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Border war of words on trade

White House aims to strong-arm Mexico on border wall payment, but imprecise language creates a cloud of uncertainty

By: Eric Kulisch
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Photo: U.S. Customs and Border Protection / Flickr
   Contradictory remarks Thursday by President Donald Trump and top aides about whether tariffs or tax policy would be used as a cudgel to somehow force Mexico to pay for a border security wall immediately sowed confusion about whether the administration had reversed its position on a key plank of a House Republican plan to cut corporate and individual tax rates.
   Administration officials appeared to cloak the so-called “border adjustment tax” in the mantle of protectionism even though the import section of the House economic plan, driven by Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady, does not touch on tariffs, let alone punitive tariffs directed at a specific nation.
   The proposed tax on imports, rather, is intended to spur exports and offset the loss of government revenue from cutting income taxes, which House Republicans believe will stimulate economic growth. By some accounts, the border adjustment tax (BAT) could raise about $1.2 trillion over 10 years.
   Reaction from pro-trade lawmakers and analysts, as well as many business groups with import operations, was swift and fierce.
   “We don’t think that is the right policy to make U.S. consumers pay for the border wall or tax reform,” Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation, said.
   Trump, staying true to his tough campaign stance that Mexico and liberal trade rules under the North American Free Trade Agreement (NAFTA) were responsible for siphoning good-paying manufacturing jobs from the United States, precipitated a crisis in relations with Mexico this week by indicating the administration intends to quickly begin constructing a physical barrier along the Mexican border using previously authorized funds - and then bill Mexico in some unstated form for the cost.
   The president promised voters during the election that he would impose high tariffs on countries with which the United States had a trade deficit and impose tariffs of up to 35 percent on imports from companies that relocated production to Mexico.
   Mexican President Enrique Peña Nieto publicly responded Wednesday that Mexico would never pay for a U.S. border wall and Thursday morning canceled a planned visit to Washington to discuss immigration and renegotiation of NAFTA after Trump tweeted that a meeting would be useless if Mexico didn’t agree to reimburse the United States for the border infrastructure.
   “The U.S. has a $60 billion trade deficit with Mexico. It has been a one-sided deal since the beginning of NAFTA with massive numbers of jobs and companies lost,” Trump tweeted Thursday morning. “If Mexico is unwilling to pay for the badly needed wall then it would be better to cancel the upcoming meeting.”
   Mexico is the United States’ third largest trading partner and bought $236 billion worth of American goods in 2015. A large portion of the trade deficit with Mexico is actually due to oil imports, according to U.S. government statistics. The gap in the balance of trade is narrower when oil is excluded and services are factored in.
   Addressing a House Republican planning retreat in Philadelphia, Trump, for the first time, conflated tax reform and tariffs as the mechanism for leveraging funds for a border wall.
   “The American people will not pay for the wall, and I’ve made that clear to the government of Mexico,” he said. “We’re working on a tax reform bill that will reduce our trade deficits, increase American exports and will generate revenue from Mexico that will pay for the wall if we decide to go that route.”
   On Air Force One flying back to Washington, Press Secretary Sean Spicer elaborated to reporters about the border wall scheme: “If you tax that $50 billion at 20 percent of imports — which is, by the way, a practice that 160 other countries do — right now our country’s policy is to tax exports and let imports flow freely in, which is ridiculous,” Spicer said. “By doing it that way, we can do $10 billion a year and easily pay for the wall just through that mechanism alone. A border tax on imports from countries like Mexico with which we have a huge trade deficit is really going to provide the funding.”

Spicer’s math for the $10 billion in annual revenue appeared to come from applying the 20 percent tax to the U.S. trade deficit with Mexico, which was $49.2 billion for goods and services in 2015

