Can the UK escape Donald Trump’s tariffs?

US President Donald Trump has imposed a general tariff on China of 10% because China has such a large balance of trade surplus with the US. China’s retaliation has been limited, targeting US fuels, large cars and agricultural machinery. The president is now looking at retaliatory tariffs, wanting to put US tariffs up where the trading partner charges more than the US under current tariff schedules.

The European Union (EU), for example, charges a 10% tariff on imported vehicles from the US but the US only charges 2.5%. The US could put its tariff up to match, or the other side could lower theirs.

The EU is a customs union by design, so it imposes a wide range of tariffs on 73% of the product lines set out in published World Trade Organisation (WTO) tariff schedules, including some high tariffs on food where it wishes to protect EU agriculture. All member states must adhere to the same published tariff schedule, with the EU being the member of the World Trade Organisation (WTO) attending the meetings on behalf of the member states.

It seems likely, given the large EU surplus on goods in trade with the US, that President Trump will go ahead and impose a range of tariffs on the EU in addition to the general tariff on steel and aluminium already announced. The EU will retaliate.

Countries under review

The relevant departments have been given 180 days to review the various practices other countries are adopting to favour their trade and to disadvantage US exports. They will present the president with the results and with the remedies they propose to adopt. The aim seems to be to turn the foreign advantage into a counter balancing tariff to negate it.

The obvious area is tariffs that are higher than US ones where the US could match the foreign level. The president also intends them to examine subsidies, favouritism to local companies, abuse of public ownership, taxes slanted to hit US firms as with digital taxes, manipulation of intellectual property, discriminatory regulations and Value Added Tax (VAT).

The curious case of VAT

The addition of VAT includes an item which most do not regard as an impediment to fair trade. Whereas a tariff raises the price of the import but not of the domestic competitor product, VAT is imposed on both the import and the home product at the same rate. It seems that the president’s dislike of the EU has had an impact, as VAT is strongly associated with the EU.

All new members of the union must adopt a VAT system and part of the VAT revenue is for the EU’s own budget. Some non-EU countries have now adopted similar taxes.

The president’s antipathy to the EU seems to stem from a variety of causes. He dislikes the way they campaigned against him becoming president and their torrent of public criticisms of him. He thinks the members have been exploiting US generosity by using the US defence protection as a reason not to increase their own defence budgets to protect themselves. As an investor in the UK, he disliked President Biden siding with the EU and Ireland against Brexit. He thinks the Ukraine is largely a European responsibility which they have expected the US to pay for.

The UK tariff schedule

The UK resumed its independent membership of the WTO on leaving the EU. It set out its revised tariff schedule which differs considerably from the EU one. The UK decided to move from imposing tariffs on 73% of all traded lines, to imposing them on 53%.

A substantial number passed to zero tariff, in three categories. Intermediate goods, items imported to be used to make things in the UK, were exempted from tariffs to lower UK business costs. Where the EU imposed a low tariff of a few percent these levies were removed, on the grounds that the small revenues came with a larger bureaucratic cost to business. Where the UK has no production, tariffs were removed as they were just a needless tax on the consumer.

The UK continued with the EU’s 10% tariff on cars, and with many of the high tariffs on food. Beef and lamb attract a tariff of 12% plus a weight-related charge. Milk is charged at £15 per 100 kg, whilst cheese is taxed at £121 to £185 per 100 kg.

The UK can drop some of these tariffs on US goods to head off retaliatory tariffs or to respond to them with cuts. In his first term, President Trump seemed sympathetic to the idea of a UK/US free trade deal which the UK government did not feel able to negotiate prior to formal departure from the EU.

The UK has been working on a general tariff on all imports involving fossil fuels, to be called the carbon border adjustment mechanism, in line with EU plans. This could hit US exports of oil, gas, petrochemicals and energy-intensive products. It may well become an issue with the US. Delaying introduction could help with these difficult trade negotiations.

