Proposed U.S. border tax bad idea for us and them

For some very good reasons we have all been focusing on what may or may not happen to the renegotiation of NAFTA, but there is likely a much bigger threat to North American trade. The proposed border adjustment tax (BAT) might be a much larger problem because it’s more immediate and there is a real possibility that the illconceived, trade-destroying tax might pass.

The BAT is no more of an adjustment tax than flying to the moon; it’s a border tax plain and simple because it’s a 20 per cent tariff on imports while it exempts exports from corporate income taxes.

This is a clear and obvious violation of World Trade Organization rules, according to any expert you would care to talk to. The Peterson Institute for International Economics has calculated that if the U.S. goes ahead with the BAT, U.S. imports would decline by $200 billion, and the WTO could authorize a staggering $370 billion in retaliation by trading partners. So why would the U.S. Congress and Trump administration contemplate such a bizarre thing?

As always, money — or revenue to be precise — is the answer. While the BAT is garnering serious support by the Trump team, another proposal — a tax reform package that would reduce corporate tax rates from 35 per cent to 20 per cent and lower the top personal income tax rate from 39 per cent to 25 per cent— is gaining steam. All of this could cost $1.8 trillion over 10 years, which begs the question: how do you pay for it?

While the BAT is flawed, it may be the only conceivable option to raise the $1.8 trillion of revenue and pass the tax reform. And you can be sure it will be pitched as improving U.S. competitiveness because it reduces the corporate tax rate in such a way that imports can no longer be deducted from income, but export revenues can be. Effectively, it acts as a 20 per cent value-added tax on imports, a corporate income tax on domestic U.S. production and a subsidy for exports. A triple threat indeed and a dangerously serious one.

The Republican Party, for 70 years the proud defenders of free trade, are now pondering the biggest trade-destroying tax hike since 1930.

The U.S. business community is understandably split. There’s a group of major retailers and importers called Keep America Affordable that vigorously opposes the border tax. They see it as an existential threat because their tax bill on imports would be many times greater than their operating income. On the other side are large manufacturers in the American Made Coalition that would benefit from a border tax by eliminating foreign competition.

U.S. manufacturers who think they’ll benefit from a BAT are mistaken. After the narcotic-like high of profitability in the first year, they’d struggle with lower trade, higher prices and angry consumers.

Consider for a moment that Apple uses 172 major suppliers in 40 countries to produce the iPhone. Apple is unquestionably the gold standard in global supply chains. You can only get the best quality parts at the best prices by going out to the most innovative companies in the world. Withdrawing from those global supply chains to avoid a border tax would cripple competitiveness.

If global supply chains were kept in place by European, Canadian and Asian competitors, collectively they will one day eat America’s lunch. Border taxes aren’t paid by big multinationals alone; consumers and middle-class workers get hit hardest.

You don’t want to be standing in the checkout line at a U.S. Walmart when all prices go up 20 per cent. Oh, and gasoline prices would increase 30 cents per gallon. Hell hath no fury like an upset Walmart customer.

The Canadian Chamber of Commerce and other stakeholders will be carrying this message to our allies south of the border — a BAT is bad not just for foreigners, but also for America. Or put another way, a BAT is a batty idea. Gerry Macartney is chief executive and general manager of the London Chamber of Commerce.