Trump's latest tariff plan threatens UK with $20 billion hit

Donald Trump

Donald Trump’s latest plan to slap tariffs on US imports based on sales taxes in their country of origin could shave £16 billion ($20 billion) off UK economic output over the next two years, in what would be a blow to Prime Minister Keir Starmer’s promise to fire up growth.

The American president on Thursday ordered top economic officials to calculate duties on US imports by looking country-by-country at tariff, tax, regulatory, currency and other barriers faced by US companies when they tried to export to those markets. The president cited value added tax levied on sales in the European Union as a problem. Britain also charges VAT — at 20%.

While UK-based trade consultants and economists said such a wide-ranging set of duties was unlikely to come to fruition, due to their potential impact on the US economy, they raise the risk of a sizable hit to the UK at a time when Chancellor of the Exchequer Rachel Reeves is under pressure to boost growth in order to generate the tax revenues the country’s 7-month-old Labour government needs to invest in Britain’s ailing public services.

If the US were to impose 20% duties on imports from the UK, it could drag Britain’s economic growth down to 1% on average over the next two years from 1.25%, according to worst-case scenario calculations from Bloomberg Economics.

The impact could even be a little higher: If the US were to impose duties based on the UK’s tariff policy and value-added tax combined, UK exporters to the US would face charges of 21%, according to analysts at Deutsche Bank. That would put Britain behind the likes of the EU at 22%, Argentina at 29%, and India at 33%, the bank’s analysis showed.

“Relative to everyone else, we’re probably still not at the top of his list because you’ve got the EU, which runs a trade surplus with the US, so instantly puts it on his naughty list,” said Sam Lowe, partner at consultancy Flint Global. Trump is “essentially trying to create a justification to impose high tariffs on whoever he wants.”

Whether Trump follows through on his threat is likely to depend on his perception of the UK, according to Anna Jerzewska, founder of consultancy Trade & Borders. Any levy he decides on “is going to be a number that is in many ways just how the US feels about a given country,” she said.

So far, the UK has attempted to stay out of Trump’s sights by keeping its head down. Just this week, Starmer’s government sided with the US over the European Union at an AI summit and refused to follow the EU in retaliating against Trump’s steel and aluminum tariffs.

“That suggests it’s doing all it can to stay out of the firing line and appease Trump,” said Paul Dales, chief UK economist at Capital Economics. He was less gloomy about the potential effect of US tariffs on Britain’s economy — estimating that the effect on GDP of 20% levies could range from a 0.2% hit — or a bit more — to a 0.2% boost, depending on exchange rate effects and retaliatory measures. Nevertheless, he added, “the economic outlook is more challenging than we previously thought.”

Reeves is already trying to revive a stagnating UK economy while scrambling to meet her own fiscal rule that day-to-day government spending must be paid for out of tax revenues. Since her budget in October, market moves that raised borrowing costs and a growth expectations downgrade by the government’s spending watchdog, the Office for Budget Responsibility, mean she faces the prospect of having to make more unpopular spending cuts in some government departments next month.

The UK’s softly-softly approach could become more difficult to maintain if the US imposes large tariffs, according to David Henig, director of the UK Trade Policy Project. Then, “the UK would at least have to impose symbolic tariffs on products received from the US that are easily substitutable, to include bourbon, other US food and drink products, Harley Davidson,” he said.