Trump on Border Adjustment
The president-elect has finally offered thoughts on the subject I wrote about yesterday.
From a Wall Street Journal piece:
The measure, known as border adjustment, would tax imports and exempt exports as part of a broader plan to encourage companies to locate jobs and production in the U.S. But Mr. Trump, in his first comments on the subject, called it “too complicated.”
“Anytime I hear border adjustment, I don’t love it,” Mr. Trump said in an interview with The Wall Street Journal on Friday. “Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”
He’s right that it’s complicated; my piece is well over 1,000 words, and it took a lot of work to get the details right. While the basic concept isn’t too hard to grasp—corporations get taxed on items sold here, including imports, but not on exports, because those are sold elsewhere—there are a ton of administrative and economic nuances here.
I’m not entirely sure what it means to be “adjusted into a bad deal,” though. This isn’t a “deal” at all; it’s a policy we would enact on our own. If anything, foreign exporters would be the ones to lose out, and they very well might challenge the policy before the World Trade Organization. Trump himself has complained that it’s bad for us when other countries use border adjustment on their “value-added taxes” (VATs), so it’s bizarre for him to say it’s bad for us when we do it too.
From later in the piece:
In his interview with the Journal on Friday, Mr. Trump said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
The yuan is “dropping like a rock,” Mr. Trump said, dismissing recent Chinese actions to support it as done simply “because they don’t want us to get angry.”
This is also an odd complaint.
As mentioned above, the policy would tax imports but not exports—which is obviously good for U.S. exports, not imports from places like China. Trump is correct that this would strengthen the dollar, which has the opposite effect (making imports cheaper and exports more expensive). But at most the currency adjustment would balance out the initial effects.
Economic theory predicts that the two effects will perfectly cancel each other out. But many are worried that the dollar wouldn’t get strong enough, and thus the policy would subsidize exports while taxing imports (something that Trump, at least, may not object to). Trump’s comment is the first time I’ve seen anyone claim that taxing imports but not exports would be bad for exports. The strong political opposition to the plan, for example, comes from importers like the retail sector, not exporters like Boeing.
As I made clear in my piece yesterday, there are enormous risks inherent in border adjustment, so I’m not saying Trump is wrong to be skeptical. But the specific problems he identified are not the real issues.
Robert VerBruggen is managing editor of The American Conservative. Follow @RAVerBruggen