The border adjustment tax (border adjustment tax) President Trump has recently signaled support for is his administration’s first foray into international economics. It is an inauspicious start.
Advocates for the border adjustment tax, like House Speaker Paul RyanPaul Davis RyanCheney takes shot at Trump: 'I like Republican presidents who win re-election' Cheney allies flock to her defense against Trump challenge Paul Ryan researched narcissistic personality disorder after Trump win: book MORE, promise it will cut the trade deficit by making U.S. exports cheaper abroad and foreign imports more expensive here. The truth is, a border adjustment tax won’t much affect U.S. exports or imports, and it certainly won’t create jobs.
It would produce a large stream of new federal revenues, and it could trigger retaliatory tariffs on some U.S. exports. A border adjustment tax also would enrich a great many foreign investors and companies, and leave a lot of American investors and large companies poorer. All told, it’s the kind of “bad deal” that Trump once railed against.
President Trump and Speaker Ryan never mentioned a border adjustment tax until recently, and the reason they like it now is that it’s a cash cow to pay for their sharp cuts in corporate taxes. The Trump-Ryan border adjustment tax would give U.S. producers a 20 percent rebate on the wholesale price of any goods or services they export — 20 percent, because that’s the GOP’s preferred corporate tax rate — and impose a 20 percent tax on foreign goods and services imported here from abroad. It would raise trillions of dollars, because we import about $500 billion more per-year than we export.
For conservatives at least, all those revenues should be a red flag. In a populist period, a subsequent president and Congress may well decide to raise corporate taxes, and when they do, the border adjustment tax’s fat revenue stream could well go to fund progressive causes.
Trump still has no Council of Economic Advisers, so maybe he believes that a border adjustment tax will spur U.S. exports and create jobs. Even Peter Navarro should to be able to tell him why that won’t happen. At first, a border adjustment tax would strengthen demand for U.S. exports and weaken demand for foreign imports here.
But those shifts in demand would quickly strengthen the dollar and weaken foreign currencies, perhaps enough to offset the border adjustment tax’s initial impact on import and export prices. In theory, the currency movements triggered by the changes in prices brought about by the border adjustment tax should restore pre-border adjustment tax prices for both imports and exports, so the only change would be a lot of new revenues from taxing net imports.
In practice, the border adjustment tax’s impact on the dollar and U.S. trade is a roll of the dice. As Federal Reserve chair Janet Yellen noted recently, no one knows how closely the currency changes will mirror the border adjustment tax’s direct effects on prices. If they overshoot, U.S. consumers will pay more for imports; if they undershoot, U.S. export prices won’t fall much.
On top of that, no one knows how much of the border adjustment tax tax U.S. importers will pass along to American consumers, and how much of the border adjustment tax rebates U.S. exporters will pass along to their foreign customers. Finally, painful retaliation might follow, since China and others won’t take kindly to paying a 20 percent tariff on their exports to the United States, and China’s competitors won’t like the border adjustment tax’s substantial devaluation in the yuan-dollar exchange rate.
One effect is certain: the border adjustment tax will harm U.S. investors and reward foreign investors as the currency changes reduce the dollar value of U.S.-owned assets abroad and increase the foreign-currency value of foreign-owned assets here. The Bureau of Economic Analysis tells us that in the second quarter of 2016, Americans held foreign stocks, corporate and government bonds, and derivatives worth $12.9 trillion, and foreign-owned financial assets in the United States totaled $20.3 trillion.
If we assume the Trump-Ryan border adjustment tax leads to a 20 percent increase in the value of the dollar and a corresponding 20 percent decline in the trade-weighted value of foreign currencies, it would reduce the value of U.S.-held financial investments abroad by nearly $2.5 trillion and increase the value of foreign-owned financial investments here by more than $4 trillion. What kind of deal is that, Mr. President?
The trillion-dollar losers will include U.S. investors in European or Asian mutual funds, U.S. companies from Microsoft and Facebook to Coca Cola and Pfizer that have profitable foreign subsidiaries, and U.S. banks that lend to foreign companies. The trillion-dollar winners will include foreign investors with U.S. mutual funds, foreign companies from Toyota and Anheuser Busch to Unilever and Philips that have major American subsidiaries, and foreign banks who lend to U.S. companies. Perhaps the best motto for the Trump-Ryan border adjustment tax is “Put Foreign Investors First.”
Robert J. Shapiro is chairman of the economic and security advisory firm Sonecon. He served as Undersecretary for Economic Affairs at the U.S. Department of Commerce in the Clinton administration. In the 2016 presidential campaign, he served as an adviser to Hillary ClintonHillary Diane Rodham ClintonDemocrats worry negative images are defining White House Heller won't say if Biden won election Whitmer trailing GOP challenger by 6 points in Michigan governor race: poll MORE.
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