<<Consider a U.S.-manufactured car that sells for $20,000. When the car arrives in Germany, a 19 percent VAT will be added on to the $20,000 price, meaning the car will be sold in Germany for $23,800. Yet no tax comparable to a VAT is imposed on a German manufactured car imported into the United States. Consider a German car that is sold in Germany for $20,000 after the 19 percent VAT is imposed. When the German car is imported to the U.S., Germany rebates the 19 percent VAT to the manufacturer, allowing the export value of the car to be $16,807 ($20,000/1.19). When the German car is imported to the U.S., no U.S. tax comparable to the VAT is assessed, so the car is allowed to enter the U.S. market at a price under $17,000. In short, the U.S. manufacturer suffers price disadvantages when the U.S. car is exported to be sold in Germany, compared to the price advantages the Germany manufacturer receives when the German car is exported to be sold in the U.S. In this example, U.S. producers are disadvantaged in two ways. On export, a U.S. product that otherwise sells for the same price in domestic markets starts off with a disadvantage of $3,800 because of Germany’s VAT. At the same time, the German car — which sells at home for the same price as the U.S. car does in America — is sold to the U.S. for a price that is $3,193 less than the U.S. car. When you add these two factors, U.S. car companies face a combined disadvantage (at home and abroad) that totals $6,993. In effect, the VAT rebate for German exports serves as a government export subsidy, while the imposition of VAT on the U.S. car serves as a tariff imposed on U.S. exports to Germany>>
Trump made a garbled attempt to explain himself, and it looks like the London metals trader who wrote in Forbes was simply riffing off the garbled explanation in an effort to obfuscate the underlying trade issue.
Or the writer may be speaking somewhat truthfully because it is Mexico they are referring to and not Europe as I initially referred to. Nevertheless there are real trade issues with VATs creating an uneven or unfair playing field.
The example above, based on European VATs, is commonly used in any argument and can be found all over the internet. Europe gets away with it because the WTO refuses to label VATS as illegal trade barriers. The VAT functions as a de facto tarrif however.
Krugman dismisses the effects VATs have on trade by saying that imports, such as the German car above, will face a sales tax. Thus he equates them, saying it's much ado about nothing because a VAT is just a sales tax. This would be true if the percentages were the same. But they are not. In the US, sales taxes range from around 7% up to as much as near 10% depending on the state you live in. On the other hand, the German VAT in the above example is 19%. So even though the sales tax applied at the end of the process will serve to reduce the combined disadvantage of $6,993 to a smaller disadvantage, it still leaves the German imported car with a big price advantage over a similar American car exported to Europe.
I've got leave and go back to lurking for awhile. Ya'll can keep up the good work and hash it out. :) |
