The Hidden Asymmetry in Global Trade: How the Lack of a U.S. VAT Disadvantages American Producers
In the ongoing debates over trade deficits, tariffs, and economic nationalism, much attention has been paid to the United States’ persistent imbalance in the trade of goods and services. What receives far less scrutiny—but arguably deserves far more—is the systemic asymmetry in how the U.S. and its trading partners tax international commerce.
While most of the world relies on a Value-Added Tax (VAT) system, the United States is one of the few advanced economies without one. This structural difference leads to a subtle but powerful imbalance: foreign countries tax U.S. exports, while the U.S. does not tax foreign imports. In a global economy where tax systems and trade rules intersect, this matters—a lot.
Understanding the VAT System
A VAT is a consumption tax levied at each stage of production but ultimately borne by the final consumer. In a typical VAT regime:
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Imports are taxed at the border.
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Exports are zero-rated (i.e., taxed at 0% but still eligible for input tax credits).
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Domestic goods and services are taxed equally.
This structure ensures that all goods sold within a country are taxed the same, regardless of origin, and that exports leave the country untaxed, making them more competitive abroad.
Most U.S. trading partners—including the European Union, China, Mexico, Canada, and virtually all OECD countries—apply VAT rates ranging from 15% to 25%.
The U.S. System: No VAT, No Border Adjustment
The United States funds its government primarily through income taxes (corporate and personal) and payroll taxes. While many states apply sales taxes, these:
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Are not collected at the border on imports.
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Are not refunded on exports.
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Vary significantly from state to state, adding complexity without correcting the imbalance.
As a result, when a foreign good enters the U.S., it typically faces no federal-level tax at all. But when a U.S.-made good enters a foreign market, that country’s VAT is added—effectively increasing the cost of the American product by 15–20%.
The Real-World Consequences
This creates a structural disadvantage for U.S. producers and workers:
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U.S. exports are taxed abroad, but imports into the U.S. are not.
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Foreign governments collect VAT revenue on U.S. production.
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The U.S. collects no equivalent revenue on foreign production.
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U.S. goods appear more expensive in foreign markets, while foreign goods enjoy an untaxed price advantage in the U.S.
This is not merely an abstract economic concern. It affects factory workers in Michigan, farmers in Iowa, and small manufacturers in Texas who must compete with imports that are effectively subsidized by this imbalance.
Tariffs as a Clumsy Substitute
President Trump’s recent push for across-the-board tariffs—calculated in part based on the U.S. trade deficit with each country—can be viewed, in part, as a rough compensation for this VAT asymmetry. Tariffs attempt to level the playing field by applying a cost to imports where none previously existed.
But tariffs are blunt instruments:
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They risk inflationary pressure on U.S. consumers.
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They invite retaliation from trade partners.
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They may violate World Trade Organization (WTO) rules.
A VAT or border-adjusted tax, by contrast, is WTO-compliant and used by nearly every major economy.
A Smarter Path: Border Adjustment or VAT
If the United States truly wants to neutralize this imbalance, it should consider:
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Implementing a federal VAT with border adjustments.
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Or reforming the corporate tax to include a border-adjusted component (as proposed in 2017 by House Republicans).
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Or applying targeted, WTO-compliant mechanisms to recapture lost tax revenue on imports.
Not only would this generate significant federal revenue, but it would treat domestic and foreign goods equally—a fair and neutral approach that supports American competitiveness without resorting to perpetual trade wars.
Conclusion: It's Time to Acknowledge the Asymmetry
The absence of a U.S. VAT is not just a tax policy anomaly—it is a quiet subsidy for imports and a silent tax on U.S. production. While other countries collect billions in VAT revenue on American exports, the U.S. collects nothing comparable on incoming goods.
This asymmetry should be front and center in discussions about tariffs, trade deficits, and industrial policy. If we care about leveling the playing field for American workers and restoring balance to our trade relationships, we must look beyond the headlines—and start with the tax code.