Japan Institute for National Fundamentals
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Speaking out

Etsuro Honda

【#1245】Consumption Tax Is Not Non-Tariff Barrier

Etsuro Honda ／ 2025.04.23 (Wed)


April 21, 2025

　
Non-tariff barriers refer to practices and legal regulations and systems that limit the competitiveness of imported goods in ways other than tariffs. If tough quality and safety standards or complex procedures impede imports from overseas, they may be considered non-tariff barriers. U.S. President Donald Trump claims that Japan’s consumption tax, which is a kind of value-added tax commonly adopted in various countries, is an unfair non-tariff barrier. However, the reason why the consumption tax is a non-tariff barrier is not specified. Rather, Trump seems to believe that much of U.S. trade deficits are attributable to foreign non-tariff barriers.

Criticism of unfairness based on misunderstandings

The consumption tax is levied in a country where goods are consumed. Therefore, goods exported from Japan to the U.S. are subject not to Japan’s consumption tax but to U.S. tariffs and the U.S. state’s sales tax for their final consumption. The consumption tax paid on these goods upon their purchases in Japan for exports are refunded to Japanese exporters. This refund may appear to the Trump administration as an export subsidy banned by the World Trade Organization. However, this is not an export subsidy. The consumption tax paid in the distribution process is simply returned. The WTO recognizes that the consumption tax refund system for exports does not run counter to WTO rules.

Conversely, Japanese importers of goods from the U.S. pay the consumption tax along with tariffs. Since tariffs are included in taxable prices for calculating the consumption tax, the tax on imported goods is higher than on equivalent domestic products. Therefore, after-tax prices are higher for imported products than for domestic products. However, the consumption tax rate for imported goods is the same as for domestic products, meaning that the consumption tax itself does not constitute any non-tariff barrier. Since only tariffs are imposed on goods upon their import into the U.S., the Japanese consumption tax may be seen as a non-tariff barrier.

Consumption tax should be eliminated on food products

As described above, Japan’s consumption tax system as well as value-added tax in general is not a non-tariff barrier. Trump insists that non-tariff barriers are included in the calculation of the reciprocal tariffs but remains ambiguous how the consumption tax is being treated. Those who call for the abolition or substantial reduction of the consumption tax in Japan emphasize the unjustness of the consumption tax based on Trump’s claim. But this is unreasonable. The treatment of the consumption tax should be discussed from the perspective of stabilizing the domestic economy. It is misguided to exploit external pressure.

In light of the recent protracted cost-push inflation centered on food products, I believe that the consumption tax on food products should be eliminated as a permanent measure. Fiscal resources required for the partial consumption tax elimination are estimated at 4 trillion yen per year. They should be raised from the part of a tax revenue increase through the past two-stage consumption tax rate hike from 5% to 10% that has been allocated for the repayment of government bonds for fiscal consolidation purpose.

Etsuro Honda is a member of the Planning Committee of the Japan Institute for National Fundamentals and a guest professor at the Kyoto University Graduate School of Management. He formerly served as adviser to the cabinet, advising then Prime Minister Shinzo Abe for the success of Abenomics.