“A Better Way,” or a Riskier Way?

A major taxation overhaul is underway as the Trump administration lurches forward with its economic rhetoric of tighter borders, corporate protectionism, and regulatory relaxation: the border adjustment. President Trump initially planned to levy a tariff on imports into the United States, a proposal which many Republicans such as Speaker Paul Ryan have publicly opposed. Trump’s specific proposal[PB1]  and GOP leadership has instead capitalized on the Trump’s projection introduction of border tax reform onto into the national policy arena to instead promote “border adjustment” reform;[i] in fact, border adjustment was on Ryan’s “A Better Way” economic policy-paper, published in June 2016, as a “Pro-America Approach to Global Competitiveness.”[ii]

            Ryan’s characterization of the plan as beneficial is not completely off the mark, and there are indeed economic benefits to border adjustment. More precisely, the border adjustment, once passed, would levy an import tariff and export subsidy of 20 percent each, in turn boosting American industry exports and lowering imports. Corporations would be more incentivized to remain in the United States, where corporate taxes are relatively high compared to other developed economies. The Financial Times estimates an additional $1.2 trillion in tax revenue over the next decade, or approximately $100 billion per year; the yearly revenue could potentially narrow the current government deficit, approximately $500 billion yearly, by 20 percent.[iii] These additional funds could be used to fund much-needed infrastructure reform, help balance the budget, or allow Congress to rollback other taxes on consumers, households, and corporations.

            As many economists such as Joseph Stigliz and Edmund Phelps[PB2]  have pointed out, these predictions are too good to be true.[iv] Firms that rely on foreign manufacturing (i.e. U.S. retailers and import-dependent industries) will have their supply chains be abysmally disrupted as costs increase by 20 percent, while firms that rely on domestic manufacturing will have a comparative advantage; this effect corroborates Trump’s promise to penalize industries that have outsourced their labor. Just as President Trump exclaimed back in Des Moines, Iowa, in December, “I’ll tell ya, I don’t think they’re going to be leaving so fast anymore.”[v]

            Many economists and financial analysts alike have argued that, given the highly volatile currency market and the market tendencies to clear, if the dollar appreciates by 25 percent this tax could generate revenue without financially burdening both domestic and foreign firms.[vi] Here’s how it would work[PB3] : since exports increase and imports decrease after the border adjustment, firms are incentivized to move capital and profits into the United States to avoid the border penalty and to take advantage of the export subsidy. Increased investment from abroad would increase demand for the dollar, driving exchange rates up. As greenbacks strengthen, exports decline and imports rise: to the point where we return to the status quo. Everybody wins in this scenario: the government enjoys increased tax revenue, firms are no longer pressured by the border adjustment because of dollar appreciation, and the United States enjoys more corporate profits domestically.

            Though ideal, this will most likely not happen. The Trump administration has shown a tendency to publicly prefer certain companies over others,[vii] has removed the Chairman of the Council of Economic Advisors from his cabinet,[viii] and has shown no ideological consistency in his economic policy.[ix] Deriding economic experts and tweeting about spontaneous policy changes dissuade foreign investors from investing in the United States. Economist Joseph Stigliz warns that foreign investment is based on confidence and trust: “That’s being eroded,” he warned.[x] If other nations look comparatively better to invest in, the American dollar has no chance of appreciation. Furthermore, due to the dollar’s volatility, even if it were to appreciate, it may take a long time to appreciate to 25 percent to clear the market.[xi]

            The border adjustment is more jarring than the average American realizes. It would harm economies in East Asia, which have found a path to economic development through marketing and exporting to the United States.[xii] Lawsuits would inundate the World Trade Organization, which explicitly prohibits nations from using direct taxation to discriminate between foreign and domestic firms.[xiii] Other nations may implement similar systems of their own in retaliation, harming American exports. Not only would these hurt American firms, but they would also reduce the aggregate gains in both economies that make free trade worthwhile in the first place. [xiv]

The risks of border adjustment are simply too high to be considered a valid policy proposal; falsely romanticized notions about the impact of foreign import competitiveness on American labor motivate this dangerously unreliable policy. If President Trump, his administration, and Congress are genuinely concerned with the American manufacturing sector and the livelihood of laborers, stronger social safety nets or job retraining programs are more efficient solutions without placing domestic and foreign firms in the crossfire: not destabilizing and unsubstantiated trade policies[PB4] .