The deficit is not as big as Trump says. And two huge chunks are easily fixable. 
Tariff Delay Granted
Sunday evening Trump rolled back until July 9, a 50 percent tariff he scheduled for June 1 after a request from European Commission President Ursula von der Leyen.
It’s meaningless unless Trump changes his clueless definition of reciprocal tariff that factors in the EU’s Value Added Tax (VAT).
Part Mirage, Part Fixable
The lead chart show a goods trade deficit with the EU of $236 billion.
Not shown, however, is the BEA’s estimate of a $76 billion services surplus with the EU. Factoring in services, the trade deficit would be $160 billion.
Ireland the Biggest EU Defict
The largest US deficit with the EU is with Ireland at $86 billion. Germany is in second place at $84 billion.
All of the deficit with Ireland is due to US pharmaceutical companies taking advantage Ireland’s low tax rate. I propose the US adopt a corporate tax rate of 10 percent with 20 percent on foreign profits and this production would return to the US pronto.
Trump can accomplish the same thing, in worse way, via tariffs. Either way, unlike iPhones, this production could easily return to the US.
Poof. Bring pharmaceutical production back to the US and factor in services, and the US trade deficit with the EI would shrink to 74 billion from 236 billion.
Trump Threatens EU with a 50 Percent Tariff in June
On may 23, 2025, I commented Trump Threatens EU with a 50 Percent Tariff in June
This is now suspended until July 9, but here is the pertinent discussion.
Nontrade Barriers and the VAT
Trump claims the EU’s VAT discriminates against the US. Once again, Trump is economically illiterate.
There are other genuine non-tariff barriers, especially with China, and those are a legitimate concern.
But the bottom line is Trump’s vision of “Reciprocal Tariffs” is nonsense because it relies heavily on seriously wrong VAT theory.
Trump Complains About the EU’s VAT, What’s the Real Story?
On May 25, I discussed Trump Complains About the EU’s VAT, What’s the Real Story?
The short answer is Trump is flat out wrong about how VATs work. Please read the article for details.
The Ireland Math Revisited
Factoring in services, the US trade deficit with the EU would be $160 billion. Of that, $86 billion, 54 percent is from Ireland.
And that 54 percent is a direct result of US tax policy that encourages US investment abroad.
To fix issues hugely related to tax policy, Trump proposed a 50 Percent tariff on all of the EU because “Talks Going Nowhere“.
Well, talks with the EU are never going anywhere because the EU is not going to change its VAT policies.
But hey, we’ve got another reprieve to nowhere that supposedly ends on July 9. That may mean tomorrow or the 88th of September.
Trump Commands Apple to Make iPhones in the US
On May 23, I noted Trump Commands Apple to Make iPhones in the US or Pay 25 Percent Tariff
An increasingly erratic Trump is clueless about what it would take to move iPhones production to the US.
What Should We Do to Get Government Spending Under Control?
I addressed corporate tax policy, tariffs, and VATs in my May 25, 2025 article What Should We Do to Get Government Spending Under Control?
Please give it a look. I am open to additional ideas.
The way “services” are counted is convoluted and a good reason for that category to be counted independently of “goods”. Business proceeds at overseas offices of US multinationals are counted as exports (reduce our balance of payments deficit) even as most of the employees at many of those offices (e.g. finance, law and others) are natives to those countries. Income from labor is counted in the country’s national income at the same time the revenue from their services is counted as a US “export”.
Pharmaceuticals are manufactured in Asia, not Ireland. Pharmaceutical companies have their headquarters in Ireland because of low corporate tax rates. So to the US, it appears Irish companies are manufacturing pharma products in Asia and shipping them to the US. The problem with putting tariffs on pharmaceuticals is that the cost of production is almost zero. A fully loaded Epipen can be manufactured in India for about 3 cents per pen and sold in the US for $500. a 25% tariff will add less than a penny to the cost. Mish’s solution of higher corporate income taxes on foreign based corporations may cause them to move their headquarters back to the states, but not manufacturing.
Maybe Trump could stop undermining the WTO and bring his case for being treated unfairly by everyone.
You know what they way: When yo think everybody’s crazy except yourself, it’s time for some self-reflection.
The US imposes a 25% import tariff on light trucks, including pickup trucks, from all countries, including the EU. This tariff, also known as the “chicken tax,” was initially imposed in the 1960s and has been in place for decades.
The real question would be why Europe produces more stuff that Americans want than the other way around. Outsize medical costs for employees would be a good place to start looking in terms of cost factors.
Compare heavy class 8 trucks by European and US makers. There is no comparison which one is in the space age. The same for buses and trains.
On the other hand, Europe hardly has any representative in smartphones, digital technologies, and so on.
Decades ago, Puerto Rico was a powerhouse for pharma manufacturing.
What happened?
Is anything trump says factual? He continues to manipulate financial markets and recapitulates on EVERY threat he makes.
Childish behavior at best and……………….
How much does Ireland invest in the USA?
