UK: 
USA:
Donald Trump has once again put tariffs and VAT policies at the centre of his trade agenda.
The US President signed a memo earlier this month in which VAT was mentioned as one of the “unfair, discriminatory and extraterritorial taxes” he plans to tackle.
His comments and proposed policy of applying a reciprocal tariff on countries with VAT highlight his belief that VAT systems, especially in Europe, create an unfair playing field for US businesses.
His stance has sparked debate and could significantly impact global trade.
So, let’s recap: What is VAT and how does it work for exported goods?
VAT is a consumption tax applied to goods and services at each stage of production and distribution. Used in over 170 countries worldwide, it is applied on a non-discriminatory basis, regardless of where a product is made.
For exported goods, VAT is typically refunded or not charged to prevent double taxation, allowing these goods to be sold internationally without the domestic tax burden.
Many European countries allow importers to defer import VAT payments and some have systems in place to allow imports without any VAT payments.
The EU Commission claims VAT is not a trade measure, let alone a tariff. It is not a measure applied exclusively to foreign goods like an import tariff.
What does the EU-US trade relationship look like?
The EU and the U.S. share a robust trade and investment relationship.
In 2023:
- Total bilateral trade in goods reached €851 billion. The EU exported €503 billion of goods to the U.S. and imported €347 billion, resulting in a €157 billion trade surplus for the EU.
- Total bilateral trade in services amounted to €746 billion. The EU exported €319 billion of services to the U.S. while importing €427 billion, leading to a €109 billion services trade deficit for the EU.
- Investment ties remain strong, with EU and U.S. firms holding €5.3 trillion worth of investments in each other’s markets (2022 data)
(Data from EU Commission)
Trump’s criticism of VAT systems
Trump has claimed VAT allows EU exporters to avoid added costs through VAT refunds while US exporters face higher costs under the domestic tax system.
Adding to this debate, White House deputy chief of staff Stephen Miller stated:
“Did you know when you ship a car from the US to Europe, if they let it in at all because of many non-tariff barriers, between the VAT and duties, that car is taxed at 30%? The German car or a European car sent to America is taxed at 2.5% or basically 0.”
A VATCalc report notes that Trump correctly identifies an imbalance but misattributes its cause.
The issue stems from differing consumption tax systems rather than discrimination.
The EU Commission clarifies that VAT is applied equally to all goods and is not an extra tax on US imports – instead, it ensures that goods are taxed in the country where they are consumed.
Reciprocal tariffs
To address what he perceives as unfair trade practices, Trump’s administration has once again floated the idea of “reciprocal” tariffs on foreign countries.
It’s reported he advocates for tariffs equal to VAT rates imposed by trading partners.
Supporters argue this would level the playing field for US businesses, but critics warn of escalating trade tensions and retaliatory tariffs.
Potential impact
- Higher Costs for U.S. Consumers: Tariffs on imports from VAT countries could raise prices on European goods.
- Retaliatory Tariffs: Trading partners could impose counter-tariffs, harming U.S. exporters.
- Strained Alliances: Trade disputes may damage relations with key economic partners.
While Trump’s criticisms reignite debates on fairness in trade, experts caution that VAT policies are standard global practices, taxing consumption rather than production.
As the President’s term unfolds, Trump’s tariff and VAT policies will remain a key issue, with the potential to reshape US trade policy for years to come.
