President Donald Trump has threatened to impose 100% tariffs on European imports in retaliation for the EU’s digital services tax, a move that could ignite a full-blown trade war. Downing Street responded sharply, with a spokesperson declaring that “Britain will not be bullied” and will defend its sovereign right to tax digital markets. The threat, delivered via Trump’s social media platform, targets the EU’s levy on US tech giants like Google, Apple, and Amazon, which the President claims unfairly discriminates against American firms.
For markets, this is a grenade tossed into an already volatile landscape. The FTSE 100 dipped 0.8% on the news, with export-heavy sectors like luxury goods and aerospace bearing the brunt. The pound weakened against the dollar, breaching $1.30 as traders priced in the risk of a transatlantic trade disruption. Gilt yields edged higher, reflecting a flight to safety that paradoxically underpins UK debt. But make no mistake: a 100% tariff is not a negotiating tactic. It is economic warfare.
The digital services tax, which the UK also imposes at 2% on revenues from search engines, social media, and online marketplaces, has long been a thorn in Washington’s side. The US argues it targets American champions while Europe counters that it levels the playing field for local competitors. No10’s insistence on defending its digital sovereignty is commendable on principle, but the arithmetic is brutal. British exports to the US total some £60 billion annually, and a 100% tariff would cripple key sectors. The UK’s services-dominated economy is less exposed than Germany’s industrial base, but the knock-on effects on consumer prices and corporate margins would be severe.
This is not just about trade. It is about the unraveling of the post-war economic order. Central banks, already grappling with sticky inflation, would face fresh supply-side shocks. The Bank of England, which has been walking a tightrope between rate cuts and price stability, would see its job made infinitely harder. A trade war of this magnitude would stoke inflation, depress growth, and fuel capital flight into safe havens like gold and Swiss francs.
The irony is that Trump’s tariff threat comes as the UK and EU are trying to repair relations post-Brexit. No10’s tough talk plays well domestically, but the reality is that Britain is caught between a belligerent Washington and a bureaucratic Brussels. The financial markets loathe uncertainty, and this is uncertainty on steroids. Investors should brace for volatility, with the VIX likely to spike. Bond markets will demand a risk premium for holding sterling-denominated assets.
In the end, this tit-for-tat has no winners. Tariffs are taxes paid by consumers, and a 100% levy would be a direct hit on household spending power. For now, the City is watching gilt yields and the pound’s trajectory. If diplomacy fails, we may be looking at the first major trade conflict of the second Trump era. Buckle up.
