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Is Australia’s GST a tax or a tariff? And why has it become a target in the trade wars?

  • Written by Felicity Deane, Professor, Queensland University of Technology
Is Australia’s GST a tax or a tariff? And why has it become a target in the trade wars?

The latest round of proposed tariffs from US President Donald Trump includes a response to what the White House describes as “unfair” taxes – specifically, value-added taxes such as Australia’s Goods and Services Tax (GST).

Most economically advanced countries have a value-added tax (VAT) or sales tax on consumption. This applies to domestic goods and services as well as to imports. The United States is one of the few countries that does not impose a sales tax, though many of the states impose their own sales tax.

So the argument, according to the White House, is these taxes apply to imported goods, but not to exports.

Is the GST a tax or a tariff?

The GST is a broad-based consumption tax of 10%. It applies to most goods and services that are consumed in Australia, regardless of their origin.

An import tariff – sometimes called an import duty – is imposed exclusively on imported goods as a condition of market access.

Tariffs are not imposed on domestically produced goods at all. This is the main point of difference with a domestic consumption tax. The GST applies equally to imported and domestically produced goods, adhering to long-agreed international trade rules.

It remains unclear how the Trump administration intends to implement a tariff that is equivalent to the 10% GST. In effect, this becomes a tax on US consumers if they buy Australian goods.

Read more: What's a trade war?

Such an indirect tax would be regressive, which means it falls more heavily on lower-income consumers. The expansion of tariffs to include other nations’ VAT systems also represents a significant overreach into national sovereignty. It has long been accepted that sovereign nations have the right to tax their citizens and businesses as they see fit.

Indeed, Australia’s GST is among the lowest among economically advanced nations, for which the average is 19%, so the wider impact on US consumers will be even greater.

Image of clothing in a store
Goods that are exported to the US face a new round of tariffs. Shutterstock

Trump is clearly (and unapologetically) seeking to reinvigorate US manufacturing. But the reality is that US labour costs are high. It is also inefficient for any country to produce all the goods and services its population requires. This is particularly the case in such a high-consumption nation as the US.

The US has been described as a consumer of last resort because strong consumer demand has been filled by ever rising imports from other countries. The mutually beneficial relationship between the US and China has enabled the rise of the middle class in China. Trump’s tariffs may shift this, causing geopolitical tensions and economic instability.

Australia’s response: pausing the digital services tax

While these tariffs primarily harm US consumers, Australian businesses will also feel the effects. However, it is unclear to what extent. Notably, one main export to the US, unprocessed agricultural products such as beef, are GST-free and should not be subject to any retaliatory tariff.

However, many other Australian exports could be disadvantaged. Trump’s policies will raise the cost of Australian imported goods in the US market, potentially making them less appealing to US consumers.

The threat of these tariffs is clearly a problem for a federal government facing an impending election, and Prime Minister Anthony Albanese has so far responded cautiously. While a diplomatic approach may secure a minor concession, it’s in stark contrast to Canada’s firm stance, which included immediate threats of retaliatory measures.

Read more: Whether we carve out an exemption or not, Trump's latest tariffs will still hit Australia

Trump’s use of tariff threats as a negotiating tactic does appear to be having the desired effect, with a potential suspension of Australia’s proposed big tech levy. This proposal would have imposed a tax on major tech firms such as Meta and Google if they did not reach a direct agreement with local media companies.

image of Meta logo
Thibault Camus/AP Reports indicate the government has put this proposal on hold due to the risk of retaliatory tariffs from the US. Such a tax would likely have invoked the wrath of the US administration, with the digital services levies of Canada and France specifically referenced in the most recent White House tariff announcement. It is fair to say the White House statement deliberately misleads any reader into thinking that tariff percentages directly impact on trade volumes. This statement ignores a fundamental principle that has made international trade so appealing since World War II – and why economists have argued in support of it for hundreds of years. Countries produce and trade the goods and services at which they are efficient. Efficiency leads to lower costs which, all else being equal, means consumers are better off. The statement from the White House, together with Trump’s past pronouncements, demonstrate that all rules to do with international taxation and fairness have been thrown out. This does not appear to be the main concern, however, with Australian negotiators potentially willing to put on hold a crucial policy to ensure the long-term viability of local journalism. This is just the beginning. Anyone who felt some comfort and safety in the strength of our own democracy should carefully consider the overreach that is occurring through these threats.

Authors: Felicity Deane, Professor, Queensland University of Technology

Read more https://theconversation.com/is-australias-gst-a-tax-or-a-tariff-and-why-has-it-become-a-target-in-the-trade-wars-250041

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