Trump complains about non-trade barriers like the EU’s and Mexico’s value added taxes, calling them trade barriers.

The Tax Policy Institute explains A Value Added Tax Is Not a Trade Barrier.

Yes, Mexico has a VAT and the United States does not.And VATs around the world are border adjustable – exports are exempt and imports are taxable. But that does not give Mexican producers a leg up over their US competitors. 

There is a simple reason for border adjustability.  A VAT is meant to be a tax on consumption.Mexicans pay the same Mexican VAT on taxable goods and services they buy in Mexico no matter where they are produced.At the same time, no Mexican VAT is imposed on goods or services consumed outside of Mexico, regardless of where they are produced.

Of course, the United States has no national sales tax.We do, however, impose federal excise taxes on goods such as tobacco products, alcoholic beverages, and motor fuels.And those taxes treat traded goods the same way as other countries’ VATs.The cigarette excise tax, for example, applies to imported cigarettes, but not those exported by U.S. tobacco companies.State retail sales taxes in the United States work the same way: They apply to domestic consumption of taxed products from all sources, but not to exports.

A VAT does not favor one country’s producers over another’s.Trump’s claim that Mexico’s VAT gives its producers an advantage over American competitors is simply wrong.

Do Value-Added Taxes Affect International Trade Flows?

Trump claims they do. He is wrong.

Please consider Evidence from 30 Years of Tax Reforms by the American Economic Association.

Value-Added Taxes (VATs) have become the most common form of consumption taxes in the world, rapidly replacing tariffs as well as sales and excise taxes.

More than 80% of the world’s countries have adopted a form of VAT. The academic consensus is that adjusting VATs at the border – by levying VATs on
imports but exempting exports – does not distort trade flows as long as imported
goods are subject to the same VAT rate as domestic goods.

For this reason, VATs, as they are currently implemented, are considered to be trade neutral, and the World Trade Organization (WTO) allows border adjustment of VATs, while it does not allow border adjustment of direct taxes (i.e., payroll taxes, income taxes, etc.) and strictly regulates tariffs.

The European VAT is Not a Discriminatory Tax Against US Exports

(Click on image to enlarge)

The Tax Foundation explains The European VAT is Not a Discriminatory Tax Against US Exports

The Trump administration has once again floated the idea of “reciprocal” tariffs on foreign countries.

When discussing trade with the EU specifically, White House deputy chief of staff, Stephen Miller, added a new policy grievance to the mix: value-added taxes (VAT).

“Did you know when you ship a car from the US to Europe, if they let it in at all because they have many nontariff barriers, between the VAT and duties, that car is taxed at 30%? The German car—or a European car sent the America is taxed at 2.5%—or basically 0.”

His statement assumes that a VAT discriminates against American car exports like a tariff, and conversely, that the VAT rebate provided to European car producers exporting to the US constitutes a subsidy and the car then simply faces a tariff and no VAT. (It is worth noting that both a domestic automobile and a European car sold in the US would face US state sales tax.)

While it may seem like a compelling political argument to justify across-the-board tariffs on the EU, it instead reflects a complete misunderstanding of what a VAT is and how it works. Worse, it misplaces the blame for a lack of US competitiveness on the European VAT instead of reevaluating the flaws of both the US federal and state tax systems.

VATs are border-adjusted, meaning they rebate tax on exports and impose tax on imports. Despite the appearance of subsidizing exports and punishing imports, however, a border-adjusted VAT is trade neutral.

If there is a complaint to be made about tax policy and implications for US competitiveness in Europe, it is about uncompetitive state sales tax structures in the US system that yield what is known as “tax pyramiding.”

Unlike most countries, the United States does not impose a broad-based consumption tax at the national (federal) level, and state-level consumption taxes are designed as general sales taxes rather than value-added taxes. Whereas a VAT is imposed on the incremental increase in value of a good or service at each stage of production, a sales tax is imposed on the total transaction price of any taxed good or service.

If a sales tax is imposed exclusively on final consumption, then VATs and sales taxes are economically identical. However, when the sales tax is applied to some intermediate transactions (“business inputs”), it results in tax pyramiding, where the tax is embedded in the price multiple times over.

