First of all, what is VAT?
Here is a good explanation
A value-added tax (VAT) is not a tariff, it is a consumption tax assessed on the value added in each production stage of a good or service.
VATs are border-adjusted, meaning they rebate tax on exports and impose tax on imports. They’re trade neutral.
VAT is applied to all goods within a country, including those that are domestically produced. In other words, for a given country, there is no difference in treatment between goods produced in the country and goods imported from the US. It's a level playing field. However, when that country's goods are exported to the US, VAT is subtracted so Americans don't have to pay it.
A tariff by contrast is only imposed on imports from other countries, to make them more expensive compared to domestically produced goods. Tariffs tilt the playing field to domestic producers.
President Trump is obviously struggling to understand the difference between tariffs and VAT.
Suppose reciprocal tariffs were put on other countries, and they included VAT, how much would be charged?
Here is the table:
There will be retaliation - probably not one for one, but in indirect ways. Defense contracts cancelled, taxes put on services imports from the USA, American businesses barred from bidding for government contracts, that kind of thing.
The biggest impact will be on Americans themselves, as the cost of all goods should jump. There will be an inflationary shock, which will impact the Fed funds rate. Bond yields will spike and the US govt will find it more expensive to borrow.
Some people think this is all a bluff and a negotiating tactic. But both Canada and Mexico negotiated USMCA with Trump in his first term, and he tore it up within a couple of weeks of re-entering the White House.
So is it worth bothering to negotiate with him, or is it better to just slap retaliatory tariffs on, and diversify to doing business with the rest of the world?