US Tariffs - Reciprocal Tariffs and EU VAT Angle

Background

Given the ever shifting direction of US trade policy and the speed at which policies are changing with respect to the implementation of tariffs, is it crucial to keep updated on tariffs, global tax and more.

The Week in Summary

In one of the biggest policy shifts since the inauguration of President Trump in his second term in office, February 13th saw the announcement of “reciprocal tariffs” on all US trading partners. 

President Trump has instructed his staff to develop "reciprocal tariffs", effectively looking to equalise the US rate of import tariffs against the tariff which applies on import in 3rd countries on US origin goods.

President Trump has ordered his team to start calculating duties by early April, increasing fears of a global trade war that could also accelerate US inflation. 

The US federal authorities have been given 180 days to identify countries that impose higher tariffs than the US and recommend country-specific tariffs. However, these tariffs could take effect before this deadline, with proposals potentially ready by April 2, as stated by President Trump's Commerce Secretary, Howard Lutnick. 

The policy targets countries with the highest trade deficits, including close US allies (including the EU), and aims to address trade imbalances by invoking these tariffs. 

Additionally, this review will not simply focus on customs tariffs but may target other factors which are deemed disadvantageous to US exporters, including subsidies, regulations, VAT, currency devaluation, and lax intellectual property protections.

What is the likely impact of reciprocal tariffs?

Economists have warned that Trump's previously announced tariffs will increase consumer prices for imported goods in the US, potentially stoking inflation. Although US inflation had fallen sharply after a period of decades-high rates following the COVID-19 pandemic, the consumer price index rose to 3% in January, the highest in six months. 

The impact of reciprocal tariffs on US inflation remains uncertain until concrete measures are formally announced. While some US domestic producers and retailers may benefit from the tariff strategy, they may also face higher import costs for raw materials and connected supply chain disruption. 

Additionally, should US trading partners impose retaliatory measures, with China already announcing countermeasures and others expected to follow suit, US exporters may be impacted as their products would potentially become more expensive to import and thus reduce their market competitiveness in key export markets. 

The announcement of these measures seem set to spark negotiations with multiple countries aimed at lowering their tariffs and trade barriers. The US has indicated it wishes to shrink its goods trade deficit which topped $1.2trn last year. A White House official commented that countries with large US trade surpluses could be targeted first with China, Mexico, Vietnam, Ireland and Germany accounting for the top five nations, according to the US Census Bureau.

Update from EU Commission

Following the announcement of US tariffs on Steel and Aluminum, EU Trade Ministers met with the EU Trade Commissioner Maroš Šefčovič to discuss EU-US trade relations. Tánaiste and Minister for Foreign Affairs and Trade, Simon Harris, speaking after the meeting said: 

"Ireland is keenly aware of the perils of further escalation. We consider that it is in our collective interests that we seek to work with the new administration and to highlight the powerful, mutual benefit of the transatlantic relationship.

"Most importantly, EU Member States are united and the EU Commission is fully mobilised to protect European economic interests.”

On February 14th, following President Trump’s announcement on “reciprocal tariffs”, the European Commission released a statement indicating it views this “reciprocal” trade policy as a “step in the wrong direction”. 

While no direct actions have been announced, the message from the Commission is clear, stating that:

“The EU will react firmly and immediately against unjustified barriers to free and fair trade, including when tariffs are used to challenge legal and non-discriminatory policies. The EU will always protect European businesses, workers, and consumers from unjustified tariff measures”.

The VAT Angle

The recent memo published by The White House indicates that the US will now consider domestic taxes and taxes on services, not just goods, in its trade policy and the application of reciprocal trade measures. This means that value-added tax (VAT) and other service-related taxes imposed by trading partners will be scrutinised with the potential responses currently unknown. 

Should the US determine that their inbound tariffs are to be equalised with both the EU import rate and the domestic VAT rate, the impact would be significant on reciprocal tariffs imposed on EU exports to the US, considering VAT rates in EU Member States range from 17% - 27% with Ireland having a rate of 23%.  

While VAT (Value-Added Tax) is applied to imported goods, it is similarly applied on domestically produced goods which are sold for consumption in the State. This marks a key distinction from import tariffs as foreign producers are not disproportionately levied with an additional tax at the border (as the import VAT is usually recoverable by the importer).

Key actions businesses can take today

While there is a small respite in the implementation of tariff measures, we would encourage you to bear in mind the following key dates: 

• 4th March: Suspension of 25% tariff on goods from Mexico and Canada due to end. This date may be extended pending the conclusion of any bilateral negotiations. 
• 12th March: Imposition of a 25% tariff on all steel and aluminium imports
• 31st March: The suspension by the EU on rebalancing tariffs, introduced to combat 2018 tariffs imposed during President Trump’s first term, is due to end. It is unclear if the EU will further extend this suspension or allow it to lapse and impose rebalancing tariffs again. 
• 1st April: First issuance of reports under President Trump’s “America First Trade Policy” to evaluate US Trade Policy and propose possible measures, which may include tariffs. 
• 1st April: Howard Lutnick, Trump's proposed commerce secretary, suggested the administration would address the matter of “reciprocal tariffs” with each affected country one by one and advised studies on the issue would be completed by April 1st.
• April - August 2025: Currently, the memorandum outlining “reciprocal tariffs” does not specify an effective date of implementation. However, a 180-day review period has now begun with the possibility of earlier tariff actions, if immediate concerns arise with specific industries or trading partners, being applied.