Sunday Spectacle CCXII

Potential Impact of US Border Tax

Bloomberg recently had an article quoting Deutsche Bank report on the impact of the proposed American border tax--there are several ones being floated around but this report seems to assume 20% tax, which is closer to the Republican House position--and there was a nice graphic of the impact on various countries. The biggest negative impact is forecast to be in Mexico, Vietnam, and Canada. All three will likely enter a recession immediately (assuming retaliatory taxes offsetting the GDP contraction aren't enacted). For some reason the data doesn't seem to include China, which will probably be the #2 loser from such a tax.

(source: "Here's a Glimpse of the Global Trade Carnage From a U.S. Border Tax," Jeff Black, Bloomberg, February 1, 2017)

When we are closer to the imposition of the US border tax, which seems almost certain under the Trump administration, I'll write a more detailed post but here are some quick thoughts. The last time there was a big global trade boom followed by big trade wars was the 1930's. At that time, countries running trade surpluses (like USA, which occupied a place similar to China now), suffered a lot, while the trade deficit countries (such as the UK, which was similar to USA now) did not suffer much. In the present, USA, which has big trade deficit, will likely not suffer as much as others. But the situation is very different now (vs 1930s) and I wonder how things will play out.

In particular, we are not on a gold standard (or any quasi-gold standard) or a fixed exchange rate. Unlike the 1930's, most currencies (except something like Chinese renminbi or Indian rupee) are freely convertible. It is quite possible that an adjustment may happen through the currency and the competitive position--basically comparative advantage of one country over another--may end up being maintained, resulting in trade relationship continuing (i.e. imports still flooding into USA in manufactured electronic goods, clothing, etc). Indeed, already, the Mexico peso has fallen around 10% since the Trump election--it fell a lot the prior few years due to the collapse in oil prices--and is down something like 40% over the last 3 years. Even with a border tax, Mexico might be competitive--their labour definitely will be.

It'll be interesting to see how a trade war plays out. As a free-market proponent, I'm against trade barriers but Trump and his associates are not fans of free markets.