A few countries tax Export to other countries to raise revenue: Argentina 16.5%,
Kazakhstan 15%, Brazil 0.3%, Indonesia 1.5%…some export items more some less. Turkey export Toyota and other products to Israel, despite their boycott, through the Palestinian Authority.100% of the PA export goes to Israel. Their income is over 2B/year.
VAT is a tax. If a European buys a product, he pays that tax as part of the price. If that same product is exported, the VAT is refunded to the seller. An analogy would be if the US, State, and local governments refunded a portion of the income and sales taxes that they levy on a exporter of a product. This is an export subsidy and treating the VAT refund as a subsidy is economically logical.
No. When it is sold in the US sales taxes apply.
If product goes from the US to Europe, no US sales taxes apply.
If the VAT was not subtracted, Americans would in effect be paying European sales taxes.
Hard to figure out how people cannot grasp this.
Hard to figure out how people can’t grasp if a nation heavily taxes domestic consumption then they don’t have to tax elsewhere. High consumption tax allows Europe to subsidize corporations.
ChatGPT
Are any Germany manufacturers subsidized, and if so, how?
Summary
Yes, German manufacturers are subsidized through a multi-layered system that includes:
• Direct grants
• Tax incentives
• Energy cost reductions
• Preferential loans
• EU co-financing
These subsidies aim to support innovation, competitiveness, sustainability, and job creation in the face of global economic shifts. If you’re interested in a specific sector (e.g., aerospace, pharmaceuticals), I can dive deeper into the subsidies that apply there.
ChatGPT
What percentage of German tax revenue is vat tax?
GERMANY’S TAX REVENUE
Tax Type
Share of Total Tax Revenue
VAT (Umsatzsteuer)
~30–32%
Income tax (wage, capital)
~25–28%
Corporate income tax
~6–7%
Trade tax (Gewerbesteuer)
~9–10%
Energy and environmental taxes
~5%
Other taxes
~10–12%
Sanofi which is a French company and number three in the world in pharmaceutical revenue announced a few days ago that it was investing $20 billion in factories and in R&D in the US over the next five years. They said they decided to do that because they foresee in the future that the tariffs are here to stay no matter who is in the White House. They already produce pharmaceuticals in four states and this is another major expansion in the US. They also said it is the biggest market so the decision was compelling. This is just one example but many large European groups across industries are doing the same and for the same reason. The level of the tariff doesn’t matter it seems. What matters is that it is there.
https://www.usinenouvelle.com/article/sanofi-va-investir-en-masse-aux-etats-unis-au-moins-20-milliards-de-dollars-d-ici-a-2030.N2232013
Ireland is a disaster just waiting to happen. Having your prosperity depend on a tax break that makes no sense but it allowed Ireland to a have an illusion of prosperity. It filled the state’s coffers and that dribbled down to the people but it created what some called a tiny Manhattan surrounded by Portugal. The statistics say Ireland is by far the richest in Europe by inhabitant and that even its economy grew by 18% the first quarter of this year. It is a great example of how accounting and statistics can give false answers. Ireland is poor. If the tax break is lifted then the EU will have to subvention it again.
Almost 20% of US GDP is healthcare with proportional spending on pharma which charges multiple of prices to other healthcare system. Which pharmaceutical company would miss out on such carefree bonanza.
Healthcare spending probably mirrors military spending where the US spends more than the 10 closest competitors.
Trump is a class A moron. I’m glad someone finally pointed out his illiterate VAT nonsense.
Trump, the biggest money maker for the media ever.
For the poor, not so much.
But hold their macro beer while they keep voting for him and against their own interests. His real magic power.
Without comment regarding the current state of affairs, policy actions, election results, how one views the current president or past presidents, etc I submit that in negotiations this is the desired backrop: “may mean tomorrow or the 88th of September.”
Frustrating for all parties, businesses, individuals, and markets and one could argue whether we should or need to be in this position but it is how one would hope negotiations are viewed if you’re ever the party that believes they hold the cards.
On the other side of the 88th of September it’s only a matter of time before someone breaks the commitment negotiated, that’s how the world has always operated.
Still, the 88th of September was humorous because you can’t fool me..the rhyme begins 30 days hath September.
1) When a tourist buys a shirt in Paris he pd VAT. He is entitled to a refund, but the cost of currencies pairs and the cost of banking fees made it unviable. When Trump talk about VAT most people get it. There few “sophisticated and smart” economists like Mish.
2) Negotiations with the EU are easy. All they need is time to resolve a few difference and f**k Ireland.
3) The arrogant, erratic and the spineless puke media hate Trump so much they cannot get anything right. These idiots compete with each others piling insults. Their anti Trump bubble will plunge by itself. Nobody apply to Harvard bc they don’t know their status.
4) Mish best idea: exclude coke, diet soda and snacks… from snap.
5) Negotiation with Iran might be easier than u think. If Israel dismantle her nukes, which are doing nothing since the 1950’s ==> so will Iran.
