31-03-2025
Why Trump is taking aim at Europe's sales tax
At the heart of President Trump's latest round of tariffs is expected to be a double-digit tax on European imports, ostensibly justified by the existence of Europe's value-added tax (VAT), the continent's version of a sales tax.
Why it matters: By claiming a VAT is a kind of tariff — or even, in Trump's words, "far more punitive than a Tariff" — the U.S. is taking a maximalist and highly aggressive stance, one that's very hard to negotiate with.
The big picture:"It's in the interest of the administration to to have a higher number and to make it harder to negotiate," says Everett Eissenstat, a partner at Squire Patton Boggs who was the president's sherpa for international economic affairs during the first Trump administration.
"I think the administration is quite comfortable with that outcome."
How it works: Value-added taxes in Europe are generally high, often in the region of 20%. They're imposed without regard to country of origin.
As the E.U. has outlined, "EU produced goods pay exactly the same VAT as any imported goods. VAT is not a trade measure, let alone a tariff."
The other side: The case for treating the VAT as a tariff is quite convoluted, and has been called"nonsense on wheels," but even nonsense needs to go through a very long judicial process before it is deemed illegal by the World Trade Organization.
The general idea is that because a VAT makes goods more expensive in Europe, it creates an incentive for European and U.S. manufacturers alike to sell their wares in the U.S. instead.
So even if the playing field is level in Europe and level in the U.S., exports from Europe to the U.S. can end up being taxed less than exports from the U.S. to Europe, something American exporters were unhappy about when the VAT was first introduced in the 1960s.
Between the lines: "The reason why Trump is doing these reciprocal tariffs is to raise money to rhetorically offset the cost of the tax cuts they're pursuing," says Brendan Duke, a director at the Center on Budget and Policy Priorities.
"The inclusion of the VAT is perfect for doing big tariffs and not having anything get in your way, because I don't think Europeans are going to destroy the integrity and logic of their entire VAT system."
"You do not expect other countries to back down, which means you can impose very high tariffs and raise money."
The bottom line: By tying tariffs to Europe's VAT, Trump gives himself all the negotiating cards.
Because the VAT is high, he can set the tariffs at a very high level. And because the VAT isn't going to go away, Trump is free to declare that anything — or nothing — is sufficient to bring the tariffs down.
