On the 13th (local time), U.S. President Donald Trump signed a presidential memorandum that included a decision to impose reciprocal tariffs, highlighting value-added taxes (VAT) as a key element of the tariff war.
According to The Wall Street Journal (WSJ) and others, reciprocal tariffs mean the U.S. will impose tariffs on foreign goods equal to the tariffs that the countries apply to American products. Trump pointed out tariffs, non-tariff barriers, and extraterritorial taxes as part of the review list for reciprocal tariffs. He also stated in the memorandum that "unfair and discriminatory taxes imposed by trade partners on U.S. corporations, workers, and consumers should also be considered in the review of reciprocal tariff calculations, including VAT." He went on to say that VAT is a "more punitive tax" than tariffs.
VAT is a consumption tax imposed in South Korea and Europe, but not applied in the United States. If a consumer buys a television or dines at a restaurant in Europe, they must pay VAT, similar to paying sales taxes in the U.S. However, there is a difference. Sales taxes are generally collected once at the point of final sale, whereas VAT is levied every time value is added throughout the supply chain.
The mechanism of VAT differs from U.S. sales taxes. Suppose a consumer in the U.S. buys a bicycle for $100; they pay the full amount of sales tax only once when purchasing the bicycle. However, if a consumer in Germany buys a bicycle for 100 euros, VAT is applied multiple times. If a German bicycle manufacturer purchases steel and aluminum for $50 to make the bicycle and sells it to a bicycle shop for 80 euros, the manufacturer pays VAT on the added value of 30 euros. Additionally, when the bicycle shop sells the bicycle for 100 euros, it pays VAT on the difference of 20 euros between the purchase price (80 euros) and selling price (100 euros).
VAT rates vary by country. European countries set and collect their own VAT. The VAT rate in Switzerland is 8.1%, while Hungary's is 27%. Germany, as the largest economy in Europe, has a VAT of 19%. However, European countries often apply lower rates or exemptions for food and tourism-related items.
VAT and tariffs differ. VAT applies to goods and services sold in Europe, regardless of origin. Imported U.S. cars are subject to the same VAT as European-made cars. In contrast, tariffs only apply to imports, making them favorable for local producers.
However, some in the Trump administration and certain economists view the value-added tax in Europe as an unfair trade practice. Peter Navarro, the White House trade and manufacturing policy advisor, cited German cars imported into the U.S. and noted, "Trump will no longer tolerate this sort of thing." There are views that the VAT's rates and application methods make it disadvantageous for U.S. exporters, contributing to a growing trade deficit. According to the Tax Foundation, the average VAT in Europe is 20%, which is higher than the average sales tax in the U.S. (6.6%). U.S. exports sold in Europe are subject to VAT, while European exports sold in the U.S. receive a VAT refund in their home countries and only pay U.S. sales taxes. Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics and a former U.S. Treasury official, told the WSJ that "it has been a major irritant for years."
Trump indicated that VAT would be treated as a tariff. Stephen Miller, senior policy advisor to the White House, said in a recent interview with Fox News that "(VAT) is a primary reason the American auto industry has been hit hard, losing jobs for a long time" and described it as "extremely unfair treatment, stating that Trump has made it clear that we will pursue a policy of reciprocity."
However, some tax professionals do not view VAT as unfair. They argue that while European countries provide VAT refunds to exporters, the U.S. provides a similar measure by exempting domestic exporters from sales taxes. Sean Bray, vice president of global projects at the Tax Foundation, said, "In the current system, products competing in the same market are subject to the same rates regardless of origin, so U.S. corporations do not suffer disadvantages." Erica York, vice president of federal policy at the Tax Foundation, also noted that "VAT is applied equally to goods purchased by European consumers, whether produced in the U.S. or Europe, so it does not give any advantage to European corporations or disadvantage U.S. corporations. It is neutral regarding trade."