De Rugy: Ideas collide as Trump lays out a pro-growth, anti-trade vision

At last week's World Economic Forum in Davos, Switzerland, President Donald Trump mixed compelling pro-growth talking points with his signature streak of aggressive protectionism. It's safe to say that these two ideas are officially on a collision course.

On one hand, Trump insists that "America is back and open for business." His promises to make America a 15% corporate-tax haven and lower energy costs are signs of this commitment.

On the other hand, Trump warns of punishing tariffs and retaliatory measures for Americans who dare to manufacture or source inputs for their products from abroad, or for countries that dare to tax their own citizens in ways he deems unfair. This sends a very different message: that the U.S. is closed to the modern way of doing business.

The stark disconnect not only runs the risk of choking off much of the global commerce Trump claims to welcome but threatens to stick U.S. consumers and businesses with higher costs. It's a blueprint for undermining American competitiveness, not enhancing it.

It bears repeating that tariffs are not exactly paid for by foreigners. They're taxes on imports shouldered by American consumers, including businesses. Most of what we import are inputs for businesses to produce things in America. Some imports are traded between related parties. Think of Tesla, which is headquartered in Texas but has foreign subsidiaries that must trade with one another.

Even if you believe U.S. businesses should have to buy inputs at home, you are supporting increasing the costs of producing at home. Either way, tariffs make American producers worse off and undermine the competitive advantages Trump is otherwise trying to strengthen.

More baffling still is Trump's conflation of Europe's value-added tax with tariffs. In his remarks, Trump railed against the European Union, claiming it treats America "very, very unfairly" by imposing "a large tax that we know about – a VAT tax." For that, he wants to punish Europe with tariffs – hence threatening another costly trade war with allies – over how they tax themselves.

I truly dislike VATs, but they do not treat U.S. exports unfairly. A VAT is a consumption tax levied on the value added to a product at each step in the supply chain. Picture a vehicle being produced by German car company. When a component is added, the VAT is calculated and applied. Unlike a tariff, which is specifically designed to make foreign goods more expensive, a VAT is neutral. It applies equally to domestic and imported goods.

Moreover, when goods are exported from a VAT-using country, the tax is refunded, ensuring that a country's exports are not taxed more than their international competitors' products. If that same German car is exported to the U.S., the VAT paid during production is refunded before it's shipped. The car is then subjected to U.S. sales taxes or other applicable taxes upon arrival. Similarly, when a U.S. company exports goods to Europe, they are subject to Europe's VAT, just as European domestic good are.

VATs are revenue-raising mechanisms that have done a lot to pay for the expansion of large European welfare states. They're fair to criticize as a tool for big government to grow and take on ever-greater roles in citizens' lives. But they're not a weapon in trade wars. Threatening European governments with tariffs won't change any of that.

If the president's goal is to make U.S. goods more competitive, he's already touting the right ideas: reducing regulatory burdens and cutting domestic taxes. If his desire is for more companies to produce in America, he should prioritize and expand firms' ability to fully expense their capital investments when his tax cuts are extended.

If Trump's concern is that European governments, by slowing their own economic growth with punishing taxes and spending, are also slowing the growth for American exports, he should just say that. And if he's genuinely concerned about VATs, the proper response isn't to retaliate; it's to say a firm "no" to those pundits and scholars arguing for the U.S. to adopt its own VAT to pay for more government.

Do all this rather than the tariffs, which are a solution to none of the above. Economically, tariffs are blunt instruments that rarely achieve their goals. They don't create new manufacturing jobs or bring back industries long gone. Instead, they raise prices on everything from cars to food to electronics.

For consumers, this means less purchasing power. For businesses, it means higher costs and less ability to compete globally. That's the opposite of being open for business.

Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University.