Here is a good post by Brian Albrecht, he works through the logic. A VAT, properly understood, does not favor say European producers over American producers. Work through his example if you don’t see this right away. In this sense the pro-tariff “fairness” arguments are quite wrong. Yet I am not entirely convinced by the rebuttals. If you compare “the European expoter market position” to “the American exporter market position” it is correct that parity of treatment holds.
But there is another way to pose the question and that is “should the resources in the EU be allocated toward export, or not?” And then exports are VAT-free, and within-EU sales generally are not VAT-free. So there is an encouragement to exports here. America has sales taxes, but VAT rates usually are higher. Thus you can say that Europe does more to encourage exporters than does the United States. Of course you can say the same about many other European government interventions. Germany’s notorious Sunday closing laws also encourage more exports. Send it to the US, and let it be sold on a Sunday, bitte! (Just not in Paramus, NJ.)
From an American point of view, I don’t think anything is wrong with this kind of “export subsidy” (and that is not how I would describe it in a first-order sense, but we are steelmanning here). We get more German goods because they keep their shops closed on Sundays. Good for us, Alex nails the bottom line. Note that every time we liberalize and improve some part of the American economy, the “net European subsidy to exports” goes up. We want to keep on doing that, not its opposite.
It perhaps would be helpful if the people on the free trade side of the debate recognized this point a little more explicitly.
The post Is a VAT an export subsidy? appeared first on Marginal REVOLUTION.
