Donald Trump’s latest plan to slap tariffs on U.S. imports based on sales taxes in their country of origin could shave £16 billion ($20 billion) off U.K. 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 February 13 ordered top economic officials to calculate duties on U.S. imports by looking country-by-country at tariff, tax, regulatory, currency and other barriers faced by U.S. 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 U.K.-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 U.S. economy, they raise the risk of a sizable hit to the U.K. 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 U.S. were to impose 20% duties on imports from the U.K., 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 U.S. were to impose duties based on the U.K.’s tariff policy and value-added tax combined, U.K. exporters to the U.S. 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 U.S., 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 U.K., 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 U.S. feels about a given country,” she said.
So far, the U.K. has attempted to stay out of Trump’s sights by keeping its head down. Just this week, Starmer’s government sided with the U.S. 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 U.K. economist at Capital Economics.
He was less gloomy about the potential effect of U.S. 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 U.K. 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 2024, 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 U.K.’s softly-softly approach could become more difficult to maintain if the U.S. imposes large tariffs, according to David Henig, director of the U.K. Trade Policy Project. Then, “the U.K. would at least have to impose symbolic tariffs on products received from the US that are easily substitutable, to include bourbon, other U.S. food and drink products, Harley Davidson,” he said.