles, pharmaceuticals, and food and drink—could be hit hard by the proposed tariffs. The British Chambers of Commerce (BCC) has expressed concern over the potential disruption to trade, warning that Trump’s approach could “create more cost and uncertainty” for British exporters.
William Bain, head of trade policy at the BCC, acknowledged that the UK exports fewer goods to the U.S. compared to other countries, providing a small buffer. However, he cautioned that the introduction of VAT as a factor in trade tariffs could “upend established trade norms.”
George Saravelos, global head of FX research at Deutsche Bank, suggested that if the U.S. calculates tariffs based on VAT rates, UK exporters could face a 21% charge on their goods.
“If reciprocal tariffs are applied on a VAT basis, European countries would be much higher on the list of impacted countries,” Saravelos explained.
Trump’s Justification for Tariffs
The Trump administration has justified its tariff strategy by claiming VAT represents an “unfair, discriminatory, or extraterritorial tax.” The argument hinges on the fact that while VAT is applied to all goods sold in the UK, including those produced domestically, the U.S. operates under a much lower average sales tax system at the state level.
According to Paul Ashworth, chief UK economist at Capital Economics, VAT is widely regarded as a non-discriminatory tax. However, some of Trump’s economic advisers argue that VAT effectively acts as a hidden trade barrier against U.S. goods, making British and European exports subject to higher tariffs in response.
The Risk of a Trade War
Caroline Ramsay, partner and head of international trade at law firm TLT, warned that it remains “difficult to predict” exactly how Trump’s VAT-based tariffs will impact the UK.
“It does not mean that the USA is going to check what the UK tariff is on paper imports and match that tariff percentage for paper exports to the U.S. from the UK,” Ramsay explained. Instead, she said, the U.S. would likely make its own assessment of what it considers to be a “fair” tariff rate.
As uncertainty looms, UK policymakers face the challenge of responding to Trump’s unexpected move. Senior UK government minister Pat McFadden urged caution, stating, “The most sensible thing to do with all of these announcements is to digest them, see if they actually come to pass, and then decide what you do.”
For now, UK businesses are left in a state of uncertainty, awaiting further details on how Trump’s tariff plan will unfold—and whether the UK government will be able to negotiate exemptions before potential trade tensions escalate into a full-scale tariff battle.