The Truth About Tariffs – Fact-Checking Trump

Consumption Taxes

VATs, tariffs, and sales taxes are all taxes on consumption.

If you want less of something you tax it. Thus, consumption taxes act to reduce trade.

The irony of Trump’s moaning is that if he truly wanted “reciprocal” tariffs he would implement a VAT instead of tariffs.

Of course, a floating VAT that varies by country is not possible, but as a means of raising money, a VAT makes far more sense than a tariff.

Tariffs punish those who spend most of their money on good, thus punishing the poor and middle class more than the wealthy.

Tariffs are also very hard on small businesses that are less able to pass on the costs or easily shift suppliers than are large businesses.

As with tariffs and who pays tax, Trump is economically illiterate about VATs.

Legitimate Gripes

Trump has some legitimate gripes, especially against China and Vietnam, but none on Canada or Mexico. USMCA took care of both countries.

Had trump joined the Trans-Pacific Partnership (TPP) he would have few gripes with 11 additional nations.

TPP singing members include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

The TPP contained measures to lower both non-tariff and tariff barriers to trade.

On the Outside Looking In

Trump withdrew the US from TPP because he believes in bilateral negotiations that he is mightily struggling with now.

The withdrawal of the United States killed TPP. However, the remaining parties successfully negotiated a new version of the agreement, the CPTPP, which entered into force in December 2018.

Wikipedia has these amusing comments on CPTPP

On 25 January 2018, U.S. President Donald Trump in an interview announced his interest in possibly rejoining the TPP if it were a “substantially better deal” for the United States. He had withdrawn the U.S. from the original agreement in January 2017. On 12 April 2018, he told the White House National Economic Council Director Larry Kudlow and U.S. Trade Representative Robert Lighthizer to look into joining CPTPP.

U.S. Wheat Associates President Vince Peterson had said in December 2018 that American wheat exporters could face an “imminent collapse” in their 53% market share in Japan due to exclusion from CPTPP. Peterson added, “Our competitors in Australia and Canada will now benefit from those [CPTPP] provisions, as U.S. farmers watch helplessly.”

The National Cattlemen’s Beef Association stated that exports of beef to Japan, America’s largest export market, would be at a serious disadvantage to Australian exporters, whose tariffs on exports to Japan would be cut by 27.5% during the first year of CPTPP.

I was against TPP at the time, but that was on the basis of the dispute resolution mechanism which could have been negotiated. Also, Obama insisted on a bunch of environmental nonsense. That too would have gone away it Trump demanded.

For discussion, please see my April 7, 2025 post Obama’s Trans-Pacific Partnership Fiasco vs. Mish’s Proposed Free Trade Alternative; How Will TPP Function in Practice?

With Obama out of the picture, Trump would have been in position to correct flaws in TPP.

Via USMCA and a modified TPP, the US would have been in a much better position to isolate China.

Instead, Trump is antagonizing our best trading partner, Canada, as well as Mexico and the EU, our three collective best trading partners.

And Trump is irritated at Japan for trading with Australia instead of the US on beef and wheat.

Reciprocal Tariffs

Reader: “Tariffs are reciprocal. All Canada has to do is to lower the tariffs they charge the US to what they want the US to charge them.”

Me: USMCA IS reciprocal right now. In extremely minor instances where it isn’t, TRUMP negotiated the deal.

Please read over and over Cheese Was a “Key Achievement” of Trump’s USMCA Trade Agreement

The above post contains over a dozen instances in which Trump bragged what a great deal.

It was such a great deal that Trump thanked Mexico and Canada. Notably USMCA is “Good for everybody – Farmers, Manufacturers, Energy, Unions – tremendous support. Importantly, we will finally end our Country’s worst Trade Deal, NAFTA!”

Related Posts

April 25, 2025: Trump Tells Time Magazine He Has Made 200 Deals Already, Refused to Name Any

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May 5, 2025: Small Businesses Will Get Hit the Hardest by Trump’s Tariffs

Small businesses were already struggling. Tariffs will end the viability of many.

May 8, 2025: Fact Check on Trump’s Claim “We Don’t Do Much Business with Canada”

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May 23, 2025: “Talks Going Nowhere”, Trump Threatens EU with a 50 Percent Tariff in June

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