The ONW Salon:Canada, A 20% U.S. Border Tax, And NAFTA
A proposed 20% border tax on imports into the U.S. is currently under hot debate within the Republican Party, with some right wing factions opposed and others in favour. President Trump has talked for months about an import tax to help U.S. businesses. But what would it do to Canada, coming on top of new NAFTA negotiations? Richard Mahoney, John Capbianco and Tom Parkin discuss.
It should come as no surprise to many of us that President Trump is now talking about imposing a 20% import (or border) tax, which is in keeping with several of his “America First” campaign promises, not least of which is the cost of the infamous Mexico/U.S. wall that he wants to build.
This wall, which President Trump has mused about on many occasions during the campaign and after, is to be paid for by Mexico. However, the President knows that he likely won’t get the money anytime soon from the Mexican government so he has to come up with some funding if he wants to start the construction.
This was further advanced by White House press Secretary Sean Spicer, who characterized the tax as “theoretical” and that it would apply to countries “like Mexico” since Mexico has a trade deficit with the U.S., whereas Canada has a surplus.
Still it's not clear whether this would leave Canada out of the mix. Likely not, but any tax on Canadian imports would have a serious impact on manufacturers and retailers who would inevitably push the cost to consumers. I know the PM is well aware of this and other trade issues, which have been mentioned in the media and in the various meetings he has had with the President's team.
One thing we do know is that President Trump's public and not-so-public musings about how he intends to "Make America Great Again," through a large measure of protectionism policies, is going to absolutely in some way hurt Canada and Canada's trading relationship with the U.S. It is a matter of time. Our provinces are aware and they are reaching out to their respective State counterparts to attempt to inoculate themselves from what could be federal policies from Congress.
The border tax issue is an almost perfect example of the contradictions and craziness of the Trump presidency and the challenges that other countries like ours face in trying to deal with it all.
First, long before Trump was even a serious candidate for President, some conservative legislators had been pushing for a border tax that resembled a VAT, or value added tax. The thinking behind this was that other countries, such as Canada, have their own VAT which add to the consumer cost in country of American imports, while Canada (and other countries) applies VATS to all goods, including imports. We call our VAT the HST.
What Trump wants to do is a little different. He proposed in the campaign to tax any import that resulted from a company closing a U.S. plant and subsequently supplying the U.S. market with that same product but manufactured in another country.
Free trading conservatives and Republicans reject that approach, and it is unworkable for many reasons. For example, in the auto sector alone, the parts of an average car travel back and forth across the border 12 times before manufacture is finished. Production shifts frequently and it is hard to know what is an "import" and what is not. Squaring that circle, as to what a border tax would actually do and how it would work, is impossible.
$2.4 billion of trade occurs between our countries every day. Our integrated economic ties are key to jobs and growth on both side of the border. Figuring out how Trump keeps his promise of a plant closing import tax, and marries that with the Republican Congress's interest in a VAT style border tax, is nearly impossible.
I guess that is why the Prime Minister and the Foreign Affairs Minister and their teams are going to more than earn their pay cheques protecting Canada's interest in the crazy world of Trump.
The genesis of the border adjustment tax lies in concerns with the U.S. House’s Ways and Means Committee about so-called tax inversions – a tax avoidance strategy in which a corporation nominally resettles to a tax haven but maintains the actual business functions in the home country. A border adjustment tax is being considered by the U.S. Congress as a strategy to disincent tax inversions.
Currently, corporate tax is paid on a U.S. company’s net income (well, except for the plethora of exemptions). The border adjustment tax is a corporate profit tax based on the location of consumption and production. A U.S.-based company would pay tax on its domestic profit – that is, their domestic revenues minus their domestic costs. Costs from importing goods are not deducted. Revenues from exporting goods would not be included.
Clearly, the BAT would be preferred by exporters and opposed by importers. That’s the point. But the BAT would also apply to foreign-based companies – including Canadian companies – which import into the United States. It’s not a tariff – but sort of! This is why there is a lot of debate about whether it does or doesn’t conform to World Trade Organization rules.
Now, in theory, in the longer term the BAT will cause an increase in the value of the U.S. dollar, which will increase the cost of U.S.-produced goods and services and close the import-export advantage while permanently eliminating the incentive to relocate a head office in a tax haven.
Or so goes the argument. But really, who knows?
