President Trump instructed his advisors to determine new collective bargaining prices for America's trading partners on Thursday, a step that he said “would correct long -term imbalances in international trade”.
As part of his plan, Mr. Trump has carried out the value creation tax, a system that is widespread in Europe and elsewhere in order to tax the consumption of goods and services. The president and his team describe the tax as other countries an unfair trading advantage over the United States.
Here is what to know.
What is a VAT?
It is a consumption tax that increases taxes in every production level for a good or service. The final VAT is the sum of the tax paid in every phase. This system is different from sales tax in the United States, which states imposed on the final sale of the good.
In Europe, VAT rates vary depending on the country, but on average around 20 percent – much higher than government sales taxes in the United States, which, according to Tax Foundation, was 6.6 percent in 2023.
VAT accumulates in the different phases and are finally paid for by consumers when the good is sold in the country in which it was manufactured.
However, if the goods are exported, the exporter will be returned a large part of the value taxes. This offers companies an incentive to export goods instead of selling on their home market.
From the 1950s to the 1970s, many countries that were run by France began to experiment with VAT. Countries of the European Union were supporters, but Vats were also adopted elsewhere in China.
VAT easing for exporters has contributed to encouraging companies in these countries to export and making many companies more competitive in global markets.
Did the US look at VAT?
The United States are an outlier among the advanced economies because it has no VAT.
When President Bill Clinton proposed an energy tax in 1993, John Danforth, a powerful Republican Senator from Missouri, countered with VAT to help American exporters. Mr. Clinton said the United States would need a decade to prepare.
The Republican party then turned against new taxes. Mr. Trump suggested a new approach on Thursday: one -sided increase in American tariffs for imports from Europe to compensate for the advantages that European exporters receive from the continent of value.
Although Mr. Trump says that the value tax of international exporters offers an unfair advantage, US companies do not pay sales tax if they export products abroad the tax foundation in Washington. “We have taxes that are analogous to VAT in terms of import and export treatment,” he said.
However, the United States also also benefited from the value aid of other countries. When President Trump increased the tariffs for imports from China during his first term, Beijing reacted with increasing relief to his exporters. This made it possible for exporters to reduce prices for American buyers, to compensate for part of the tariffs and to help Chinese exporters to keep a significant share in the American market.
However, there is no guarantee that China will increase the relief of Mr. Trump's latest threats. Many in China were unhappy six years ago that Chinese taxpayers contributed to inspiring the law for Mr. Trump's tariffs instead of American consumers.
How important is it for European economies?
It is a large source of tax revenue for European budgets. VAT will be charged in 21 of the 37 countries, which are members of the Organization for Economic Cooperation and Development, an intergovernmental organization. The tax corresponds to about a fifth of its total tax income.
If Mr. Trump increased the tariffs, the effects for European companies would be enormous.
“The greatest risk that Europe is now exposed is the risk of fragmentation – the risk of negotiating the tariffs with individual countries and the European Union politically fragmented” Brussels. “Unity will be the most important answer for Europe, but it will not be easy because the countries will try to get favorable treatment.”
How did the European leaders react?
You said you are preparing a broad answer, but are waiting to hear the details of Mr. Trump's plan before saying more.
Fabian Zuleeg, the managing director of the European Political Center in Brussels, said that Mr. Trump's announcement on Thursday was an opening salvo and that it was too early to say which would lead to anything of his threats. “What I think is also part of a tactic because it makes it very difficult to have reactions,” he said.
In a broader sense, 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 does not simply know that the Trump government ignores the agreements available there,” said Zuleeg.