President Trump ordered his advisers on Thursday to determine a new tariff rate for American trading partners. He said it would “fix the longstanding imbalances in international trade.”
As part of his plan, Trump aims to value added tax, a system widely used in Europe and elsewhere to tax consumption of goods and services. The president and his team describe the tax as giving other countries an unfair trade advantage over the United States.
Here's what you need to know.
What is VAT?
This is a sales tax that adds tax to goods or services at each stage of production. The final VAT is the total taxes paid at each stage. This system is levied by the state regarding the final sale of the goods, unlike the US sales tax.
In Europe, VAT tax rates vary by country, but on average are around 20%, much higher than the US state sales tax in 2023, an average of 6.6%, according to the Tax Foundation.
Value-added taxes accumulate from various stages and when the property is sold in the country in which the goods are created, the consumer is ultimately paid.
However, if the goods are exported, much of the VAT is returned to the exporter as a rebate. This provides an incentive for businesses to export goods rather than sell them in the home market.
During the 1950s and 1970s, many countries led by France began experimenting with value-added taxes. The European Union countries were supporters, but VAT taxes have also been adopted elsewhere, especially in China.
VAT rebates for exporters have encouraged companies in these countries to export, making many companies more competitive in the global market.
Did the US think of VAT?
The US is an outlier in an advanced economy because it does not have a VAT.
When President Bill Clinton proposed the energy tax in 1991, Missouri's powerful Republican Sen. John Danforth retorted with VAT to support American exporters. Clinton said the US needs 10 years to prepare.
Republicans then opposed the new taxes. Trump proposed a new approach on Thursday. Unilaterally raises US tariffs on imports from Europe to offset the profits European exporters receive from the continental VAT refunds.
Trump says VAT gives international exporters an unfair advantage, but US companies are selling sales tax when exporting products overseas, similar to how VAT works. They say they won't pay, senior economist Alan Cole said. At the Tax Foundation in Washington. “There are taxes similar to VAT on import and export treatments,” he said.
However, the United States sometimes benefit from VAT refunds in other countries. When President Trump raised tariffs on imports from China during his first term, Beijing responded by increasing rebates to exporters. This allowed exporters to lower prices to American buyers, offset some of the tariffs, and help Chinese exporters retain a significant share of the US market.
However, there is no guarantee that China will again increase rebates in response to Trump's latest threat. Many in China were unhappy about how six years ago Chinese taxpayers were helping Trump write tariff bills rather than American consumers.
How important is it to the European economy?
This is a major source of tax revenue for European budgets. Value-added tax is collected in 21 of the 37 countries that are members of the intergovernmental organization Economic Co-operation and Development Organization. Tax calculations account for about a fifth of total tax revenue.
If Trump increases tariffs, the impact will be significant for European businesses.
“The main risk that Europe faces today is the risk of fragmentation. The risk that the Trump administration will negotiate tariffs with individual countries and politically fragment the European Union,” said the Bruegel Institute's senior research firm. said Simonet Taliapietra, a fellow European think tank. Brussels. “Unity is an important answer for Europe, but it's not easy as the country tries to get favorable treatment.”
How did European leaders respond?
They say they are preparing a wide range of responses, but we are waiting to hear more about Trump's plans before we can say more.
Fabian Zuleeg, chief executive of Brussels' European Policy Centre, said Trump's announcement on Thursday was opening salvo and it's too early to say which of his threats lead to anything. Ta. “I think this is also part of the tactic, because it makes it very difficult to respond,” he said.
More broadly, Europe is in a difficult situation, he added. “On the one hand, I want to avoid a trade war, but on the other hand I know that the Trump administration isn't just accepting that it ignores the deal there,” Zleig said.
