The BAT all but died last week, and not a moment too soon for those invested in trade
We at the Adam Smith Project spent an inordinate amount of bandwidth early this year covering the possibility that the United States might implement a border adjustment tax (BAT) on imports.
Just take a look at this page.
Virtually every other news outlet with a stake in economics, trade, or foreign policy did likewise. If enacted, the proposed BAT, part of wide-ranging Republican Congressional leadership blueprint for America’s economy, would have been as impactful as any other U.S. policy on the table in 2017.
Alas, the BAT apparently died an unheralded death last week, as its proponents in the House gave up hopes of making it a foundational piece of their proposed tax reform bill. GOP leaders in both houses have turned to tax reform as their next priority after the Senate narrowly failed to repeal President Barack Obama’s signature health care legislation, the Affordable Care Act.
Like health care, tax reform has for decades been a prickly policy issue for Congress to tackle. There’s always public support for reduced taxes – the problem is how to pay for the reduction in federal revenue that comes when the government lowers the tax rate.
The BAT was the almost singular way authors of the so-called “Better Way Forward” blueprint, released in June 2016, planned to pay for tax cuts. Import taxes would have generated a projected $1.2 trillion over 10 years, largely helping to offset the loss in revenue from lower tax collection.
But by assessing a tax on imports and refraining from assessing that same tax on exports, the GOP leadership was not only seeking to pay for its bill, it was seeking to reorient the entire direction of the U.S. economy. This message dovetailed nicely with that of President Donald Trump, who won in part by campaigning on the idea that other countries were taking the United States to the cleaners on trade deals.
Economists mostly panned the idea of the BAT from the start. The calculations just didn’t add up. For one, BAT proponents argued that the higher cost of goods (due to an import tax) would have been offset by a corresponding strengthening of the U.S. dollar. Most economists argued this could not be guaranteed, that currencies don’t simply fluctuate in binary movements. (The current weakness of the dollar only proves this point).
Even supposing the dollar did strengthen significantly, BAT proponents also never fully explained how a strong dollar would fail to negatively impact exports. If a partial goal of the BAT was to provide a platform for U.S. manufacturers to thrive and reduce the U.S. trade deficit, that plan necessitated that exporters would be able to sell their goods at competitive prices on the global market. Already at a disadvantage on labor and other fixed costs, it’s hard to see how a strengthened dollar wouldn’t have hamstrung U.S. exporters further.
Even supposing the dollar did strengthen significantly, BAT proponents also never fully explained how a strong dollar would fail to negatively impact exports.
If the goal was simply to impede imports, that would have necessarily driven up the price of goods for U.S. consumers, who would have been forced to turn to comparative goods from U.S. manufacturers. Those domestic manufacturers would have been safe in the knowledge that no imported goods could compete on price with them after factoring in a hefty import tax. Maybe, at some point, a competitive landscape of U.S. producers would have developed and created a competitive domestic landscape of goods. But at the beginning, consumers would have been hurt by more expensive goods, and that would have had an inedible impact on the U.S. economy.
It’s also not entirely clear whether the BAT would have complied with World Trade Organization rules. This is probably the murkiest point in the debate, since the United States regularly argues its WTO member trading partners don’t always comply with the rules of the trading body. Also, since the BAT functioned much like a value-added tax (VAT), it may well not have fallen afoul of WTO guidelines.
But a BAT would almost have assuredly stoked a trade war. Any country whose goods were subject to a BAT would certainly have instituted some sort of retaliatory trade barriers (whether tariff or non-tariff) to punish the United States. That would have been another hurdle for U.S exporters to climb.
From an economic perspective, the BAT never seemed workable. Even in Congress, a healthy proportion of senators and U.S. representatives said they saw the BAT as a non-starter. This is all good news for those involved in trade, even for those domestic manufacturers that stumped for the BAT.
Trade restrictions, especially poorly thought-out, blanket ones such as the BAT, rarely achieve the goals they set out to accomplish. Protectionism is not a viable, long-term plan. Like it or not, the United States is a consumption-based society. Trade with the countries the Trump Administration believes has shaken the United States down has, on balance, benefited the U.S. economy and those we trade with.
This is not to say that thoughtful consideration of U.S. trade policy isn’t overdue. It is. But tariffs – and that’s what the BAT was, at its heart – are not the vehicle to achieve that consideration.
As for the GOP’s tax reform plans, they’re going to have to look under a different rock for the money to offset a loss in revenue. It’s not coming from U.S. importers and consumers.