Trump’s VAT tariffs are mad, bad – and dangerous for Britain. Here’s how we bite back

A big and important trade partner hitting us where it hurts could scarcely come at a worse time for a country grappling with a stagnant economy and the looming threat of a fiscal crisis, writes James Moore. But we still have a hand to play

Donald Trump wasn’t kidding about tariffs.

The idea that his angry comments about trade – along with his repeated threats to hit friends and rivals alike – were just rhetoric designed to elicit cheers at his rallies has been comprehensively debunked. The hammer has fallen, and looks set to fall again.

This spells danger for the UK. A big and important trade partner hitting us where it hurts could scarcely come at a worse time for a country grappling with a stagnant economy and the looming threat of a fiscal crisis.

Unfortunately, the US president has signed a memo ordering staff to report back on a plan covering “reciprocal trade and tariffs” within 180 days. Howard Lutnick, the Wall Street veteran who is his pick for commerce secretary, said it would be ready by 1 April.

The British government will be on tenterhooks until that date, not least because it isn’t just the tariffs and trade policies of other countries that Trump is taking aim at. Our taxes are also in the firing line.

The digital services tax, imposed on Silicon Valley, is one area of contention. Introduced in April 2020, it was designed to address concerns that an international tax system more suited to the 19th century than the 21st was failing to recognise the value being generated for digital companies by UK consumers.

Paid by search engines, social media platforms and online marketplaces, it targets revenues, not profits, at a rate of 2 per cent above the first £25m. Any business with global revenues of £500m or more is liable. However, a review of the levy, which generates nearly £700m, was announced at the beginning of February. I wouldn’t be surprised to see it junked.

While £700m is a godly sum, ditching it wouldn’t be a killer when you consider that the decision to raise employer national insurance from 13.8 per cent to 15 per cent is expected to generate as much as £26bn on its own.

Of far more concern is Trump’s railing against VAT, which currently stands at 20 per cent. This is where things could get sticky. There is no scope for the government to scrap (or even easily reduce) a tax that raises £160bn to fund vital public services.

While big tech benefits massively from the decrepit international tax set-up, it is possible to argue (as the US has done) that the digital services levy unfairly targets US tech businesses. However, VAT is levied equally on goods and services regardless of where they come from. You’ll pay the same rate on a car whether it is made in the US, the UK, Japan or the EU. However, you’ll pay nothing on a US-printed book or a box of California raisins, because food and books are zero-rated.

While VAT doesn’t operate in quite the same way as the hotchpotch of sales taxes imposed by US states, and sometimes topped up by US cities, both are levied on goods and many services regardless of origin, and they are ultimately paid by the end consumer.

The British Chambers of Commerce (BCC) urged both governments to “quickly open negotiations and focus on ways to build upon our bilateral trade of £300bn per annum”. William Bain, the BCC’s head of trade policy, also said: “It is vital that the UK government does not get sucked into a trade war of tit-for-tat tariffs, which could easily spiral out of control.”

True. But this is so far one area where a lamentably accident-prone British government, which has inspired little confidence to date, has played a bad hand relatively well.

It has attempted to play nice with the Trump administration, despite some of the unwise comments made by senior figures while Labour was in opposition, and regardless of the feelings of its activists, and indeed, large parts of the British public.

This is eminently sensible, not least because whatever you may think of him – and I am certainly not a fan – Trump is far from the worst world leader the UK plays footsie with. We do more than that with some decidedly unsavoury regimes, some of which torture their citizens, suppress free speech, and import arms from this country.

When Trump hit steel imports with a 25 per cent across-the-board tariff, the UK stood pat, passing on imposing a tit-for-tat levy. Contrast that with China, which swiftly responded to Trump’s measures with tariffs of its own.

China is, of course, a giant, and while it will be hurt by the developing global trade war sparked by the US president, it has the ability to bite back and make it hurt.

Britain is in a more difficult position. Shorn of its EU membership, it is a mid-sized fish in a sea filled with giant sharks, of which the US is the biggest. Wait, wasn’t a super US trade deal supposed to be one of the mythical benefits of that bonkers project?

Tariffs are ultimately self-destructive. One of the major reasons Trump won his thumping victory was the impact of inflation on US consumers, and their feeling that the Biden administration had failed to get it under control. Trump’s trade polices will inevitably stoke it by raising the price of goods Americans buy and rely upon.

However, it is fair to note that the threat of them is proving rather effective, as that review of the digital services tax demonstrates.