The new government’s failure, so far, to offer the US a tariff-free trading agreement or to fully engage on trade issues with the new president means the UK may now be in line for some of the same treatment the Mr Trump is proposing for the EU. The UK still has VAT as a major tax, not switching back to the simpler purchase or sales taxes which VAT replaced. It still imposes some of the higher tariffs the EU imposes. The sooner the UK engages with the US wish to pull tariff barriers down, the better for the sentiment in markets.

UK/US trade

The UK has greatly boosted its services exports in recent years. Services do not currently attract tariffs. Total service exports were up 30% between 2016 and 2023 in real terms.

The US is the UK’s largest single country trading partner and a big consumer of UK services. UK exports of goods to the US are dominated by vehicles, machinery, and chemicals, largely pharmaceuticals. The UK imports a similar value of US goods, also dominated by machinery, chemicals and transport (especially planes), with the addition of fuels.

Mr Trump has not indicated the UK as big trade problem, because his figures do not show a worrying US deficit. He may, however, have general worries about the few asymmetric tariffs, and about the UK’s treatment of the profits and activities of US technology companies. He thinks some UK regulation of online activities is excessive and the rate of company taxation high. He could now add VAT to his grievances.

What might happen to UK trade?

A happy outcome for the UK is possible. The UK could avoid the US additional tariffs by prompt and friendly action. It could go one further and offer a free trade agreement to the US, getting rid of all tariff barriers on both sides.

President Trump has been offended by the statements of various senior ministers prior to taking office, and by the governing party’s highly visible support for Joe Biden in the election. He, however, has also indicated continuing warmth towards the UK and a willingness to do a deal. He invited the prime minister and foreign secretary to dinner prior to the election.

The US is not happy with the gift of the Chagos Islands to Mauritius, a friend of China. They would like the UK to keep ownership, which guarantees a friendly owner and avoids settlement or use of the other islands by people and visitors who might not be well disposed towards the US Navy. The Diego Garcia base in the Chagos Islands is a crucial part of Western defence in the Indian Ocean, stretching to Singapore and Malaysia. The UK could change its policy.

The president may not be pleased with the UK holding out hope of Ukraine joining NATO when the president has ruled this out and can of course veto it.

Other measures the UK could take to improve relations with Washington include:

• Revisiting the Online Safety Act which may have overdone the threats to US companies. They can be fined up to 10% of world turnover for an infringement.
• Arranging a state visit for President Trump.
• Any of these changes would be bridge building to exempt the UK from the tariff attacks coming to others.

The US has also accepted Lord Peter Mandelson as the UK Ambassador as a goodwill gesture despite his unpopularity with some Republicans.

A less happy outcome is also possible if UK diplomacy fails to make a sufficient case for special treatment. The US could introduce retaliatory tariffs wherever UK tariffs are higher. It could make a big issue of the forthcoming carbon tax on imports. It could impose new tariffs on the UK to get the UK to improve its offer to the US.

The US administration could discourage the US technology giants from continuing to make substantial investments in the UK pending changes to the regulatory and tax environment. The UK has been growing trade well with the US in recent years and on UK figures runs a large surplus in services. The UK needs to be careful how it treads.

The UK could muddle through

President Trump has used tariff threats to get a change of behaviour by Colombia on receiving returned illegal migrants, and to persuade Canada and Mexico to work up plans to strengthen their sides of the US borders to stop drugs and illegal migrants crossing. He is now using a general tariff on steel and aluminium to boost US capacity at the expense of higher prices. He is threatening retaliatory tariffs where others impose them already.

The UK government started badly with its approach to the new president before the election. More recently, it has been friendlier. It has not rushed to impose or threaten the US with higher tariffs and has not agreed to row in with the EU’s more aggressive response. It did not complain about Vice President JD Vance’s speech to the Munich Security Conference in the way the EU did. This leaves it with the chance of muddling through with the US, avoiding much extra damage to UK/US trade.