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      • Panel
        • Robin Walduck – Global Head of Tax & Legal, Financial Services, KPMG UK
        • Yael Selfin – Chief Economist, KPMG UK
        • Alistair Pepper – Managing Director, KPMG US
        • Raluca Enache – Head of KPMG’s EU Tax Centre
        • Angela Savin – Partner, KPMG Law

      Yael Selfin opened the next session ‘Navigating Geopolitical Change’ at KPMG’s annual Tax in Financial Services event with a look at the effects of US trade policy.

      Events prior to the event – and since – have brought about huge uncertainty. A week beforehand, President Donald Trump had imposed varying import tariffs on countries worldwide. The next day, he reset them to a blanket 10%, excepting China, for 90 days. An escalating trade war between the US and China followed.

      What comes next is highly unpredictable. How long will tariffs be in place? Will they keep changing? How will different countries respond? And what does it all mean for the global economy?

      Forecasting the fallout

      Such acute unpredictability makes it difficult for businesses to plan, which means delayed investments – in capex, R&D and IP – and deals. Meanwhile, higher trade tariffs will slow economic growth (see fig. 1). Markets have moved to price in an economic downturn as result.

      Fig. 1. Global GDP growth forecasts under different trade scenarios

      Source: Yale Budget Lab; KPMG modelling using Oxford Economics model

      Yael then turned her attention to the likely impact in Europe. Factoring in the retaliatory measures announced by the European Union before our event, she warned that European economies faced negative growth, if not recession, over the next two years (see fig 2).

      Fig 2. Impact of EU’s reciprocal tariffs on European economies

      The EU has since paused these measures, in response to Trump reducing tariffs on European imports from 20% to 10%. However, the threat of a downturn remains.

      There are some positives amid the chaos. Weaker domestic growth should reduce inflationary pressures – indeed, falling inflation is now the outlook for many economies. Plus, the price of some imported goods and commodities may fall due to slower global demand. These trends could in turn drive interest rates down slightly faster in the short to medium term.

      In the UK, that would mean more financial headroom for the Treasury, as the interest rate on government debt comes down. At the same time, however, a slowdown would squeeze the tax take, as Robin Walduck pointed out.

      To retaliate or not to retaliate?

      The panel moved on to explore how European nations might respond to the US’s protectionist stance.

      At the time of the discussion, the EU faced 20% tariffs on goods exported to the US, while a rate of 10% had been applied to the UK.

      As 10% was the lowest level imposed on any country, Yael felt there was little to be achieved by retaliating, which would only hurt the domestic economy.

      From an EU perspective, however, “all options are on the table”, Raluca Enache pointed out it – including resorting to its Anti-Coercion Instrument. While retaliatory tariffs are on hold, moves are underway to strengthen trade ties with other markets, notably China, India and African nations.

      That said, it will take a few years to carry out the research and development, and establish the new supply chains, required to enter new markets. By then, Angela Savin noted, the US administration and trade policy may have changed.

      Alastair Pepper highlighted the possibility of targeting US services, as the tariffs only apply to goods (when services are taken into account, the balance of trade between the EU is fairly even). For instance, a Digital Services Tax (DST) could be used to target the US tech giants.

      That would likely draw a sharp response from the US, however. Both Trump and Biden have staunchly opposed a DST being charged by foreign countries, which they consider discriminatory in its effect on US firms. A recent memo from the Trump administration on the subject describes it as ‘extortion’.

      There’s an argument that this would make the threat of a DST a useful negotiation lever in the months ahead. But unlike import tariffs, such taxes aren’t imposed at a European level: they’re part of individual member states’ tax policies. Changes to national policies – either removing or imposing DSTs – seem unlikely.

      In the final analysis, Yael suggested, governments must decide whether the current direction of travel is a blip or a long-term trend. If they believe it’s here to stay, then they’ll need to establish new international trade flows. That means providing certainty, and incentivising businesses to make the necessary investments.

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