Analysts warn of major economic hit for the UK if Trump moves forward with 21 percent trade tariffs in response to VAT policies

The UK economy could be in for a serious setback if former U.S. President Donald Trump follows through on plans for new ‘reciprocal’ tariffs.

Analysts warn that British goods might face a hefty 21% levy, a move aimed at counterbalancing the impact of VAT.

This could hit businesses hard and slow down economic growth significantly.

Economic Growth Under Pressure

According to the National Institute of Economic and Social Research (NIESR), such tariffs could shave off 0.4 percentage points from the UK’s GDP over the next two years—equivalent to a £24 billion loss.

This comes at a challenging time for Chancellor Rachel Reeves, who is already dealing with economic stagnation and rising debt interest costs.

The £10 billion buffer in her spending plans appears to have been erased due to sluggish growth following the latest Budget.

No Cushion for Unexpected Shocks

NIESR’s latest report indicates that the government’s budget is precariously balanced, leaving no financial wiggle room for unexpected economic downturns.

Without changes to taxation or spending, the UK would struggle to absorb future economic shocks during the remainder of this parliamentary term.

This raises the possibility of tax hikes if conditions worsen.

Temporary Boost to Growth?

Despite the looming risks, NIESR has slightly increased its growth forecast for the year to 1.5%, up from a previous estimate of 1.2%.

This optimism stems from the expanded government spending announced in the October Budget.

However, economists warn that this surge in growth is likely to be short-lived.

In contrast, the Bank of England has taken a more cautious stance, downgrading its growth projection from 1.5% to just 0.75%.

Business Concerns Over Rising Costs

Adding to the economic strain, UK businesses are grappling with higher costs.

The government’s plan to increase spending by £70 billion annually, financed through higher business taxes and borrowing, has raised concerns among companies.

Firms are already feeling the squeeze from increased national insurance contributions and upcoming wage hikes, forcing many to reconsider hiring and investment plans.

Trump’s Tariff Strategy

Trump has previously imposed a 25% duty on steel imports, including those from the UK, and is now expected to unveil another wave of tariffs.

Unlike the UK, which has VAT at a national level, the U.S. relies on state-level taxes.

Some experts, such as George Saravelos from Deutsche Bank, believe that a VAT-targeted tariff policy could deal an even harsher blow to the UK economy, potentially resulting in a much steeper 21% import tax rather than the standard 1%.

What Happens Next?

With economic uncertainties mounting, all eyes are on how the UK government will respond.

Will it negotiate exemptions, introduce countermeasures, or prepare for a prolonged economic hit?

The coming months could be crucial in shaping Britain’s financial future in the face of these new trade pressures.

This article was published on TDPel Media. Thanks for reading!

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