   The statement appeared to align the administration with the BAT, which House Republicans consider an antidote to value-added tax systems in many countries that tend to benefit foreign exporters and raise the price of imports. It is designed to incentivize companies to manufacture domestically. But Trump, in an interview in the Wall Street Journal two weeks ago, expressly stated his opposition to the BAT.
   The BAT is designed to tax cash-flow at the point of consumption, rather than taxing profits. House Republicans want to lower corporate taxes from 35 percent to 20 percent and then tax the full sales value of imports at the 20 percent rate without allowing input costs, such as purchasing and freight transportation, to be first deducted. Exports, on the other hand, would not get taxed.
   Spicer’s math for the $10 billion in annual revenue appeared to come from applying the 20 percent tax to the U.S. trade deficit with Mexico, which was $49.2 billion for goods and services in 2015, according to the Office of the U.S. Trade Representative.
   Expressions of concern from affected stakeholders led Spicer and Chief of Staff Reince Preibus to quickly walk back the statement, saying that it was simply one idea among many that could be part of a broader import tax plan
   But then last night, Trump told NBC News: “We’re going to tax people coming in. Look, we cannot lose our companies to Mexico or any other place and then we have them make the product and just send it across our border for free. We’re going to put a substantial tax on those countries, okay? And that’s why, by the way, they’re all [manufacturers] coming back. Without that they don’t come back so easily.”
   In reality, American consumers would pay the 20 percent tariff on Mexican goods when purchasing goods and American companies would pay the import tax, which they could pass onto to consumers in the form of higher prices. In either case, Mexico would not be paying for the border wall, although a steep rise in tariffs could depress exports to the United States and damage its economy.
   Several senators were critical of attempts to undermine trade relations with Mexico, raising questions about whether Republican establishment in Congress will push back against Trump plans that diverge from traditional conservative orthodoxy.
   “Simply put, any policy proposal that drives up the cost of Corona, tequila or margaritas is a big time bad idea. Mucho sad,” Sen. Lindsey Graham, R-S.C., tweeted.
   “I’m deeply concerned by President Trump’s statements today reaffirming his commitment to renegotiate the North American Free Trade Agreement,” Sen. John McCain, R-Ariz, said in a statement. “While renegotiations could help to strengthen and modernize NAFTA to benefit American businesses and consumers, any effort to restrict or impose new barriers on our ability to trade with Mexico and Canada could jeopardize the future of this trade agreement and have serious consequences for Arizona and the country.
   “Facts are stubborn things, and the facts clearly show that NAFTA has delivered enormous economic benefits to the citizens of my home state since it went into effect in 1994. In just two decades, Arizona’s exports to Canada and Mexico have increased by $5.7 billion, or 236 percent. Today, international trade supports more than one-in-five jobs in Arizona, which pay roughly 18 percent higher salaries. Imports to the state have also lowered the cost of raw materials, allowing Arizona companies to remain competitive and reducing costs for Arizona consumers. Free trade stimulates economic growth, creates higher paying jobs, reduces the cost of goods and services, and deepens our relationship with key allies around the world.
   “The free flow of trade has been the foundation of U.S. economic policy for decades, and a major factor in our prosperity and greatness. We should not have to relearn the lessons of history. Retreating from NAFTA and other international trade agreements will harm our ability to compete in today’s global economy, raise costs for consumers, threaten jobs, and undermine our relations with our closest neighbors,” McCain said.

We should not have to relearn the lessons of history

   Trump has repeatedly stated, articulating the philosophy of Chief Strategist Steve Bannon, that multilateral trade deals have damaged the United States and he wants to replace them with bilateral deals in which the United States can exert its muscle to get more favorable terms.
   “Unless Mexico is going to treat the United States fairly, with respect, . . .I want to go a different route,” Trump said in Philadelphia.
   Chris Wallace, the president of the Texas Association of Business, pleaded with the administration not to take rash action on NAFTA.
   “Texas is the largest exporting state and one of the largest importing states,” he said in a statement. “Texas could suffer severe repercussions from the dismantling of trade deals like NAFTA and not participating in the Trans-Pacific Partnership. There is no question that Texas has benefitted more than any other state from NAFTA and will be hurt the most if it is killed. We simply must have a seat at the table to ensure that we even the playing field for our businesses. We are working hard to create jobs in Texas, and we shouldn’t do anything that would cost us thousands of jobs as limiting trade would do in Texas.”
   Meanwhile, on Fox News, Rep. Brady knocked down suggestions the BAT would raise prices on consumers.
   “We’re proposing an equal 20 percent tax on imports as well as the products here in the United States,” he said. “So for the first time they would be taxed equally, leveling the playing field and creating competition. That’s always good for the consumers. Plus, I am convinced that this world economy recognizes changes. We will strengthen our made-in-America exports, our dollar will appreciate, you will be buying imports at a lower price. I think it balances out in a major way.”
   Some experts say the BAT would cause the dollar to appreciate as much as 20 to 25 percent, thereby creating a large discount for imports. But others note that currency valuations are difficult to predict and that any changes in the Federal Reserve’s handling of monetary policy could lower the value of the dollar. There are also questions whether a BAT violates rules under the World Trade Organization.
   It is unclear is whether Senate Republicans will be as supportive of the BAT as some in the House, but Rep. Chris Collins, a New York Republican who served as congressional liaison to the Trump transition team, said on MSNBC’s “MPT Daily” program that he believed the Republican Conference could support the tax as a way to bring jobs back to America.
   “Other countries have been stealing our jobs,” he said. “This is a way to get taxes down, get GDP growth up. And yes, there’s going to be some inflation. We don’t need runaway inflation. But at least we’re paying our debt down in the future with cheaper dollars.”
   Manufacturers will recalculate their production costs under the new tax scheme and many will opt to invest in domestic factories and export more, Collins said.
   “If something is cheaper by 20 percent or more in another country they may in fact still make it in another country,” he said. “But time and again we hear that the cost differential on Made in America vs. Made in China, or other countries, is in that 16, to maybe 30 percent, range. This is going to be a big incentive for companies like Apple to bring manufacturing back to the U.S.”
   The congressman dismissed the notion that a BAT would spark a trade war.
   “I think what you’re going to find is other countries have been taking advantage of us with a value-added tax imposed on our goods, where they had a free ride into our country,” he said. “What we’re doing is leveling the playing field. If they want to call that a trade war and then step up with additional sanctions or tariffs against the U.S., well then we would have to respond in kind.
   “I don’t believe that’s going to happen. I don’t believe the WTO would declare our border adjustability tax an unfair tax. But these other countries depend on the U.S. consumers. We’re 25 percent of the world’s economy. So they’d have to tread very carefully and decide where they pick their fights.”