E Trump’s Medical Prescription Will Kill The Patient, Instead Of Curing The Disease

The Trump administration has devised a strategy linking the corporate tax cuts with a border tax adjustment. The border tax adjustment would generate about $1.2 trillion in federal revenues over 10 years, about the same amount needed to fund the loss from corporate tax cuts. This is an ingenious, but badly flawed, strategy since it results in a straightforward transfer of $1.2 trillion from the U.S. consumer to the U.S. corporations.  

On paper, this strategy would promote exports and deter imports thus reducing or even eliminating the country’s trade deficit. In reality, the strategy would neither help exports nor close some of the trade gap. The patient not only continues to suffer, but the condition worsens after the medicine is applied.

Conceptually, a border tax is a retail sales tax in disguise on all U.S. imports for both intermediate and finished products. This explains why major companies such as Wal-Mart and automotive manufacturers strongly oppose the tax on their supply chains. Moreover, they believe that any savings on their corporate tax bill will be insufficient to offset the higher costs and/or lower margins. The Trump scheme is replacing a corporate tax with a retail sales tax that hits the American consumer directly.

Proponents of the border tax argue that the tax would lead to a rise in the value of the U.S. dollar and that would, in turn, result in lowing the cost of imports. Trade models do suggest that exchange rates would adjust to external changes in competitiveness. Just how much each component of the trade account adjusts is not clear a priori. We can surmise, however, that the trade deficit will continue to exist.

A recent research note from the CIBC makes the case that the real damage to the United States is the ``reduced access to the fastest growing segment of the global economy---- the emerging market consumer.”[1] The research note goes on to argue that:

Emerging markets now account for a record 38% of US goods exports. That’s up from 32% only a decade ago, with China by itself accounting for just under 9%. Compromising access to your fastest growing export market, which accounts for close to 40% of your international sales, is clearly a risky proposition. At the current rate, emerging markets demand will account for roughly 45% of exports within a decade, adding an average of $50 bn a year to US foreign sales.

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