The first few weeks of Donald Trump’s second term as President of the USA have been nothing if not unpredictable. Catching the watching world off guard with a constant battery of policy announcements seems itself to be part of the new administration’s policy strategy.
One thing that hasn’t surprised anybody, given how prominently they featured in Mr Trump’s election campaign, is the focus on trade tariffs. And yet even then, when the president signed an executive order instructing his team to look into establishing “fair and reciprocal tariffs” to address what he characterises as pretty much every other country on Earth taking advantage of the US on trade, he had a surprise in store.
According to that order, VAT – and specifically VAT in the EU – is one of the restrictive practices unfairly penalising US trade that the Trump administration is looking to redress with tariffs.
It’s a curious argument, but one that could have massive repercussions for EU export trade to the US. The logic seems to go something like this – because the US doesn’t have VAT or any other kind of consumption tax, the fact that VAT is charged when US-made goods are sold in Europe acts as a trade barrier. In fact, in a press conference announcing the next phase of his tariff plan, Mr Trump went as far as saying he considered VAT ‘the same as a tariff’.
How big a tariff?
It’s not a position that stands up well to close scrutiny. Tariffs and VAT might be mechanisms for a government to raise tax revenue, but that’s about where the similarity ends. Tariffs are specifically targeted at goods and services imported from other countries, and are often used to protect or favour domestic output.
VAT on the other hand is paid on all goods and services regardless of where they originate from. It’s hard to see how VAT could be putting US exports at a disadvantage when EU goods and services are also charged VAT in Europe, and Irish goods and services in Ireland etc.
The sense of labelling VAT a trade barrier is unlikely to make much difference, however. Mr Trump is very keen to position his “fair and reciprocal” tariffs as a long-overdue intervention to balance the US’s trade deficit in goods with the likes of the EU, China and many other places in the world – conveniently overlooking that the US has a huge trade surplus in services with the EU.
Using VAT as a pretext for ‘reciprocal’ tariffs also gives a worrying indication of the size of the tariffs the Trump team is considering. It would make sense that the EU minimum VAT rate of 15% would serve as a baseline, possibly to be then adjusted country-by-country. If that proves to be the case, Irish exporters could be looking at having 23% tariffs slapped on the price of goods sold to the US.
