Trump’s Reciprocal Tariffs and VAT

A massive threat for Europe if the US will try to include Value-Added Tax (VAT) in its calculation of reciprocal tariffs to be applied to the EU and the UK that uses the same form of indirect taxation

Trump’s reciprocal tariffs and VAT

Trump commanded the preparation of “ reciprocal tariffs” country by country, “also considering VAT” so that they start to be implemented on the 1st of April. It is unclear whether he was referring to average or targeted tariffs. The differences in average tariffs are shown in the following chart:

Source: World Integrated Trade Solution

©FT

These levels of difference are not on average material for European countries. On a targeted base, there is the traditional Trump’s complaint about cars, where the EU charges a 10% tariff on its imports and the US only 2.5%. So, there are rumours that the EU is preparing to lower its car tariffs to 2.5%. An issue with this, concerns the application of the WTO rule of the Most-Favoured Nation clause that implies the use of the lower tariff to all countries, including China. This may not be such an obstacle because the EU decided on a tariff of 35% on China’s EVs with the rationale that it is done to offset the degree of subsidies and protection given by China to its EV producers, which is a measure complying with WTO rules.

The big issue concerns the announced consideration of the value-added tax (VAT) in calculating the reciprocal tariff. I watched Peter Navarro , the (in)famous Trump trade advisor, saying on Bloomberg TV that because of VAT exemption European exporters get a subsidy when exporting, and foreigners are taxed with VAT when the EU imports their goods. His face and wording denounced a total incomprehension of the indirect tax neutrality principle that makes the EU procedure comply with WTO rules.

The reason for this lies in the principle of Taxation at the Point of Consumption. VAT, as a special type of indirect (or “sales”) tax, is designed to tax goods and services where they are consumed, not where they are produced. By exempting exports from VAT, the EU ensures that its goods are not double-taxed when they enter another jurisdiction and are subject to whatever form of domestic sales tax exists in the destination country. There are no distorting subsidies involved.

By the same logic, the EU must apply the principle of equal internal indirect taxation for domestic and foreign goods. By charging imports at the point of entry with VAT, it is ensured that in the domestic market, local and foreign goods pay the same level of indirect taxation. The VAT regime followed by the EU does not imply trade distortions, and it gets the full approval of the World Trade .

The average VAT rate in the EU is 21.8%, as it can vary within a range among member countries. If the US “ reciprocal tariffs” include VAT as interpreted by Navarro and implicitly by Trump, that would be a violation of WTO rules (that the US no longer respects) and, of course, a dire consequence for EU and the UK economic growth. There is, naturally, the hypothesis this VAT issue is being used as a negotiation lever to try to obtain other things, but with Trump, we never know beforehand where it all ends. Europe must be ready to reciprocate forcefully in the incoming negotiations. It is always hopeless to try to appease a bully.