Batting around a border tax

The ongoing fight over a border adjustment tax (BAT) suggested by US President Donald Trump and House Speaker Paul Ryan has triggered debates over how US major trade partners such as China might respond if it's enacted.

Ryan, along with his colleague Kevin Brady, chair of the House Ways and Means Committee, hopes that the BAT, such as a 20 percent on imports, would encourage US companies to produce within the US instead of outside.

Their plan also assumes that the BAT could help raise an extra $1 trillion over a decade to help fund a reduction in the corporate tax rate and other taxes.

Trump has not publicly endorsed the plan, calling it "too complicated". But he has talked about various border taxes many times, including threatening last week to levy a 20 percent tax on Mexican exports to the US to pay for a border wall.

Peter Navarro, Trump's trade advisor, also spoke recently about a flexible BAT targeting countries with big trade surpluses with the US, such as China, Mexico and Germany.

Nick Lardy, a senior fellow at the Peterson Institute for International Economics, believes the impact from a BAT on countries like China is still uncertain, depending on how much it will be offset by an appreciation of the US dollar.

Lardy said China's reaction is likely to depend on the reaction of the rest of the global community. "I doubt China wants to take big retaliation if everyone else - Mexico, Canada, UK - all seem to be saying: 'This isn't going to affect us very much because the exchange-rate change is going to offset this border adjustment tax,'" he told China Daily on Thursday.

Gary Clyde Hufbauer, a senior fellow at the Peterson Institute and a former US deputy assistant treasury secretary for international trade and investment policy, agreed.

"Some people say the dollar will go (up) as much as the BAT. If that were the case, then there would not be any impact on Chinese imports," he said.

Economists in Washington are divided over how much the US dollar will appreciate as a result of the BAT.

Hufbauer emphasized that there is strong opposition in the US to the BAT. He said he would put the chance of its passage at 50-50 at best.

US retailers, automakers and oil refiners have lashed out at the BAT, calling it a measure to hurt US consumers, especially those in the low-income bracket.

Hufbauer said that even if enacted, it would be phased in over a period of time, and the impact would be rather small at first.

Derek Scissors, a resident scholar at the American Enterprise Institute, believes that if a BAT is enacted, China will still run a large trade surplus with the US, implying that a comparable US dollar appreciation will take place.

"The major impact will be downward pressure on the yuan against the dollar, at a time where the Chinese government strongly prefers a stable yuan," he said.

Scissors does not think any government should retaliate against a BAT, which does not discriminate by country.

"If a BAT has special provisions that target certain American trade partners, of course they should consider retaliation," he said.

"For China, it might be best to indicate that a BAT is

acceptable, but a BAT and also other trade measures aimed at China will provoke retaliation. China can also wait for a WTO (World Trade Organization) ruling on a BAT," Scissors said.

Hufbauer believes much of the Chinese government reaction will depend on the details of the final provisions. He suspects that the Chinese government is more likely to retaliate.

"If they retaliate, the question is how they retaliate," he said.

According to Hufbauer, China could launch a WTO case against the US; it could also impose countervailing duties on US exports, or it could do some unannounced retaliation such as shifting Chinese imports of US soybeans and planes to other sources.

He argued that most countries are unlikely to bring a case to the WTO, due to the lengthy and complicated process.

"One of these three or some of the combination is highly probable," he said of the possible Chinese reaction.

Lardy believes that countries will regard the BAT as an unfavorable initiative by the US. He warned that if some countries, especially a big one, do not care about rules in a global trading system, then the whole system runs the risk of breaking down.

chenweihua@chinadailyusa.com

(China Daily USA 02/03/2017 page1)