No Trade Wars Without Taxation -Who's to Blame, and What Comes Next?

As tariff policy once again shapes U.S. trade strategy, this article makes a foundational claim: trade wars are, at their core, tax wars. Against the backdrop of escalating economic tensions with the United States’ trade partners, this article argues that tariffs cannot be understood apart from the fiscal architecture that sustains them. What appears to be protectionism often masks deeper structural asymmetries in the U.S. tax system. The discussion proceeds through three interrelated dimensions: reshoring production, promoting fair trade, and raising revenue. In each, the interaction between tariffs and the tax system reveals deeper distortions. U.S. export mechanisms such as the Domestic International Sales Corporation, Foreign Sales Corporation, and Extraterritorial Income Exclusion were not reactions to European value-added tax border adjustments, as commonly asserted, but instead responses to deficiencies within the U.S. corporate income tax regime. Furthermore, this article challenges the conventional view of VAT as inherently cross-border trade- neutral. Through theoretical modeling and empirical evidence, it shows that border adjustments can affect trade flows in the presence of rate disparities, weak enforcement, and incomplete currency offset. In a global environment dominated by consumption taxes, the United States' continued reliance on income taxation places its exporters at a structural disadvantage and contributes to escalating cycles of retaliation. In response, the article proposes a VAT-equivalent reform consisting of full capital expensing, elimination of interest deductions, a zero tax rate on foreign-derived intangible income for exports, and broad-based wage taxation at a baseline rate matching that of capital income and equal to the corporate tax rate. This hybrid structure replicates the economic effects of a subtraction method VAT and could even preserve progressivity through targeted credits, all while averting the economic inefficiencies of tariff escalation. Bridging international tax law, trade regulation, and public finance, this article calls for a fundamental rethinking of the tax-trade relationship. It contends that the prevailing focus on VAT as a source of unfairness misdiagnoses the underlying problem. True trade reform requires tax reform, and only by addressing these systemic shortcomings can the United States construct a more equitable, sustainable, and competitive position in the global economy.