Tensions rose between Sajid Javid and US counterpart Steven Munchin at Davos as the two threaten taxes on each others' countries.
Chancellor Javid reiterated the UK's plans to tax US digital giants such as Amazon and Facebook, leading to Treasury Secretary Mnuchin to respond by saying the US would install retaliatory taxes on British cars.
A trade deal with the US is seen of high priority for the UK post-Brexit, so a souring of relations would be less than ideal when it comes to business.
- Treasury Secretary Steven Munchin called the 'arbitrary' tax 'discriminatory'
US President Donald Trump is expected to further heap pressure on Boris Johnson to drop the tax, but the UK has insisted it will implement the measure in April.
Mr Javid said the digital services tax will only be a temporary measure until an international agreement is in place on how to deal with online giants such as Google and Facebook.
But Mr Mnuchin was clear about Washington’s opposition, and said Mr Trump will discuss it with the Prime Minister.
Mujtaba Rahman, managing director of Eurasia Group, believes this is a sign of the complications involved in satisfying both sides in the long term
Mr Rahman told ITV News: "Well it is indicative of the fact a UK-US trade deal was never going to be easy to negotiate, partly due to the substance, but partly because of the mercurial nature of Donald Trump and his character; very erratic, very difficult to do business with."
The US and France have announced a truce over President Emmanuel Macron’s plans to introduce a similar measure after Washington responded with a threat to slap punitive tariffs on products including French cheese and wine.
But Mr Javid said the tax – a 2% levy on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users – will be introduced.
The tax is expected to raise around £500 million.
- Paul Brand discusses what happened in Davos
Speaking at the World Economic Forum in Davos, Mr Javid said: “We plan to go ahead with our digital services tax in April.
"It’s important – as we said at the time when we first introduced it to Parliament and legislated for it – it is a proportionate tax.
“It is a tax that is deliberately designed as a temporary tax, it will fall away once there is an international solution.”
The UK has been urged to hold back on the tax by the Organisation for Economic Co-operation and Development (OECD), which called for time to allow the international approach to succeed.
Asked whether a post-Brexit US-UK trade deal will be possible if Mr Javid presses ahead with the tax - a Tory manifesto pledge - Mr Mnuchin said “we will be having some private conversations about that”, adding: “I’m sure this will be worked out.”
Appearing alongside Mr Javid on a panel at the Swiss ski resort, Mr Mnuchin said: “I’m sure the President and Boris will be speaking on it as well, as the President did with Macron.”
He said a digital tax is “discriminatory in nature” and the US is participating in the OECD process to find a solution.
“If people want to just arbitrarily put taxes on our digital companies, we will consider arbitrarily putting taxes on car companies,” he warned.
OECD secretary general Angel Gurria told the BBC that without a global solution to technology companies paying less than a fair share of tax, there would be a “cacophony and a mess” of 40 countries going their own way with “tensions rising all over the place”.
The UK should “absolutely hold fire and contribute to a multilateral solution”, he said.
Mr Javid said there has been a growing disconnect between where customers of online firms are based and where they are taxed.
“This does require an international solution and that is something I think we all agree on,” he said.
While there is not an international agreement yet, “this could be the year of change”, the Chancellor added.
Downing Street warned that a trade war would cause harm on both sides of the Atlantic.
The Prime Minister’s official spokesperson said: “Our strong preference is for an appropriate global solution.
"It has taken too long to address this issue at international level and so we will continue to introduce our digital services tax in April in the absence of a global solution."
The spokesperson added: “Imposing additional tariffs would harm businesses and consumers on both sides of the Atlantic.”