The US view on VAT taxes will be key when reciprocal tariffs are announced

March 13, 2025 at 12:20AM

In one sense, US President Donald Trump seemingly has a winning communication formula by calling for reciprocal tariffs. What that means is — whatever tariff rates a country charges the US, the US will hit back with.

That makes sense to most people but it begins to fall apart in practice.

For one, many countries aren’t interested in US exports of things like farm goods or autos and already don’t export those things to the US, so they’re pointless. Secondarily, the US may need things that have tariffs on them and the exporting country may not. Think of avocados from Mexico, which are heavily purchased by the US. If Mexico were to have tariffs on US avocados (which are barely shipped south) then reciprocal tariffs wouldn’t accomplish anything except to drive up domestic costs.

More importantly for the short term though is the idea that the US has floated in the case of Europe, Canada and others — that VAT or sales taxes are tariffs. It’s an absurd take, that borders on disbelief. But so does the idea that 0.03 pounds of fentanyl crossing intercepted at the Canada-US border in Dec-Jan is an emergency that justifies 25% tariffs.

If that’s the line that Trump wants to take, the it would be an excuse from tariff levels of 5% (Canada) to upwards of 20% (the UK and Italy). VAT taxes are used in 175 countries. In addition, sub-national governments in those areas may also have sales taxes, complicating the calculation. (It’s also worth highlighting that California’s sales tax is 7.25%, Tennessee is at 7% and Arkansas is at 6.50%, with local governments often adding to those).

The whole thing is a mess.

“The problem is the U.S. administration looks poised to treat those domestic consumption taxes incorrectly as tariffs, and could impose an average reciprocal tariff rate of the same rates,” RBC writes. “In reality, value added taxes like [Canada’s] GST do not discriminate against imports in the way that a tariff would.”

For Canada, the considerations are huge. According to the World Trade Organization, the average tariff rate on US imports is just 1.1% but if the US tries a tariff rate at 5% or higher, it would beg for retaliation.

Perhaps even more dangerously, using VAT taxes as a ruse for ‘reciprocal tariffs’ would undermine any reasonable justification for tariffs. It would beg for an international response and a Congressional one.

We will see what comes with Trump’s promised April 2 reciprocal tariff announcement.

This article was written by Adam Button at www.forexlive.com.