VAT vs. sales tax: What we know as Trump signs reciprocal tariffs

President Donald Trump signed a presidential memorandum on Thursday initiating a new reciprocal tariff system. This policy adjustment seeks to counterbalance the tariffs, taxes and subsidies that other nations impose on U.S. products.

“I have decided for purposes of fairness that I will charge a reciprocal tariff, meaning whatever countries charge the United States of America we will charge them. No more, no less,” Trump announced from the Oval Office on Thursday.

Newsweek reached out to the White House for comment via email on Thursday.

Why It Matters

Trump’s new tariff system, described as “reciprocal,” could redefine the rules of global trade by imposing higher tariffs on countries that levy high duties on American products.

Both existing tariffs and taxes like the value-added tax (VAT) applied by other countries on U.S. goods will be considered.

Experts warn this could escalate into trade wars, affecting everything from consumer prices to global economic relationships.

What To Know

The new tariffs would consider not only existing tariffs but also taxes like the value-added tax (VAT) applied by other countries on U.S. goods.

VAT is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. Each participant in the supply chain pays VAT on their purchase price and charges VAT on their sales price, making this system widely prevalent in over 160 countries, particularly in the European Union.

In contrast, the U.S. primarily utilizes a sales tax system, which is only applied at the final sale to the consumer. This means the tax is only collected once, at the retail level, on the total sale price. As a result, U.S. products could face a compounded tax burden in VAT-implementing countries, affecting their competitiveness abroad.

Trump argues that this system disadvantages American businesses and justifies his policy as a move toward balancing the scales. “In almost all cases, they’re charging us vastly more than we charge them. But those days are over,” he said.

Tahra Jirari, director of economic analysis at the Chamber of Progress, an American trade group, told Newsweek that Trump’s concept of reciprocal tariffs overlooks the fact that many nations implement VATs as regular tax practices, not as protective measures.

“Labeling them as trade barriers could justify unnecessary tariff hikes, raising costs all while inflation persists here—the very problem Trump claims to be addressing,” Jirari said.

Historically, such tariffs have resulted in elevated prices, retaliatory actions from trade partners and diminished American exports, she noted.

Supporters believe that these measures could level the playing field and lead to a surge in U.S. manufacturing, ultimately benefiting the American economy.

What People Are Saying

President Donald Trump wrote on Truth Social on Thursday: “For many years, the U.S. has been treated unfairly by other Countries, both friend and foe. This System will immediately bring Fairness and Prosperity back into the previously complex and unfair System of Trade.

America has helped many Countries throughout the years, at great financial cost. It is now time that these Countries remember this, and treat us fairly – A LEVEL PLAYING FIELD FOR AMERICAN WORKERS.”

Tahra Jirari, director of economic analysis at the Chamber of Progress, an American trade group, told Newsweek: “These new tariffs will likely increase costs for American consumers and businesses by making imported goods more expensive.

History shows that tariffs often lead to higher production costs, slower economic growth, and reduced global competitiveness for U.S. exporters. The White House claims tariff revenue will help offset deficits, but in reality, it’s a tax that American businesses and consumers will ultimately pay.”

What Happens Next

The U.S. administration is still in the process of deciding the exact tariff rates to be applied to each country under the new reciprocal tariff policy.

Howard Lutnick, Trump’s pick to head the Department of Commerce, suggested in a press conference Thursday that the process would take a handful of months.

“Our studies should be all complete by April 1st. So, we’ll hand the president the opportunity to start on April 2nd if he wants,” Lutnick said.