A warning to travelers: a border tax is in the works

In anticipation of the imminent official start of the “D as in Donald” era, other “Ds” are menacingly stirred behind the curtains of the 45th president of the United States. “D as in destabilization.” He already made the unpleasant effects clear (with Mexico as his first victim), and he hangs like the Sword of Democles (another “D”) over the rest of the world where other scenarios like “D for disaster” crop up between nightmares and attempts to read the future. We won’t have to wait long to understand if President Trump is seriously determined to build the Great Mexican Wall. In the meantime, republican members of congress have already made moves to introduce fiscal measures that, once approved and ratified by the new White House tenant, will build a wall of tariffs with epochal possible consequences on economic models centered on exports, with China and a large part of Asia first in line. And Europe second.
They’re already calling it a “Border tax,” but in a first attempt to stay under the WTO’s radar, its promoters prefer to call it a “border adjustment,” trying to pass off “adjustment” as some sort of American VAT. The US fiscal system doesn’t consider a VAT, least of all in the current European form, and it’s one of the factors that most contributes to trade deficit. In Italy, the VAT is applied to imports leaving exports free. The “Border Tax” would like to have analogous effects, but through corporate income tax. In practice, if Walmart sells $100 of goods imported from China that it paid $80 for, it is taxed on the $20 margin. With the “Border adjustment” it would have to pay the tax on the whole $100. All clear: importers will be penalized heavily, exporters will be rewarded, a one-way border tax. Even more than China, Asian economies that survive via exports to the US would be affected, like South Korea, Japan, Taiwan, Singapore, Malaysia, and Vietnam. There would be fewer consequences for India, Indonesia, and the Philippines. And God help Mexico. European countries with high trade surpluses would also end up in the crosshairs, like Germany, Switzerland, and Holland. It could be less bad for the rest of the EU, also because Germany would be forced to enact measures to stimulate spending. If Italy could operate according to a system of trade deficit, it could benefit from American imports that aren’t taxed at their origin. But it could also be impoverished further.
It’s obvious that with a border tax we’re risking constriction of consumption due to the inflation of imports. The tax would also hit production in NAFTA countries, including Japanese automobile production that migrated to Mexico and Canada. The millionaire elite will feel the beating first, and they’ll fight to the death to change the cards. But the negative fallout on the blue-collar workers who saw Trump as their savior is inevitable.
Trump could still tend toward ad hoc tax barriers against China and/or enact internal fiscal provisions to punish companies that delocalized overseas, avoiding the disastrous impact for Asian countries that built their increased wellbeing on exports. The Border Tax will unleash reprisals, and it will certainly end up under the WTO’s scrutiny as its proponents believe that, like the VAT, it doesn’t violate the rules in as much as it doesn’t discriminate against countries nor workers. Trump won’t bat an eyelash at leaving the WTO if it is necessary for his ends.
The final scenario could be a global increase in prices caused by taxes and counter-taxes in countries hit by the terrible consequences on demand and on the stock markets where many companies with international supply chains are hurt by the Border Tax. It’s small step from a Border Tax to a global recession that would hit the US as well. Subverting the flux of globalization with a superficial law doesn’t exactly come with a gift basket.