Concerns are growing that the UK could be more vulnerable to US trade taxes after President Donald Trump announced his latest move to target VAT.
Trump has instructed his staff to create custom “reciprocal tariffs” for each country – charging the same amount of duty as that imposed on American exports.
The UK’s trading relationship with the US had suggested it would face fewer tariffs than others, but the surprise inclusion of VAT in calculating potential tariffs has raised questions about the impact on British businesses.
Analysts have suggested that tariffs of 20% or more could be imposed on the UK as well as the European Union, but the outcome is uncertain.
The British Chambers of Commerce (BCC) business group has warned that cars, pharmaceuticals and food and drink are among the specific products that could be “significantly hit” by the measures announced by the White House on Thursday.
The Trump administration's latest announcement was broad and threatened retaliation by the United States for not just tariffs, but other "unfair or harmful acts, policies, or practices."
One of the arguments Trump has given so far for imposing tariffs on countries is whether they have a trade surplus with the United States - meaning they sell more to the United States than they import from the country.
The tariffs are part of Trump's efforts to protect American businesses and boost manufacturing.
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Both the UK and the US have claimed they run trade surpluses with each other because of inconsistencies in how the countries collect data. It is uncertain whether Trump will exempt the UK from the tariffs, but the introduction of value-added tax (VAT) into the equation complicates matters.
The president's latest announcement described VAT as an "unfair, discriminatory or external tax".
VAT is a tax that people pay when they buy most goods or services, except food and children's clothing. The standard rate in the UK is 20% and is levied regardless of whether a product is imported from abroad.
George Saravelos, head of global foreign exchange research at Deutsche Bank, said that if the US imposed a combined tax on existing tariffs and VAT, British businesses exporting to the US could face a charge of 21%.
"If the reciprocal tariff were applied on a VAT basis, European countries would be much higher on the list of countries affected," he said.
William Bain, head of trade policy at the BCC, said the UK had a "level playing field" because it did not export as much to the US as other countries.
But he warned that Trump's proposals would "create more costs and uncertainty" and "overturn established trade rules".
Paul Ashworth, a UK economist and chief economist at Capital Economics, said most people would view VAT as a non-discriminatory tax because it applies to all goods, whether domestically produced or imported.
But he noted that one of Trump's advisers had argued that because the US imposes much lower average sales taxes at the state level, VAT was "a form of discriminatory tariff".
Mr Ashworth said it appeared the US president was now in favour of imposing "country-specific" tariffs, which was a departure from his original idea of introducing a universal tax on all imports into the US.
'Hard to predict'
A tariff is a tax on imports collected by a government and paid by the company importing the goods. Countries typically impose tariffs to protect certain sectors from foreign competition.
But to protect domestic businesses, if a company importing goods from abroad bears higher costs rather than accepting or reducing import duties, prices could rise for consumers.
Caroline Ramsay, partner and head of international trade at law firm TLT, said it was “difficult to predict” what the latest announcement would mean for the UK.
She suggested that the word “reciprocal” did not mean what people initially assumed, adding that an assessment would be made on what the US considered fair.
“It does not mean that the US will look at the UK’s tariff on paper imports and match that tariff percentage for paper exports from the UK to the US,” she added.
Mr Bain argues that it is “vital” that the UK government negotiates with Trump and “does not engage in a one-on-one tariff trade war”.
Senior UK government minister Pat McFadden said the government would wait before reacting.
“The smartest thing to do with all these announcements is to digest them, see if they actually materialise and then decide what you do next.”