According to the US Constitution, Congress is responsible for setting tariff rates. However, the government has long ignored this constitutional duty, leading to a need to consider the implications of the president’s stance on tariffs. A recent article in Fortune magazine sheds light on this issue.

President Trump has attributed the US trade deficit with the European Union, reaching $236 billion in 2024, to the Value-Added Tax (VAT), dubbing it as a tariff. However, this assertion is inaccurate. Unlike a tariff, which is a tax on imports, the VAT is a tax on all domestic consumption, regardless of the product’s origin. The key distinction lies in the method of collection.

So, why did the president make a statement that contradicts economic reality? It could stem from a common misconception related to the GDP equation:

GDP = C + I + G + (X – M)

While imports (M) carry a negative sign in this equation, indicating a reduction in GDP, it is crucial to understand that imports do not directly diminish GDP. They contribute positively to either consumption or investment, depending on the nature of the imported goods.

A VAT functions as a tax on all consumption, irrespective of the product’s origin. The tax can be collected in two ways: at the point of purchase in the US or applied to both domestic and imported consumer goods in Europe. Due to its non-discriminatory nature towards domestic and foreign products, the VAT does not qualify as a tariff.

It is essential to differentiate between factual statements and misconceptions. While President Trump has expressed admiration for tariffs, it is imperative for leaders to grasp fundamental economic principles accurately.

Some may argue that granting the president significant power is necessary for effective governance, while simultaneously excusing a lack of economic understanding. However, reconciling these conflicting viewpoints is challenging.

In my opinion, the term ‘tariff’ carries negative connotations, often associated with ignorance, xenophobia, and nationalist sentiments. It is crucial to approach trade policies with a comprehensive understanding of their implications.