Trumping Trade

Image of an American flag in front of a building

“You’re going to pay a very large border tax.” That’s what President-elect Trump said at his January 11th news conference (if it can be called that) about U.S. companies that manufacture abroad, repeating statements he repeatedly made on the campaign trail.

It seems fair to predict that this blustering will become actual U.S. policy after January 20th. We’re seeing American trade policy being made through press conferences and 140-character tweets, creating huge uncertainty and unpredictability in international trade.

What Trump is saying—on its face—contravenes every U.S. legal obligation under international treaties, especially the World Trade Organization (WTO) Agreements, which contain sanctified rules that have been promoted and championed by every U.S. administration since World War II—until now. Apparently, Trump has little regard for U.S. legal obligations in ratified treaties.

Thanks to the surprise U.S. election result, we’ve gone from a reasonably orderly rules-based global trading system to one where there appears to be no rules.

Think-tank analysis coming out of Washington seems to agree that Trump could use executive authority to invoke statutes that could proclaim so-called border taxes to penalize companies he doesn’t like.

One view is that this would directly challenge Congress’s constitutional authority over trade and the raising of revenue and could result in litigation in U.S. courts until the cows come home.

Leaving aside the internal U.S. legal situation, threats to apply penalty-type taxes on imports from China, Mexico, or other countries where U.S. companies have manufacturing plants run counter to every known rule governing global trade.

First, there is the matter of bound duty rates applied for decades under the General Agreement on Tariffs and Trade (GATT) and now the WTO Agreements, not to mention all bilateral trade agreements the United States has with other nations, Canada included. These are legal commitments. They can’t be unilaterally changed.

Bound duty rates make for stability in international commerce. These bindings are overlain with the fundamental rules of non-discrimination in international trade—most-favoured-nation treatment plus national treatment.

This means imports must be treated equally in all respects with domestic-made goods in terms of taxes, charges, rules, and all other measures. WTO members have to provide equal competitive opportunities for imports in the local market.

The United States has steadfastly promoted these fundamental rules since the Bretton Woods Agreement of the 1940s. They ensure order and stability in international trade.

Without them, the global trading system starts to fall apart and chaos results, bringing on the kind of situation that shook the global economy in the 1930s.

The United States has invoked these same rules time and again in bringing GATT and WTO disputes to challenge the slightest tinge of discriminatory treatment by trading partners that affect American exports.

As well as Trump’s threat to apply border penalties, there is an equally dangerous proposal under consideration in the U.S. Congress.

This involves changes to the U.S. tax system, set out in a tax reform bill tabled by House Speaker Paul Ryan and Congressman Kevin Brady, Chair of the House Committee on Ways and Means, replacing the present 35 per cent corporate income tax with a “cash flow business tax” of 20 per cent.

The Ryan–Brady bill would then tax all imports, regardless of source, through a 20 per cent border tax designed to equal the cash flow corporate tax.

Like Trump’s threat of 35 per cent border penalties, the Ryan–Brady bill would set international trade back decades. As Canadian press analyses have said, the idea would be highly damaging to Canada–U.S. trade relations and indeed global trade generally.

It’s true that GATT/WTO rules, formulated largely by the United States itself, allow countries to apply border tax adjustments (BTAs) to equate with internal sales taxes applied to like products.

Under these rules, BTAs can be used to tax imports—in addition to import duties—but only at the same tax rate applied to domestic purchases of the same kinds of goods.

This means that if a Canadian buys something through Amazon shipped from the United States, harmonized sales tax (HST) is applied to the imported purchase—a legal BTA in accordance with GATT/WTO rules. It’s allowed because the same HST applies when the same good is bought in Canada.

The problem is that the United States doesn’t have an HST or a national value-added-type tax. So it can’t use these GATT rules to apply a border tax because there isn’t any equivalent domestic tax.

The rules don’t allow border taxes on imported products to somehow adjust for corporate income taxes paid by domestic manufacturers. If every country did the same thing, the global trading system would unravel.

Both the President-elect’s threats of border penalties and the Ryan–Brady 20 per cent tax proposals are thus cause for great concern. They have resulted in serious uncertainty about where international trade is heading.

If the new government in Washington ignores the obligations enshrined in international treaties that America itself promoted and indeed formulated, the rules-based post-WWII multilateral trading system will soon start to crumble.

Maybe it has already.