Imminent Trump tax plan will send signal on trade policy

13 February 2017. By Ira Teinowitz.

Some of the speculation about what President Donald Trump will do to boost US exports and reduce imports will end in the next two weeks when he uses the rollout of his tax plan to unveil major elements of his administration's trade strategy.

In seizing on the tax plan as a vehicle for trade policy, the Trump administration will try to integrate trade with broader economic policy much more than did the Obama administration.

Trump has signaled that his pick for Department of Commerce secretary, Wilbur Ross, would play a much stronger role in setting trade policy than did Obama's Commerce chief. The Trump administration has portrayed the Office of the US Trade Representative as having a lesser role, though both the USTR and the Commerce secretary are Cabinet members.

The use of tax policy could increase the challenges in attempts to revise existing trade agreements or sign new ones. Trump has indicated he wants to revamp the North American Free Trade Agreement and has talked in recent days about new pacts with Japan and China.

Several key trade initiatives are expected to be determined by the outcome of the tax plan rollout.

Prominent among those proposals are a controversial border adjustment tax and a 35 percent tariff on goods made overseas by US manufacturers who move jobs elsewhere.

If the tax package does include a border adjustment tax, which has drawn support from Republicans in the US House of Representatives, it could pit the manufacturers who would benefit against the retailers who would get hurt. Such a conflict could continue for years and create uncertainties about the environment for trade.

There have been warnings that a US border tax would draw retaliation from trading partners and complaints to the World Trade Organization over whether it is an unfair barrier to trade. That scenario isn't likely to benefit trade negotiations.

A tax plan without the border tax would increase the incentives for the Trump administration to seek to impose the 35 percent import tariff on companies that move jobs overseas.

Trump so far has aimed his import-tax fire at US automakers and the makers of cookies and air conditioners. But Peter Navarro, who heads the newly created White House National Trade Council, in a recent interview warned German automakers of the possibility of being hit with a similar tax on cars built outside the US.

A US import tariff sanction could invite retaliation, as well as complaints from WTO partners.

The White House has portrayed the proposed border tax as a means of paying for a border wall with Mexico meant to stop illegal immigration. A decision against the tax would increase the chances other taxes could be used to pay for a wall, and some could have an impact on US trade with Mexico.

The White House last week said the tax plan would include steps to make US manufacturers more competitive. Press Secretary Sean Spicer, while not being specific, said the plan will reduce tax incentives for companies to move overseas.

The Trump tax plan is being drawn up while controversy continues to build over the border tax proposal in the House Republicans' tax plan being pushed by House Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady.

Under the House plan, the US also would cut its corporate tax rate, assess it on income from US sales rather than world sales, and replace some the income lost with a 20 percent tax paid at the wholesale level when goods are bought, whether made in the US or abroad.

Proponents of the border adjustment tax cite the elimination of tax advantages for companies to move manufacturing — or their headquarters — overseas. Critics say the net effect would be to dramatically push up prices of products for consumers, while moving a big chunk of the US tax burden from manufacturers to retailers and consumers.

A spokesman for Americans for Affordable Products, the coalition of retailers and manufacturers opposing the border adjustment tax, said the group fears that tax would devastate their industries.

Spicer last week hinted the border tax adjustment would be part of Trump's tax proposal.

"We recognize — whether it's inversions or other means in which people are shipping jobs overseas or reestablishing themselves or the profits that are kept over there — we need fundamental, comprehensive tax reform," said Spicer.

Trump's press secretary said the tax plan would cut taxes for working Americans but also ensure US manufacturers have a fighting chance to compete.

"I think part of the issue that we continue to see over and over again with businesses is that we're facing competition from abroad because of our tax code. It favors companies for not wanting to stay, and the president recognizes that," Spicer said. "And what he wants to do is create a tax climate that not only keeps jobs here but … incentivizes companies to want to come here, to grow here, to create jobs here, to bring their profits back here."

There are already indications that the congressional debate over the Trump plan could be fearsome, with the split among business interests especially problematic for Republicans.

US Senate Finance Committee Chairman Orrin Hatch said in a speech to the US Chamber of Commerce on Feb. 1 that he has concerns about whether the tax burden was merely being shifted, and whether the tax could withstand a WTO challenge.