Rejection of TPP and Border Adjustment Taxes

Yesterday was big, bad news.  Today I want to shift to some potentially good news!  Don't worry, there's still plenty of bad news to come.

President Trump has rejected the Trans-Pacific Partnership (TPP).  This will upset few except for those in assorted financial elites.  There was little to like in the pact in terms of protecting workers' rights and plenty to dislike in terms of protectionism for doctors, which has the net effect of adding around $700 to the average American families' annual health costs.

It is looking as though Donald Trump may actually be sincere when it comes to protectionism.  NAFTA will be coming under review.  I have to say I honestly find it hard to believe that a GOP President is sincere when it comes to reworking "free trade" policies, but it appears to be the case.  Trump is buttering up labor unions affiliated with the building trades, who appear to be quite warm to him.  This is an odd spectacle to witness and doesn't augur well for the Dems, the ostensible party of labor in this country.  (The Democrats are wisely rolling out a $1 trillion infrastructure plan of their own, and it will be very interesting to witness the sparring over infrastructure soon to come.)

With all this protectionism in the air, it's time to discuss the Border Adjustment Tax, which I'm going to abbreviate as "BAT".  This isn't in vogue but I don't know why.  People call a Value Added Tax a "VAT" - why not "BAT"?  BATman!  Sorry if I sound like Andy Rooney.  Let's move on.

A BAT is essentially a tax levied on imports, so it's more or less a tariff.  Currently, exports are taxed - not as exports per se, but as goods produced in the United States which are subject to US taxation, and then exported - whereas imports are not taxed.  This is a net burden on the exporter and a net benefit for the importer.

A BAT regime would flip that equation, with tax cuts across the board easing the de facto "export tax", while imposing a tax/tariff on goods entering the country.  In a way, this is a tariff and a subsidy for exporters.  Good for exporters, lousy for importers: really, in many ways, the crux of Making America Great Again.

In theory, then, the people paying the price under a BAT regime would be international corporations who currently produce goods abroad (at low or tax free rates) and import cheap goods back into the United States ("free trade", in other words), whereas those who do well would be manufactures looking to sell goods at home or abroad.

President Trump has called the BAT system, floated Paul Ryan and the House Republicans, "too complicated," but in all honesty, what does he propose as an alternative?  It sounds like a classical tariff by another name.  Tariffs built manufacturing in this country in large part, so if the goal is to overhaul America as a classic manufacturing power, it makes sense to have something resembling a tariff.  A BAT might work very well.

However, there is one big problem with the BAT, which is this: as imports will face a tax, those goods which currently flow into the United States and are cheap - our tennis shoes, cell phones, flat screen TVs and the like - will now have a tax tacked on them.  In other words, they might not be so cheap anymore.

Who pays the price of a BAT?  The consumer.  The flip side of the "hollowing out" of our economy, as manufacturing jobs have fled overseas, has been the proliferation of cheap goods for purchase.

Now - if a BAT regime results in significant job gains due to an increase in manufacturing, all else being equal, that will drive wages up.  If wages go up, it won't matter for consumers - who are also workers, let us never forget - that our consumer goods are costlier, because we'll have more money to spend on them.

Federal budget-wise, significant cash flow gains could result from a BAT regime.  A uniform BAT of 20 percent is estimated to yield $100 billion per year, or $1 trillion over 10 years.  Not too shoddy, really.  Now, of course, that money could be frittered away on pointless tax cuts, but what if it was used intelligently, say, to shore up Social Security, which is not in any way insolvent, but which otherwise intelligent people frequently insist it is?

President Trump has gone back and forth on this issue, as he is wont to do.  Reading the tea leaves, though, it appears to be very much on the table.

All this above is a radical oversimplification of imports, exports, modern protectionism, etc., but you gotta dumb it down at some point.  TL;DR VERSION: a BAT would likely be good for manufacturing in the United States, would hurt the international corporation, and might lead to some sticker shock for the consumer, but if consumers get a raise, who cares. 

I encourage you to read this article and also this article about BATs, from which I have derived most of this post.  I will certainly follow up on BATs in the future.