Trump targets global VAT system in tariff rhetoric, but world sees little chance of change

US President Donald Trump - File Photo

US President Donald Trump's attack on value-added taxes (VAT) as an unfair trade barrier has caught the world's attention, but officials and experts say that the long-standing tax system is not going away—and will not be swayed by US pressure, the Wall Street Journal reported.

Trump attributes trade deficit to VAT

In revealing broad global tariffs, Trump targeted "exorbitant VAT taxes" as a cause of America's trade deficit, arguing US exporters are unfairly at a disadvantage because they pay VAT overseas, while foreign manufacturers shipping into the US are exempt. Economists and foreign governments, however, argue that VAT is trade-neutral, accepted across the board by the World Trade Organization, and charged equally on domestic and foreign manufacturers based on where goods are consumed, rather than made.

Global standard, not European prejudice

While frequently labelled a European tax by Trump supporters, VAT is applied in more than 170 countries, including China, India, Canada, and Mexico. The United States alone among OECD countries does not have a VAT. The efficiency, large base, and anti-evasion properties of VAT make it a pillar of public finances worldwide. In the EU, VAT accounts for as much as 35% of national budgets and also funds the bloc's central budget, so any attempt to eliminate it is politically and financially unrealistic.

A tax, not a trade instrument

VAT works quite differently from tariffs, experts say. It's returned on exports to avoid double taxation and doesn't serve as a subsidy. Changes in national VAT or sales taxes can produce cost differences, but the structure of VAT itself isn't discriminatory. US sales taxes, which are often applied unevenly throughout supply chains, are the actual problem weakening American competitiveness, critics say.

Revenue too vital to risk

Aside from fairness considerations, VAT's revenue significance renders its abolition a nonstarter. In 2023 alone, Germany collected almost $320 billion in VAT—twice the amount of its exports to the United States. With high public debt and budget constraints in most nations, forgoing VAT to appease US trade requirements would be economically costly and politically unfeasible.

Experts reject US leverage

Julian Hinz, a Kiel Institute economist, said that the US is exaggerating its capacity to coerce nations into dumping VAT. "It's as likely as making the world change metric to imperial," he noted. While Trump's initiative might be used to ratchet up trade tensions, most consider it part of a comprehensive strategy to push trading partners around—rather than a serious attempt to revolutionise the world of taxation norms.