6) Negotiation with Putin are easy. He isn’t crazy. A killing fire before a ceasefire is very typical.
I have many a time handed in a claim on Sales Taxes (HST) that I paid as a tourist in Canada — it was easy peasy. Just need to keep your receipts in case they challenge (they didn’t).
Frictionless financial perpetual motion requires that, income not spent, is reintroduced into the economy, thereby sustaining and promoting economic momentum.
If a debt was acquired to finance the acquisition of a (1) [new-security], the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) [existing-security] or to finance the purchase of an existing house (read bailout), or to finance (1) [inventory-expansion], rather than refinance (2) [existing-inventories].
The former types of investment are designated as (1) “REAL” [new construction] as contrasted to the latter (2), which constitute “FINANCIAL” investment [existing property].
FINANCIAL speculation (the transfer of title to existing goods, properties, or claims thereto), provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy.
Compared to REAL investment, FINANCIAL investment is rather inconsequential as a contributor to employment and production.
Only debt growing out of REAL investment or consumption makes an actual direct demand for labor and materials.
The “Taper Tantrum” was the result of putting savings back to work (as predicted).
As I commented on 12-16-12, 01:50 PM #1 when the FDIC’s unlimited transaction deposit insurance was reduced to $250,000:
“We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier & faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average.
With low inflation (given some deficit resolution), Jan-Apr could be a zinger”
Then we got the “taper tantrum” and subsequently above average R-gDp and N-gDp growth rates by putting savings back to work (by increasing money velocity).
Zinger – a surprise, shock, or piece of electrifying news.
So we had a “taper tantrum” and a temporary rise in gDp:
01/1/2013 ,,,,, 4.4
04/1/2013 ,,,,, 1.6
07/1/2013 ,,,,, 5.1
10/1/2013 ,,,,, 6.1
01/1/2014 ,,,,, 0.7
04/1/2014 ,,,,, 7.0
07/1/2014 ,,,,, 7.1
10/1/2014 ,,,,, 2.6
01/1/2015 ,,,,, 3.2
04/1/2015 ,,,,, 5.0
That’s called a “predictive success
Lending by the DFIs (+M +Vt) is inflationary (S “≠” I ).
Whereas lending by the NBFIs is non-inflationary (S = I ), ceteris paribus.
I was completely in favor of cutting the corporate tax rate form 39.6% to the current 21%, but cutting it again to 10% seems like a probable huge loss of tax revenue. Corporate tax receipts are about $400B/ year. Bringing back pharma production (or pharma companies’ headquarters) into the US won’t come close to offsetting that revenue loss. That’s especially true because only a fraction of the $86B trade deficit with Ireland would be taxable corporate income. Another flaw in the 2017 tax bill was cutting the tax rate on S Corps to BELOW the top tax rate on ordinary income. S Corps already receive favorable pass-through treatment. That should have been enough without enacting a specifically lower tax rate for income derived from S Corps.
Sack cardiologist who insert stents after CT to accumulate millions.
The big pharmaceutical exodus was led by two tax policy changes. The first was in 2006 which allowed pharmaceutical companies to manufacture in Puerto Rico without paying federal income tax. The buildings are still there (as are some of the workers) and companies could easily relocate back to Puerto Rico. https://www.finance.senate.gov/imo/media/doc/Arthur%20MacEwan%20and%20J.%20Tomas%20Hexner%20(Submission%206).pdf
The second was Trump’s TCJA in 2017, which allowed the intellectual property to be held offshore without being taxed. https://www.cfr.org/blog/american-pharmaceutical-companies-still-arent-paying-tax-us#:~:text=In%20other%20words%2C%20it's%20the,and%20Jobs%20Act%20(TCJA).
The Tyrant’s Trade WarTrump’s use of tariffs is purely punitive and arbitrary.
https://daniellarison.substack.com/p/the-tyrants-trade-war
Since you are in the know, tell us who was running the White House before Trump? Biden was almost braindead even four years ago so somebody did and who controlled his autopen?
Doug, this is all just ad hominem BS against Biden. Pray tell, what are you hoping to improve about the USA by bringing some old codger who didn’t know what he was doing to heel shortly before he dies of Cancer? What’s the goal here? To me, it’s just whataboutism but please prove me wrong.
as I have commented before it is voters who hold back cuts and other valid changes. Assume REPs make serious cuts and 2026 the DEMS winb the House as a result of cuts. what was accomplished?
the voter has to be educated about why your ideas are good for them. Forget the country as they don’t care
I guess the question is without cuts what was accomplished? If republican winning means they implement progressive wish list policies we might as well let democrats rule so those same policies are hung around their neck so we wind up with a republican who actually wants to fix things. Trump clearly doesn’t. In all matters economic he seems to be a prototypical ignorant progressive.
Where does it say it is Mish’s obligation to make voters understand why his ideas are good for them? Last I checked it’s the voters’ responsibility.