Tackling VAT to promote EU production and combat unfair competition

Fair trade, fair production and fair competition requires a change in VAT on goods produced in the EU by European workers.

VAT is value added tax. But where is this value added?

It is the end-user who pays for all the value added in the production process to the end-user. That means that the consumer in the Netherlands, and throughout the EU, pays VAT on the labour supplied.

And then the worker also pays Income Tax which affects the labour cost - the labour factor, and thus the price of the products.

With imported goods, the VAT in the retail price is calculated on the import price , and the cost and retail margin charged by the seller.

The idea behind free trade and elimination of import tariffs was that production can take place where it is cheapest, thereby making products cheaper for consumers, and also that it was not a real problem if economy and employment in the EU became a service sector economy. Clean work in Europe, and benefit from cheap production elsewhere.

However, this has taken extreme forms, and with the continuing advance of IT also disappearing in sectors where there used to be many jobs, for example in finance and the ticket clerk at the railroads.

If the expectation of free trade was that production conditions would become the same everywhere in the world, an objective without a time-frame, in reality it causes decades of exploitation of hundreds of millions of workers in low-wage countries.

The bargaining position of the labour factor in these low-wage countries, where government policies often restrict trade union freedom, where there are no social agreements, is too weak, and the policy of free trade and delocalization of production thus mainly benefits the entrepreneurs, and the international trading companies that put a sticker with a well-known and trusted brand name on the products (example: Philips, Grundig, Tefal, and so many other brands).

In short, an inefficient way to achieve a more equitable world economy and to improve living conditions in Low (and Middle) Income Countries. Free trade is an unsubtle tool that works the same for the "Asian tigers" (often now Middle Income Countries, at least for some of the criteria common to them) as it does for the Low Income Countries. It's about the green beans from Zimbabwe and the laptop computer from China. The agreements made between the EU and groups of countries in Africa and Latin America are insufficient to prevent this effect and seem to favor mainly large EU companies.

Why should we in the Netherlands pay VAT on value added in the EU causing EU produced goods to increase in price while less VAT is paid on the cheap product from outside the EU because retail price is lower. In other words, the difference in consumer price increases because more VAT is paid on the higher base price of the product produced in the EU and also because it includes other taxes that do not exist in the cheap production location (think of payroll taxes and environmental taxes).

Fair Consumption, and fair competition, can only be based on Fair Trade if there is Fair Production and Fair Labour.

Self-regulation by the large companies that have become degenerated into purchasing organizations is not to be expected because the margins are so enormously high thanks to sourcing in low-wage countries.

In the ´Trumpian´ approach, which does not really appear to have worked, and which itself was a departure from neo-liberalism, was the idea of reintroducing import tariffs, of a kind of ´stop and go´ with trade agreements and tariffs.

For Europe, things can and should be different.

For a moment, the idea was that the corona crisis would be the opportunity for fundamental changes in the economy, for a ´Build Back Better´.  A rethinking of the economy and ways to promote an economic and climate transition, while maintaining quality of life = amenities, work, income, social security, for the population, and achieving the Sustainable Development Goals. This opportunity disappeared as soon as the lock downs ended, and the old economic thinking made a powerful comeback.

For a sustainable economy, including energy transition, it is clear that there must be more near-sourcing, local production within the EU, and if sourcing is done from Zimbabwean green beans, the environmental and transportation costs must be factored-in and tax differences compensated.

As in the recent initiative of a supermarket with for 1-day real prices. The real prices make clear how much our consumption is now based on unequal trade, with an old-fashioned term – actually - economic colonialism.

The losers are not just the sweatshop workers in Bangladesh, or the low-wage agricultural workers in Zimbabwe, the workers in the EU and the tax and social system in the EU are the losers.

How can the example of the supermarket with real prices become the norm, the new normal? It always takes some getting used to, but if the choice is between 500 grams of green beans from Zimbabwe for 5 Euros or in winter a red cabbage for 2 Euros, I think it is clear.

If the laptop computer imported from outside the EU has a price tag of 1,000 euros and the computer produced in Europe 1,200 euros, then the choice is very different from now. In fact, there is no choice because laptop computers are already no longer made in the EU. Another example: solar panels and microchips, two sectors that were destroyed by unfair competition and now need to be rebuilt.

This gap must be narrowed to give consumers a real choice, to keep knowledge and skills in the EU, to reduce energy use for logistics, to contribute to energy transition and indirectly, of course, to level the differences in production costs. Because if predatory pricing, in fact disloyal competition no longer works, if import companies in the EU are held accountable, and it becomes less attractive to stop production and sell brand names with all the social and fiscal consequences, then we can see an economic transition.

The labeling initiatives that trace origins and are used by a growing number of companies to indicate the origin of their goods, to have some control over working conditions at the producers, the Real Price Model supermarket initiatives, the Fair Trade and TONY chocolony are all commendable, but Fair Trade and Fair Production (=Fair Labor) must become mainstream.

It will have to be brought about through innovative tax measures and conditions on import goods, which are not simple import taxes -that would end up directly in proceedings at the WTO.

A VAT reduction for locally produced goods, locally here in the sense of EU, or a luxury tax on imported goods such as on certain cars, or agro-products that fall out of the growing season in order to limit climate impact via transport, a levy on fictitious labour costs that are taxed twice (payroll tax and VAT) for EU produced goods and limited to VAT for imported goods could be considered.

The additional revenue for public finance and social security will be twofold: the levies imposed, but in the long run also lower social charges when unemployment is structurally reduced, and more revenue through payroll taxes.

The higher consumer prices will be partly made up if the rate of the lowest income tax scale can be lowered, or if the lower VAT rate for some locally produced goods can be lowered, or on the producer side certain taxes can be reduced so that consumer price of locally produced goods becomes more attractive for the European consumer.

Phase II:

In a second phase, VAT should be changed to a tax on raw materials used. Such a change can only be achieved at the European level. To achieve fair trade, fair production and fair work, a tax on the use of raw materials is necessary. Only then will better production methods, a reduction in the use of raw materials and protection of the environment be encouraged.

08/07/24, Hans Lunshof, PhD