Author granted license

Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type


Publication Date





Tax Analysts




During the first presidential debate President-elect Donald J. Trump argued that the value added tax (VAT) operated as a trade barrier to American business everywhere. He particularly pointed to the North American Free Trade Agreement (NAFTA). Mexico was a special concern. China was also a concern, but in this instance Trump was troubled both by China’s VAT and by China’s alleged currency manipulation.

This paper can only consider the VAT aspect of Trump’s trade policy. There appears to be some confusion about the operation of the VAT, particularly the border adjustment mechanism, and how US tariffs could “level the playing field.” The confusion needs to be cleared up.

Trump indicated that as president he would respond to “unfair trade practices” by imposing retaliatory tariffs on goods and services coming into the US from any country that imposed an import VAT on American businesses exporting goods or services to their country. There are more than 160 countries that have a VAT and all of them impose an import VAT. Trump is promising a trade war. He promises to set US tariffs at a rate that would force governments and businesses to take notice.

The argument for imposing US tariffs on imported goods coming from countries that collect an import VAT on US goods raises three questions that can be adequately handled by looking just at the NAFTA relationship. Two questions consider the issue from the perspective of a US manufacturer exporting to a NAFTA country, the third question hypothetically moves a US manufacturer into a NAFTA country, and considers the impact of VAT refunds on sales that this company will make back into the US. The questions revolve around the two central elements of border adjustments – the full VAT refund allowed for exports, and the import VAT collected from the importer of record. Trump has concerns with both aspects.

The three questions are:

(1) US Exports to NAFTA - In the normal case, does the standard, destination-based, credit-invoice VAT erect a trade barrier equal to the amount of the import VAT?

(2) US Exports to NAFTA - If not creating a barrier in the normal case, are there other fact patterns where the standard, destination-based, credit-invoice VAT does erect a trade barrier equal to the amount of the import VAT?

(3) US Imports from NAFTA - Can an American manufacturing company move its operations to Canada or Mexico and gain an unfair advantage when selling their product back into the US VAT-free; that is, can a manufacturer unfairly benefit from the VAT refund aspect of border adjustment that is provided to exporters from VAT jurisdictions, as compared to comparable manufacturers producing and selling entirely within the US?

These are the questions this paper considers.

Find on SSRN Link to Publisher Site



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.