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. While it is unclear what formula the administration will use to determine what is “reciprocal,” the intention of responding to foreign charges—real and perceived—is clear enough.

In the past, the administration has made general assertions about different tariff and nontariff barriers that American exporters face that should be rectified by “reciprocal” US tariffs. Trump commonly mentions that the EU charges a 10 percent import tax on US vehicles while the US only levies a 2.5 percent tariff on European cars coming into the US. Though one can certainly find examples of higher trade barriers abroad, the overall tariff gap between the US and its trading partners is relatively minor—and any increase in US tariffs will ultimately be paid by US businesses and consumers.

However, 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.