Europe exempts most of their exports from value added taxes.  A huge export subsidy.  But they are complaining about tax credits for U.S. biodiesel industry.  The pot is calling the kettle black.   

Arcane tax stuff.  I know.  But a big piece of the "wacko" part of the "wacko free trade" deals.  If you can stand it, read on about this tax issue. 

Here is the summary.  All other countries tax our exports to them at a 17% average level.  Like a tariff.  And all other countries rebate that tax to their domestic companies that export. Like an export subsidy.  The result is a 17% barrier to our goods, and a 17% subsidy to their exports.  The New York Times editorial board has never, ever written about this double digit trade distortion in their "free trade" exhortations. Its real money.

Here are some details.  Read it a couple times. Your eyes may glaze over because tax stuff is boring.  Arcane.  But this is important.

There are a few things that can be taxed.  Income, wages, consumption, property, and wealth.  The U.S. federal government taxes income and wages primarily, a relatively narrow tax base.  Most governments in the world tax consumption as well to broaden the tax base.  Ireland, which has been called the Hong Kong of Europe for its high growth rate, has a 21% value added tax (VAT).  A VAT and a GST (goods and services tax - as in Canada) are basically the same thing.

A VAT is collected from businesses at every level, to the extent of the valued added to a product or service by that business.  If a manufacturer buys an input at $10, processes it, and sells it for $20, the "value added" is $10.  If the VAT is 20%, the tax owed is $2 ($10 x 20%).  (U.S. state sales taxes are similar, but collected only at the retail level). 

The foreign VAT's are a substantial part of their tax mix, lessening reliance on income, sales and property taxes.  Europe has a very progressive tax system, with VAT's included at levels ranging from 15% to over 20%.  China has a VAT.  None of these countries has only a VAT.

Virtually every country in the world - 150 of them, including all our trading partners - uses a VAT.  The average is 17%.  

VAT's are imposed where the product is consumed.  Thus the trade distortion to the U.S.  If France's, for example, products are consumed in their country, the tax is imposed.  If the French products are exported, they are not consumed in France, and so the VAT tax is not imposed.  The French government rebates any tax paid, like an export subsidy.

If we send a product to France, the French government imposes its VAT on our products, just like a tariff.  Because the product is consumed in France.

U.S. has to pay an average of 17% to export to every other country.  Every other country pays their companies an average of 17% to export to other countries. Only the U.S. does not, because we have no VAT. 

So we have the biggest trade deficit in history.  The Very. Serious. People. in DC cannot understand why real people don't like their FTAs.  Trade policy must address this, or it cannot be called a trade policy.

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written by China Watcher , June 14, 2008

It's silly to equate the two issues. Legally, the essence of a subsidy is that it is a targeted benefit from a government, like the biodiesel money. The same amount of money, or more, would not be considered a subsidy if it were available more generally. The rebate of consumption taxes like the VAT, while available only to exporters, has not been considered a subsidy since the 1890s because the importing country is free to tax it. The level of the tax on imports can be higher or lower than than the rebate on the priduct when exported, but it must be no higher than the tax levied on the same good if produced domestically. If almost 150 countries (not quite all US trading partners) rebate their consumption tax on exports and the US,almost uniquely, insists on not applying a tax of its own, I for one find it hard to criticize the trading partners for legal and economically beneficial behavior. I prefer to criticize the US for stupidity and laziness -- we don't need anybody's permission to take maximum advantage of the international trade rules, just an act of Congress. To make matters worse, the same outmoded American tax system results in US exports being double taxed -- once here and again at the foreign border. No wonder we have a persistent massive trade deficit!

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