As a trade lawyer, I am concerned about recent proposals from our country’s leadership. Last month, a senior member of Donald Trump’s transition team said that the president-elect is considering imposing up to a 10 percent tariff on imports and what this means for U.S. business.
In addition, the House Ways and Means Committee is considering a destination-basis corporate tax system, or “border adjustment” tax, that would effectively tax imports at 20 percent. This border adjustment tax is proposed as a major overhaul of the corporate income tax, As proposed, it would apply to U.S.-made goods and imports but not exports. Unlike an import tariff, the border adjustment tax applies only to U.S. companies.
Both of these policies pose financial risk to U.S. manufacturers who depend on sourcing materials and intermediate goods from abroad to produce finished goods here in the United States. I hear statements about proposed duties and think policymakers must have considered all the relevant facts, right?
To be sure, the president-elect and Congress should consider these points.
While the aim of both the import tariff and border adjustment tax is to boost U.S. manufacturing, they are likely to have the opposite effect. This is because in today’s global economy, most goods are not made from parts from just one single country. Instead, one finished good is likely to include parts or intermediate goods sourced from several different countries.
If either an import tariff or border adjustment tax were imposed on all goods, those intermediate goods would be taxed. Therefore, U.S. manufacturers will be disincentivized to manufacture in the U.S. and will move their plants to other countries that have no import or border adjustment taxes.
Declining transportation costs, the rise of the global financial system and cheap, instantaneous communication have made global supply chains part of our delivery system in the United States. According to the U.S. Chamber of Commerce, 56 percent of imports are actually intermediate products. They are needed to make U.S. goods.
Economic theory suggests that, rather than fearing globalized trade, the United States should focus on those industries in which it has a comparative advantage. Those industry typically produce high-value, technologically intensive goods.
To manufacture these high-value, technologically intensive goods, U.S. manufacturers must purchase lower value and low technology component parts from foreign countries. Taxing U.S. manufacturers that import these lower value and low technology goods means that manufacturers in the United States will either have to absorb the tax or pass the extra cost onto consumers.
In the end, a tax or duty will make goods manufactured in the United States more expensive than goods produced by manufacturers in other countries that do not pay an import duties or tax. This is one of the reasons that bilateral, regional and global trading agreements have become the norm. We all benefit together with fewer trade barriers.
For instance, a U.S. chemical company might import a basic chemical from China that is an ingredient in a more complex chemical compound manufactured in the United States. Let’s say a Chinese company wants to buy this chemical for use in China. If the federal government imposes a tax on the basic chemical when it is imported into the United States, the cost of the finished chemical compound will also be more expensive, making the Chinese company more likely to buy from Sweden, Germany or even a U.S. company manufacturing the same compound outside of the United States.
U.S. companies will not only be less competitive but also likely to increase their investment in foreign subsidiaries in other countries that would not be subject to high import tariffs on intermediate goods. The border adjustment tax scheme would seem to pose the same issue.
Although the proposed system would likely make U.S. companies with foreign subsidiaries more competitive with foreign companies, it would also likely cause U.S. companies that rely on importing intermediate goods to invest more in their foreign subsidiaries rather than their U.S. entities, since the foreign subsidiaries would not be subject to the border adjustment tax.
Let’s not forget the obvious harm to U.S. consumers. A tax on imports, whether in the form of an import tariff or a border adjustment tax, would raise retail prices. U.S. importers are not likely to absorb the costs of the duty or border adjustment tax for long. Data show that such cost increases on cheaper imported goods will disproportionately affect the purses of low-income families who typically spend a larger fraction of their household income on cheaper imported goods.
Of course, any import tariffs would raise the likelihood of starting a trade war as other countries protest new U.S. duties imposed on their products and a general import tariff would be in violation of several U.S. free trade agreements and World Trade Organization (WTO) rules.
A border adjustment tax would be similarly problematic as a violation of our WTO commitments. The United States has an obligation to extend national treatment with regard to internal taxation and regulation to other WTO members, meaning that the United States cannot treat products imported from WTO members differently than domestic-like products. If the United States were to lose a dispute at the WTO, which could well be the case, billions of dollars in penalties would likely be assessed against the country.
The president-elect and Congress are absolutely right to be concerned about the decline in U.S. manufacturing and correct in their aim to bolster U.S. exports. Their concern for U.S. manufacturing should be lauded.
However, neither an import tariff nor a border adjustment tax will have the effect intended. Rather, the result is more likely to cripple U.S. exports because these exports are now themselves dependent on the ability of U.S. companies (and foreign companies manufacturing in the U.S.) to source raw materials, component parts and intermediate goods from other countries.
Doreen Edelman is a trade attorney and co-leader of the global business team at Baker Donelson. She has more than 25 years of experience advising companies on import and export compliance, foreign investment and global expansion.
The views of Contributors are their own and are not the views of The Hill.