How concerned should Ireland – and the broader EU – be regarding the “fair and reciprocal plan” for tariffs unveiled by US President Donald Trump?On the surface, the president struck out at numerous Ireland-related issues – including the pharmaceutical sector, Apple, EU courts, airline fees, and agricultural products.
Moreover, there’s the VAT in the EU and the Digital Services Tax implemented by France. Remember those tech leaders on the tightly controlled platform who stood behind Mr. Trump during his swearing-in just a few weeks ago? Three of the top five taxpayers in Ireland were present.
The tariffs could be the lesser concern. Just as observed during the Brexit negotiations, we have “non-tariff barriers” to trade (NTBs) – essentially rules and regulations that complicate trade.
Additionally, the notion of a Digital Services Tax (with France and Canada both called out). This was among the few acknowledgments of the service trade – which isn’t affected by tariffs and where the US holds a significant surplus in its interactions with Europe. Nevertheless, Mr. Trump never mentions the service trade, only goods.
Donald Trump directed his economic team to formulate plans for reciprocal tariffs on each country taxing US imports.
When questioned by a sympathetic reporter regarding the EU’s Value Added Tax, Mr. Trump claimed it acted like an additional tariff.
“They impose a 20% VAT, which we’re considering equivalent to a tariff, plus they levy numerous fees, and they’re executing other actions. The European Union has been extremely tough on our companies.”
“They’ve sued Apple, Google, Facebook, and numerous other businesses – these are American companies – and the figures involved are staggering; their court system is not very favorable to our firms.”
“For instance, Apple had to cough up what I believe was $16 billion in penalties from a court case, which was truly shocking because many thought they would win that case according to observers, showing just how tough they’ve been.”
“Airlines have reached out to me asking, could you assist us with Europe? They charge us countless fees. I received a call from the head of United Airlines and other carriers lamenting that every time we land, we face exorbitant charges from the EU. Their treatment hasn’t been equitable.”
“You know, we think the European Union is wonderful. We have great affection for Europe and its countries, but the European Union has been utterly brutal on trade,” he remarked.
However, no detailed plan has emerged yet. What we have is a memo outlining actions to be discussed by cabinet chiefs in order to clarify the substantial gaps in a rudimentary policy direction that is emerging.
The first step involves a review by the Commerce Department to identify tariff imbalances. Its newly appointed Secretary, Howard Luttnick, has indicated that this should be ready by April 1. Following that, Mr. Trump can determine what actions to enact.
Donald Trump criticized numerous aspects connected to Ireland, including Apple.
The memo elaborates on the policy goals related to tariffs, VAT, and beyond: “The ‘Fair and Reciprocal Plan’ aims to rectify longstanding imbalances in global trade and ensure fairness universally. The era of America being exploited is over: this initiative will prioritize the American worker, enhance our competitiveness across all industries, diminish our trade deficit, and strengthen our economic and national security.”
“AMERICA WILL NO LONGER ACCEPT UNFAIR TRADE PRACTICES: The United States boasts one of the most open economies globally, yet our trading partners frequently keep their markets shuttered to our exports.”
The document states that in two-thirds of the 600,000 tariff lines analyzed across 123 nations, the US is at a disadvantage in those two-thirds.
It mentions numerous examples of unfair trade practices but highlights just two concerning the EU: the EU’s tariffs on automobiles (which is currently changing) and a ban on shellfish exports from 48 states (though only 24 of those are coastal and produce shellfish), attributed to delays in approving exports as pledged in 2020 (although delays were exacerbated by the pandemic).
The memo asserts that the US has one of the most open economies worldwide and among the lowest average weighted tariff rates globally (the EU makes a similar claim).
The memo asserts that the US has been treated unfairly by its trading partners “both friends and foes,” resulting in substantial and persistent annual trade deficits.
It warns that this trade deficit “poses a threat to our economic and national security, has eroded our industrial base, hindered our overall national competitiveness, and made our country reliant on others for key security needs.”
To address these issues, the memo claims it is now the official policy of the US to reduce the imbalance in goods trade and tackle “other unfair and unbalanced facets of our trade with foreign partners.” Yet, there’s again no reference to the substantial US surplus in service trade.
This distinction is crucial when contemplating the roster of targets for rectifying the trade imbalance: it encompasses not only tariffs on goods imported into the US but also – “unfair, discriminatory or extraterritorial taxes…including value added tax.”
