The barrier, or simply call it cost disadvantage, is in the difference between the amount of the VAT and the sales tax. In your example you used a VAT of 20% and a sales tax of 5%. The 15% difference is tacked on to the price of the US good sold in Europe.
<<$100 good.
Produced in the EU sold in the EU, after tax price $120
Produced in the US, sold in the EU, after tax price $120
Produced in the US, sold in the US, after tax price $105
Produced in the EU, sold in the US, after tax price $105.
In each country of sale the tax affects the sale the same regardless of the country of origin. So it still doesn't seem to be a trade barrier>>
The $100 EU item is imported and sold for $105. Even though it paid a 20% VAT in Europe, that VAT was rebated back to the company when it left. Once here, it faces a 5% sales tax. Keep in mind, though, that the buyer pays the sales tax, not the European company. Nevertheless, I agree the 5% sales tax is an impediment. So we'll say the EU item is priced at $105 to break even.
The $100 item exported to Europe must pay the 20% VAT, so must price itself at $120 in Europe to break even.
The problem is that EU VATS have risen considerably in the last ten years, thus widening the differential between VAT and sales tax. Ten years ago the VAT in Germany was 12%. Now it is 19%.
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