Former US President Donald Trump’s vocal criticism of the value-added tax (VAT) has once again spotlighted a fundamental element of global taxation. During his recent statements aimed at justifying broad global tariffs, Trump pointed fingers at “exorbitant VAT taxes”, claiming these taxes contribute to America’s trade deficit.

According to Trump, US exporters face unfair treatment, as they are subjected to VAT in foreign markets while foreign companies importing into the US are not similarly taxed. He views this as a major imbalance in the international trade setup, making it tougher for American products to compete globally.

However, this argument has met strong resistance from economists, tax experts, and foreign governments, who assert that VAT systems are not only standardised across most countries but also designed to be trade-neutral, ensuring fair taxation regardless of the origin of goods.

What is VAT and Why It's Important

Value-added tax (VAT) is a consumption tax imposed on goods and services at each stage of production and distribution. It is levied in over 170 countries, including major economies like India, China, Mexico, and Canada. Interestingly, the US is the only OECD country without a national VAT.

VAT functions differently from tariffs. It is charged based on where goods are consumed, not where they are produced. For example, when a product is exported, VAT is refunded or not charged to avoid double taxation. This mechanism ensures that VAT doesn’t operate as a trade barrier, contrary to Trump’s assertions.

Economists argue that VAT systems are accepted under World Trade Organization (WTO) rules, and are applied equally to domestic and foreign producers. This makes VAT a neutral tax instrument, rather than a protectionist measure.

Mischaracterising VAT as a European Tax

Trump’s stance has been echoed by some of his supporters who often label VAT as a “European-style tax”. However, this is misleading. While Europe relies heavily on VAT—especially the EU, which uses it to fund national budgets and its central administration—the system is global.

In countries like Germany, VAT contributes significantly to national income. Germany alone collected nearly $320 billion in VAT revenue in 2023, almost double the value of its exports to the US. That amount of revenue is too critical to abandon, making Trump’s demand to eliminate VAT not only economically unfeasible but politically untenable.

VAT vs Tariffs: Key Differences

A crucial misunderstanding lies in Trump’s comparison of VAT to tariffs. Experts clarify that VAT is not a trade weapon. It is designed to avoid distorting trade by refunding the tax on exports. On the other hand, tariffs are import duties meant to protect domestic industries, which can directly affect international competitiveness.

While VAT may result in cost differences across countries, these differences are not a result of discrimination or trade manipulation. In fact, US sales taxes, which vary widely across states and are often applied inconsistently throughout the supply chain, are seen as less efficient and more distorting than VAT.

Why Countries Won’t Drop VAT

Aside from fairness arguments, the financial role of VAT is irreplaceable. In most countries, VAT forms a substantial chunk of national budgets. With rising public debt and mounting expenditure needs, replacing VAT is not a viable option.

For example, in the European Union, VAT accounts for up to 35% of national budgets and also contributes directly to the EU’s central budget. Even a partial rollback of VAT would lead to massive revenue gaps and force governments into borrowing or cutting essential services—something few are willing to risk.

Experts Question US Influence Over Global Tax Norms

Julian Hinz, an economist at the Kiel Institute, summed up global sentiment well by comparing the US’s attempt to dismantle VAT to “forcing the world to switch from metric to imperial.” His statement underscores how entrenched and accepted VAT is in the modern economic system.

Despite Trump’s aggressive rhetoric, experts view this as part of a broader strategy to increase pressure on trading partners rather than a serious move to change international taxation. Most governments are unlikely to bow to such pressure, especially on an issue as fundamental as VAT.

A Political Move More Than an Economic Strategy

Trump’s remarks on VAT are widely seen as political posturing, designed to appeal to domestic voters concerned about trade deficits and manufacturing job losses. While the claim may resonate with a section of the electorate, it lacks support from international economic data and policy frameworks.

Moreover, attempting to shift blame for trade issues onto global tax structures diverts attention from internal inefficiencies within the US tax and trade systems. Addressing these internal disparities would likely be a more effective strategy for improving US competitiveness.

Conclusion: VAT Here to Stay

The global consensus around VAT remains firm. It is not a discriminatory trade practice, but a well-structured consumption tax that is vital for funding public services. While Trump's campaign may elevate the issue in political circles, it is highly unlikely to trigger any major changes in global tax norms.

Nations are focused on fiscal stability, and VAT systems are deeply embedded in their economic fabric. The international community views Trump’s remarks more as rhetoric than a realistic policy proposal, and the status quo on VAT is expected to continue, regardless of trade tensions.

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