Huge Uncertainty over Future U.S. Trade Policy
It appears that the Trump administration wants to tackle fundamental matters related to the world trade regime. Even if most is rhetoric so far, Trump’s election announcements to put 45 per cent and 35 per cent protective tariffs on imports from China and Mexico, respectively, are worrisome. The withdrawal from the Trans-Pacific Partnership (TPP) is regrettable but will foremost have negative implications for the United States itself. The announced renegotiation of NAFTA must be monitored with a critical eye. However, members of Congress have recently been seeking alternatives to avoid the imposition of high tariffs on unpopular trade partners like China and Mexico. They fear a trade war that would rapidly affect the entire global economy.
WTO Conformity of a Border Adjustment Tax Is Questionable
One solution from their point of view would be the introduction of a Border Adjustment Tax (BAT) as part of a comprehensive corporate tax reform in which cash flow would be taxed on a destination basis, while the taxes would be cut from 35 per cent to 20 per cent. This approach would dampen imports because importers would no longer be able to deduct their imported intermediate goods. Exports, on the other hand, would be favoured because cash flow from sales to foreign countries would not be subject to taxation. The effect would be the same as that of a 20 per cent import tax.
Those who endorse this approach (including Kevin Brady, who chairs the House Ways and Means Committee that has jurisdiction over taxes) see it as the equivalent of the value-added and import sales taxes levied by other countries. However, the question remains whether the BAT would be in line with WTO rules. Some in Congress argue that the cash flow tax is an excise duty and not an income tax. But that distinction plays no role under existing WTO law. What is allowed is an indirect tax on a product (or its rebate) as an exemption from the subsidies regulation. As there is still no draft bill yet, it is difficult to make a final judgement if the cash flow tax is indeed an indirect tax on goods.
Europe Should Raise the WTO Issue Sooner Rather Than Later
The new U.S. administration’s stance on this suggested approach remains unclear. Initially, President Trump dismissed it as too complicated. Germany and Europe should draw attention to the question of WTO compatibility at an early stage and at the highest level during the legislative process. The situation must be carefully monitored because U.S. decision-makers assume they could obtain an exemption in the WTO. However, we should avoid drawing hasty conclusions at this point. The U.S. administration has yet to come up with a trade-policy concept, while the relevant government posts remain unoccupied and the alarming announcements are, after all, only fragments from interviews.
Professor Andreas Falke holds the Chair of International Studies in the Faculty of Economic Sciences of Friedrich-Alexander University Erlangen-Nuremberg.