Possible US border tax’s impact on China unclear

The ongoing fight over a border adjustment tax suggested by US President Donald Trump and House Speaker Paul Ryan has triggered debates over how US major trade partners such as China might respond if it’s enacted.

Ryan hopes that the BAT, such as a 20 percent tax on imports, would encourage US companies to produce within the US.

The plan assumes that the BAT could help raise $1 trillion over a decade.

Trump has not publicly endorsed the plan, but he has talked about various border taxes.

Peter Navarro, Trump’s trade adviser, spoke recently about a flexible BAT targeting countries with big trade surpluses with the US, such as China, Mexico and Germany.

Nick Lardy, a senior fellow at the Peterson Institute for International Economics, believes the impact of a BAT on countries like China would vary, depending on how much it will be offset by an appreciation of the US dollar.

Gary Clyde Hufbauer, a senior fellow at the Peterson Institute and a former US deputy assistant treasury secretary, agreed.

“Some people say the dollar will go (up) as much as the BAT. If that were the case, then there would not be any impact on Chinese imports,” he said.

Economists in Washington are divided over how much the US dollar will appreciate as a result of the BAT.

Derek Scissors, a resident scholar at the American Enterprise Institute, believes that if a BAT is enacted, China will still run a large trade surplus with the US, implying that a comparable US dollar appreciation will take place.

“The major impact will be downward pressure on the yuan against the dollar, at a time where the Chinese government strongly prefers a stable yuan,” he said.

Scissors does not think any government should retaliate against a BAT, which does not discriminate by country.

“If a BAT has special provisions that target certain American trade partners, of course they should consider retaliation,” he said.

“For China, it might be best to indicate that a BAT is acceptable, but a BAT and also other trade measures aimed at China will provoke retaliation,” Scissors said.

According to Hufbauer, China could launch a World Trade Organization case against the US; it could also impose countervailing duties on US exports, or it could do some unannounced retaliation such as shifting Chinese imports of US soybeans and planes to other sources.

He argued that most countries are unlikely to bring a case to the WTO, due to the lengthy and complicated process.

“One of these three or some combination of them is highly probable,” he said.