President Trump ordered his advisers on Thursday to determine new tariff rates at the US trading partners, a movement that he said would “correct for long -term imbalances in international trade”.
As part of his plan, Mr Trump focused on the tax with added value, a system that is widely used in Europe and elsewhere to burden the consumption of goods and services. The president and his team describe the tax as giving other countries an unfair trade benefit compared to the United States.
This is what to know.
What is a tax with added value?
It is a consumption tax that adds load on a good or service in every production phase. The final VAT is the sum of the tax paid in every phase. This system is different from a sales tax in the United States, which is imposed by states on the final sale of the good.
In Europe, the VAT rates vary per country, but are approximately 20 percent on average – much higher than the sales tax in the United States, which, according to the Tax Foundation, amounted to an average of 6.6 percent.
Added value is assessed in every production phase for good or service. The costs are borne by the final consumer, not by the company.
If the goods are exported, many of the taxes with added value are returned to the exporter. This offers companies an incentive to export goods instead of selling at their home market.
From the 1950s to the 1970s, many countries, led by France, began to experiment with added value taxes. Countries in the European Union were proponents, but barrels were also taken elsewhere, especially in China.
VAT exemption for exporters has helped to encourage companies in these countries to export and have made many companies more competitive in global markets.
Have the US considered a VAT?
The United States is a bijter among advanced economies because it has no tax with added value.
When President Bill Clinton proposed an energy tax in 1993, John Danforth, a powerful Republican Senator from Missouri, countered with a tax with added value to help American exporters. Mr. Clinton said that the United States would need a decade to prepare.
The Republican Party then turned against new taxes. Mr. Trump proposed a new approach on Thursday: unilaterally increasing the American rates from Europe to compensate for the benefits that European exporters receive from the tax system of the continent with added value.
Although Mr. Trump says that the tax with added value gives international exporters an unfair advantage, American companies do not pay sales tax when they export products abroad, similar to the way in which the tax works with added value, Alan Cole, a senior economist at The tax foundation in Washington. “We have taxes that are analogous in vessels with regard to import and export treatment,” he said.
Nevertheless, the United States sometimes also benefited from the tax reduction of other countries with added value. When President Trump increased rates on import from China during his first term, Beijing responded by increasing the lighting of his exporters. This allowed the exporters to lower the prices to American buyers, compensate for part of the rates and Chinese exporters help to maintain a significant share of the American market.
But there is no guarantee that China will re -increase the exemption in response to Mr Trump's last threats. Many in China were unhappy six years ago that Chinese taxpayers helped to pay the bill for Mr Trump's rates instead of American consumers.
How important is it for European economies?
It is a major source of tax revenues for European budgets. Added taxes are collected in 21 of the 37 countries that are members of the Organization for Economic Cooperation and Development, an intergovernmental organization. The tax is good for about one fifth of their total tax revenues.
If Mr Trump increases rates, the impact would be enormous for European companies.
“The most important risk that Europe is now confronted with is the risk of fragmentation – the risk of the Trump government that negotiates rates with individual countries and politics fragment,” said Simone Tagliapietra, a senior fellow at the Bruegel Institute, A European think tank in Brussels. “Unity will be the most important answer for Europe, but that will not be easy because countries will try to get favorable treatment.”
How did European leaders respond?
They said they are preparing a broad reaction, but waiting for the details of Mr.'s plan. To hear Trump before they say more.
Fabian Zuleeg, the Chief Executive of the European Policy Center in Brussels, said that Mr. Trump's announcement was an opening salvo on Thursday and that it was too early to say which of his threats would lead to something. “What I think it is also part of a tactic because it makes it very difficult to have answers,” he said.
More in general, Europe is in a difficult situation, he added. “On the one hand it wants to avoid a trade war, but on the other hand it knows that it cannot only accept that the Trump government ignores the similarities there are,” said Mr. Zuleeg.
