Donald Trump has vowed to impose tariffs on countries that charge VAT, leaving the UK at risk of a £24billion blow to its economy.
Trump signed an executive order declaring that his administration would impose the “exact same tax or tariff” on all imports as were imposed by other countries on American exports.
Mr Trump said last night that he views VAT - as imposed by the UK - as an unfair trade barrier.
“We’re going to call it a tariff,” he told reporters.
It is not yet clear whether Britain will be specifically singled out by Mr Trump, as the US vowed to address “each country one by one”.
George Saravelos, the global head of foreign exchange research at Deutsche Bank, told The Times that if the US imposed duties based on tariff policy and VAT combined, British exporters to the US would face charges of 21%.
Tariffs of this scale would knock 0.4 percentage points off GDP growth — about £24billion — for the next two years
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William Bain, Head of Trade Policy, at the British Chambers of Commerce, said President Trump's plans will create more cost and uncertainty for investors, businesses and consumers across the world.
“Plans to factor in countries’ VAT regimes could lead to especially complex and costly tariff scenarios which upend established trade norms," he 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.
“It will need to adopt a flexible and agile response, while assessing the reaction of other major players. But it must make the most of the time available before the introduction of these tariffs to negotiate with the US on alternative arrangements.
“If they do not, then sectors such automotives, pharmaceuticals, and food and drink could be significantly hit as higher tariffs inevitably feed through into globally higher prices for consumers.
“Our services exports with the US won’t be subject to these tariffs and are far higher than our goods exports, giving UK trade a level of insulation.
“Nevertheless, we would urge the UK Government and US Administration to quickly open negotiations and focus on ways to build upon our bilateral trade of £300billion per annum. We must make the case for pro-growth exemptions from proposed tariffs to benefit UK-US trade.
“There is no disguising it has already been a tough start to the year for business. Cost pressures are ramping up, confidence is down, and government pledges to unlock growth are yet to bear fruit.
“Ministers must now leave no stone unturned in their quest to develop a robust economic environment to support high levels of employment, investment, and growth.”
Pat McFadden, a senior UK Government minister, told Sky News that the UK was an “open trading economy” and said that he thought retaliation against Mr Trump’s plans would be “premature”.