Taxing imports at the border could cost America billions — in retaliation
President Donald Trump and congressional Republicans are taking advantage of the party's control of the federal government to reshape the way U.S. companies are taxed. But one plan could incur the wrath of the global trading community and cost the U.S. hundreds of billions every year.
The tax reform bill created by House Speaker Paul Ryan and Rep. Kevin Brady, which would create a so-called border adjustment tax, could draw $385 billion in retaliatory tariffs from our trading partners, according to estimates from an economist at the Peterson Institute for International Economics, a nonpartisan think tank.
Under the border adjustment scheme, Washington would not tax exports but would impose an across-the-board tax — probably around 20 percent — on imports into the country. The hope is that the new import tax would help mitigate the big boost to the U.S. budget deficit that's expected if Trump slashes U.S. corporate taxes. Border adjustment also is seen as boosting U.S. exports and manufacturing.
But countries affected by the tax could retaliate with their own tariffs on imports of American-made products, and could do so with the sanction of the World Trade Organization, the governing body in that kind of trade dispute. We don't know for sure if the Republican tax plan would trigger WTO-approved retaliatory tariffs, but foreign governments are already laying the groundwork for legal cases — and it's happened before, though never to the extent that a 20 percent tax on imports could incite.
"In trade, the devil is in the details," WTO Director-General Roberto Azevedo told Bloomberg recently. As the new trade policies get hammered out, whether they conform to international trade standards will be figured out. "I think the WTO has the tools to handle a lot of the things that have been mentioned as concerns so far," Azevedo said.
The WTO has the authority to arbitrate disputes between member countries when one feels targeted by another's trade policies. The organization has heard more 500 such cases since its inception in 1995, and 13 have gone through the arbitration process and received approved retaliatory judgments. Of those, the U.S. was involved in nine cases.
Too COOL for school
For starters, Canada and Mexico — two of our biggest trading partners — already have permission to impose retaliatory tariffs on imports from the U.S., to the tune of $1 billion. That stems from a legal action filed with the WTO in 2015, a repercussion of a U.S. law that hurt foreign companies shipping meat to the United States.
In 2009, the U.S. implemented a law requiring certain types of meat to display a country-of-origin label ("COOL"). Labels would list the countries where beef, pork and other meats were raised and slaughtered.
Canadian and Mexican meat producers filed legal action with the WTO, claiming the law hurt their export business. The WTO eventually decided against the U.S. and allowed the two countries to apply their own retaliatory tariffs up for more than $1 billion. The U.S. revised the law and neither country implemented the retaliatory tariffs.
That may not seem like a huge amount compared with the size of total trade, but it can be a lot for a particular industry that's targeted.
A 2009 retaliatory tariff imposed by Mexico on the U.S. in a dispute over cross-border trucking permits reduced the sales of certain U.S. farm products in Mexico by around 22 percent over a year and a half, according to researchers from the USDA Economic Research Service. That was about $984 million in lost exports.
Subsidized exports
Countries can violate WTO rules in two ways: by imposing an unfair import tax or supporting exports with unfair subsidies. It's possible the border adjustment tax could do both.
The import side could cause upward of $220 billion in retaliation, according to Chad Bown, economist at the Peterson Institute. As an export subsidy, a border adjustment tax could bring $165 billion in tariffs. Bown's calculations are based on the WTO's historical application of tariff formulas.
In the biggest case in which the WTO has granted retaliation, the U.S. was determined to be unfairly subsidizing exports using certain tax exemptions. In 2003, the WTO endorsed the European Union's adoption of $4.04 billion in retaliatory tariffs against the United States.
The EU promptly planned tariffs for a range of U.S.-origin products, from furs and leather to essential oils and nuclear reactors. The U.S. eventually repealed the tax exemption, and the tariffs were dropped.
Ongoing beef dispute
WTO cases certainly don't always go against the United States. In the late '90s, the U.S. won more than $300 million in retaliatory tariffs against the EU in two cases, including one challenging the EU's ban of hormone-treated beef.
The EU adopted a ban in 1989 on beef treated with certain hormones, which has been an issue in trade between the two continents ever since. In 1999, the U.S. and Canada sought legal recourse from the WTO in the form of retaliatory tariffs. The WTO granted the tariffs — $116.8 million to the U.S. and around $7.6 million to Canada — on the grounds that the EU's ban lacked sufficient scientific backing, among other reasons.
U.S. imports of European meats, fish and cocoa fell significantly in the 10 years following the tariffs' implementation, according to data from the Congressional Research Service. Imports of cheeses and mustard fell by 39 percent and 26 percent, respectively. U.S. imports of selected EU products fell from $130 million in 1997-98 to $15 million in 2008. The U.S. has since lifted some of the tariffs, but the end has not arrived for the "beef wars."
In late 2016, the Obama administration reignited the trade conflict, calling for renewed trade action on the EU's ban on U.S. beef.
"The EU's ban on U.S. beef is not based on sound science and discriminates against American beef farmers, ranchers and producers," the Office of the U.S. Trade Representative said in a December statement.
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