Trade, taxes and tantrums
Even if underlying global economic conditions are more benign than they have been in several years, “Trump risk” in the form of a policy shock is still on the cards in 2017. Indeed, aside from withdrawing from the Trans-Pacific Partnership the Trump administration hasn’t really begun to tackle one of the president’s favourite campaign issues: trade policy.
What form action on this front will take is open to speculation. Though he promised to impose punitive tariffs on imports from China and Mexico, it is unclear whether the president will be able to muster sufficient support in Congress to take this approach. One reason is that such a measure would end up punishing US companies: the value added on iPhones assembled in China, for example, is minimal, so a tax on the import from China of products back into the US would in effect be a tax on Apple’s profits.
Another proposal with worrying implications are tax reforms that would cut the top-line rate of corporate tax but levy “border adjustments”, such as a 20% tax on imports and exemptions for exporters. Again, getting Congressional support for such a radical plan is uncertain, not least because lobbyists from US net importers like retailers, who rely on low-cost manufacturing abroad (often in Asia), are pitted against those from large American exporters who favour the idea. It would also push up the value of the US dollar, making US exports less competitive.
Regardless of its precise form, some kind of action is certain: the issue will be how other countries respond. Direct tariffs targeting specific countries (China and Mexico) tempts those countries to retaliate, for political reasons as much as economic ones. The tax plan might have a less immediate impact but could still trigger similar policies elsewhere — or, if other countries show due restraint, a long-winded challenge to its legality at the WTO.
The signs so far have been good that the world does not share Donald Trump’s antipathy for the global trade system that has been built, slowly and painstakingly, since the second world war. It is worth remembering that Washington controls only American trade policy, not global trade policy. Since the late 1980s, the most explosive growth in trade liberalisation has actually been in regional agreements between developing countries.