The “Value-Added-Tax” Inequity in Global Trade:

Foreign VATs Subsidize Overseas Producers and Penalize US Exporters

VAT Tax Systems:

Indirect, border-adjusted taxes like the Value-Added-Tax (VAT) are consumption taxes rebated on exports by the producing nation and assessed on imports. Today, 137 countries have a VAT system with an average rate of 15.7 percent.

US Exception:

The United States is the only industrialized country in the world without a border-adjustable tax system. Instead, it relies on direct taxes such as corporate income and property taxes, which cannot be levied or rebated at the border under World Trade Organization (WTO) rules. As a result, foreign exports to the United States encounter minimal tariffs (averaging 1.3%) and no VAT while US exports face tariffs (averaging 40%) plus VATs (averaging 15.7%).

History of the VAT and WTO Rules:

The distinction between direct and indirect taxes dates back to the General Agreement on Tariffs and Trade (GATT), the precursor to the WTO. While many countries had indirect tax systems at the initiation of the GATT in 1947, no country had a VAT structure specifically. France was the first to implement a VAT in 1948. In 1955, the United States agreed to a GATT amendment declaring that indirect taxes, such as VATs, “shall not be deemed to be a subsidy.” Rates of indirect taxation were reportedly as low as 2-4% at the time. Then, in 1960, GATT members approved a list of prohibited export subsides which included rebates of direct taxes. It was not until the 1960s that additional countries began to adopt VAT systems. Consequently, VAT schemes were not initially identified by political leaders in the United States as a major problem.

Impact on Trade:

In 2005, US producers faced $300 billion in additional taxes on their exports abroad and subsidies provided to competing, imported goods as a result of foreign VATs. This staggering disadvantage fuels the trade deficit, cripples US competitiveness and creates a powerful incentive for US companies to shift production and jobs to nations with VATs. Furthermore, foreign governments including the European Union have negated, in a sense, tariff reductions negotiated through the WTO by increasing their VAT rates correspondingly. As a result, total costs on imports in many countries today are as high as or higher than they were at the inception of the GATT.

Time for Action:

President Johnson first attempted to reach an agreement with our trading partners in the late 1960s but made no progress. As part of granting “Fast Track” negotiating authority in 1974, 1988 and 2002, Congress instructed US negotiators to remedy the distortion through changes to GATT/WTO rules. Despite these efforts, WTO negotiations have yielded no changes, and the United States has agreed to packages leaving the distortions intact.

It is time for a new strategy. H.R. ---- requires that upon completion of WTO negotiations by x date, USTR must certify to Congress that the goals of equitable boarder tax treatment for goods and services have been met. If these efforts fail, the bill 1) directs the United States to begin charging a fee on imports from VAT countries equal to the VAT rebate each product receives and 2) mandates that US exports receive a tax rebate equal to the amount of VAT imposed on importation into a foreign market.