Many analysts and economists actually say that there is one industry that might benefit from the U.S. border tax and that is the oil patch – Canada’s oilsands producers. Our benefit would of course only work at the expense of the Mexicans' and only if the import tax is with Mexico and not Canada.
It has been reported by Bloomberg that Canada sent over 3 million barrels a day of oil to the U.S. in October, which is about five times more than Mexico did, and any 20% tax on Mexico's oil import would give Canada a significant boost, and this on top of the President's recent support of Keystone's XL project.
Tom is technically right that the U.S. Congress, especially the likes of Speaker Paul Ryan, has been the biggest promoters of a border tax, but the President's significant influence on saving and creating American jobs plays very well into this issue and has since he's been President. Throw in the politics of sour Mexico/U.S. relations and the wall and you have a dangerous mix, which can have a significantly bad effect on Canada.
Notwithstanding Canada's outreach to the U.S. which I have reported on these pages in the past as being strategically smart and well thought-out, we cannot let our guard down for one second or assume anything coming from the President or Congress will not have some adverse consequence in our trading relationship no matter how "cordial" we think our relationship is with the US.
The two ideas are out there - Trump's unworkable tax on imports from plant closures and the border adjustment tax. Right now, neither look like they have the support to pass Congress, but as Tom says, who knows? The reality is that, for Canadians, there be dragons there.
Both ideas pose economic risk for us. Which is why it is so important that the Trudeau government continue its deft handling of the U.S. trade file. The toughest part is surely yet to come.
It was interesting to see our Foreign Affairs Minister pointing out a few facts to her U.S. counterparts and to Congress. First, that our trade with the United States is balanced, fair, and mutually beneficial. Secondly, that the U.S. currently enjoys a surplus in the balance of trade. Thirdly, that increasing barriers to trade hurts workers on both sides of the border.
And there are increasing signs that Canadian governments, including the federal and Ontario governments, will respond to other protectionist measures, such as "Buy America", with similar provisions here. Neither government wants to do that. But an escalation of trade actions against our interest will leave our governments little choice but to match the measures.
There are two realities here. We will need all of our brains and resources to match the growing threat of protectionism south of the border. And that a tit for tat trade war hurts both sides. Our economies are too integrated and co-dependent to be any other way.
Finally, all of this underlines the fact that Canada needs to continue to look to other markets, such as Asia, Europe etc. if we want the kind of growth we need to build a modern prosperous economy. We will not be able to rely solely on the U.S. for our economic future. The question is, can Canadians and their governments find those opportunities and build on them?
There's an interesting sidebar to all this - Paul Ryan, of course, was the favourite child of the Koch bothers before the last electoral cycle. They wanted him for Presidential candidate. Now Americans for Prosperity, the Koch's main front group, are 100% against this border adjustment plan, which was heavily supported by Ryan. So given all the politics and linking to other tax reform issues, none of this may ever happen.
Regardless, you can see why there is so much trepidation about this tax. And very clearly, not only does it have nationalistic and anti-trade overtones (though these are disputed, in theory, anyway) but it also pushes trading partners to adopt similarly structured taxes. The overall fear here is that the BAT will decrease global trade and retreat toward national economies. That could have implications ranging from increased prices to conflict.
As for Morneau’s messaging about a BAT hurting the U.S. more than Canada – just disregard it all. He’s shouting at a thunderstorm.
Canada needs to be part of an international strategy to fix the problems with globalized trade and constrain Trump. I don't see that happening. Rather, there seems to be a hope that if we say nice things about Trump, he'll be nice back. Guaranteed, that strategy won't work.
And finally, there are some interesting (theoretical) side effects from a BAT. China is a massive holder of U.S. debt, which is denominated in U.S. dollars. If the BAT does push up the U.S. dollar, China is a big winner. Conversely, an American invested in foreign assets will be a big loser as those currencies relatively sink. So, all you investor class types – rebalance your portfolio!
Richard Mahoney is a lawyer with deep experience in politics and governance. He is a former senior advisor to the Rt. Hon Paul Martin, a former Campaign Chair and President of the Ontario Liberal Party. John Capobianco is a Senior Partner and National Public Affairs Lead at FleishmanHillard. He has been a Conservative strategist with over 30 years of political activism at all three levels, including as a former federal Conservative candidate. Tom Parkin is a veteran NDP strategist and a frequent commentator on national issues.