To my post earlier today, some might be tempted to respond, “That’s nice in theory, but how do VATs affect trade in the real world?”

That’s a question economists have asked, too. Specifically, economists Youssef Benzarti and Alisa Tazhitdinova wrote a paper published in the American Economic Journal: Economic Policy in 2021 entitled, “Do Value-Added Taxes Affect International Trade Flows? Evidence from 30 Years of Tax Reforms.”

Here’s the gist:

We find small elasticities of trade flows with respect to VATs, even when VAT changes are large. These elasticities are substantially smaller than the elasticities of trade flows with respect to tariffs estimated in the trade literature. This finding holds across different time periods, countries, and types of reforms. Our results imply that VATs are unlikely to distort trade flows.

Benzarti and Tazhitdinova are appropriately modest in their conclusion by hedging with “unlikely.” It’s a complicated world out there, and there are probably some cases somewhere of VATs affecting trade flows. But in addition to being trade-neutral in theory, the evidence suggests VATs are trade-neutral in practice. They certainly aren’t an enormous rip-off justifying a global trade war.

You can read the NBER working paper version of their paper for free here.