Additionally, it empowers a committee comprising the US Trade Representative, the Treasury Secretary, the Commerce Secretary, and the Senior Counsellor to the President for Trade and Manufacturing (Peter Navarro) to pinpoint “any unfair limitations on market access or any fundamental obstructions to fair competition with the US market economy.” This constitutes a fairly broad mandate.
In a CNN interview shortly following the signing, Mr. Navarro provided an example from the EU. “The European Union has a 10% tariff on automobiles, while we impose a 2.5%, making theirs four times greater. Beyond that, they also impose a Value Added Tax that acts like a 19% tariff on our autos, coupled with significant export subsidies.”
“Consequently, what we observe is Germany sells us eight times more cars than we sell them. We operate under a deficit of over $200 billion with them, all driven by this unfair trade. The president has asserted he will calculate equivalent, reciprocal tariffs to address this, unless these foreign nations diminish their trade barriers.”
“It’s a proverbial win-win for America, as we’ll reclaim our production and factories. More jobs will follow, right? Higher wages, that’s the vision.”
The emphasis on VAT is somewhat puzzling. For starters, it’s a sales tax applicable to all sales of goods and services in the EU (and also the UK). It doesn’t serve as a tariff or a penalty on imports: no matter where a product originates, if it’s sold within the EU, VAT is imposed.
US vehicles struggle to compete in Europe due to their high costs driven by VAT – cars produced in the EU are also subjected to VAT (and VRT if sold in Ireland). They fail to sell not merely due to VAT, but also because they are equipped with large engines that are impractical in a continent where fuel prices are more than double those in the US.
Moreover, VAT – or an equivalent consumption tax – is one of the reform proposals included in “Project 2025,” the conservative think tank The Heritage Foundation’s scheme for the second Trump administration.
It asserts: “Public finance literature clearly indicates that a consumption tax minimizes governmental interference in private economic decisions and thus represents the least economically harmful method to generate federal tax revenues.”
“There are several forms a consumption tax might take, including a national sales tax, a business transfer tax, a Hall–Rabushka flat tax, or a cash flow tax.” (the presidential memo defines VAT as “a type of consumption tax”).
Donald Trump specifically singled out the EU for its “absolutely brutal” trade practices towards Washington.
A prominent contributor to Project 2025, Russel Vought, now serves as the Trump administration’s Director of the Office of Management and Budget (OMB). He is named in the memo concerning foreign trade distortions signed by the President.
His assignment involves evaluating the fiscal implications of proposed trade remedies for the US government and the public within 180 days of the suggested measures. Following the current timeline, this will likely offer insights by October regarding the potential domestic impacts of this new trade agenda.
This timeframe should grant the EU a chance to formulate its response. They have been developing an array of actions, undoubtedly informed by Project 2025’s guidelines – and drawing from their previous reactions to Trump’s tariffs (the measures instituted during the first Trump administration are “frozen” and can be reinstated promptly, according to a senior EU official).
Yet, primarily the EU has been maintaining a low profile, remaining patient to see how circumstances unfold. The proposal regarding automobile tariffs might assist. The offer made right after Trump’s election to replace Russian oil and gas contracts with US contracts can help bridge the gap in goods trade (Indian Prime Minister Narendra Modi extended a similar proposal when meeting Mr. Trump shortly after he signed the tariffs memo yesterday).
And the increase in European defense spending will also significantly contribute to reducing the overall trade gap – though future taxation of the digital economy is likely to remain a contentious issue.
Aiming to avoid disruption and a possibly damaging trade war will be the EU’s and its member states’ objective.
Yet this doesn’t imply the path will be smooth if necessary: after all, a strike against VAT challenges the fundamental tax sovereignty and revenue generation abilities of every EU state. How much of the criticism aimed at VAT is a tactic, seeking a compromise on other issues (like digital services?), and how much is genuine will need to be unraveled as more detailed information emerges.
According to the perspective offered by Americans, they perceive themselves as a naive, entirely open market that every foreign entity (Ireland included) is exploiting. Mr. Trump claims the EU has been “brutal” in its trade dealings with the US.
Conversely, trade officials in Brussels argue that the US employs numerous trade barriers to safeguard their own industries and have been particularly ruthless about it – taking vast sums of wealth out of Europe for the past seven decades.
Thus, the ruthless and the brutal may be on the verge of clashing once again over their shared market, which constitutes 40% of global trade – and one characterized by a notably low overall tariff rate between these two major markets.
Or maybe not. This hinges on the findings of the Luttnick review, the nature of the actual deal, and what the EU might propose as an incentive – while remaining steadfast on the core principles of international trade and taxation.
