Mr. President: Border Taxes Won’t Work
Many countries around the world impose value-added taxes on imports, making them more expensive in domestic markets. The United States tax system does not do that, opting instead to tax domestic production.
President Donald Trump has proposed imposing border taxes in a number of instances while campaigning for the presidency—and touched on in the president’s inaugural address today—including on products of U.S. companies that take their production abroad or on products from countries such as China that he says do not trade fairly with the U.S. But a report published by the American Enterprise Institute concludes that such as measure would not produce its desired effects of boosting exports and reducing imports.
According to that report, a border adjustment would trigger an increase in the value of the dollar that would raise the cost of U.S. exports and reduce the cost of U.S. imports, directly offsetting the desired results of the border tax. “In that model, the border adjustment would have no economic impact at all,” noted the report.
This simple model assumes that border taxes will apply uniformly rate to all goods and services. That’s not exactly what Trump is proposing as far as we know. If the border adjustment applied to only some items, it would in effect constitute an exise tax on those products and would have real trade effects, according to the report. If the U.S. is a net importer of a specific item, the exise tax would reduce imports of that item while the resulting strength of the dollar would increase imports of other goods and services and reduce exports. The result would be a reduction in the volume of trade and no change in the balance of trade.
But if the U.S. is a net exporter of the product in question, the excise tax would increase exports of that item while the strength of the dollar would reduce exports of other goods and services and increase imports. “The end result would be an increase in the volume of trade, as imports and overall exports would both rise, with no permanent change in the balance of trade,” said the report.
If a border tax somehow did result in a reduction in the trade deficit, it would lower U.S. living standards.
“In economic terms, imports are the gain from trade while exports are the cost of trade,” noted the report. “We give up exports so that we may obtain imports.”
The notion that we should try to increase exports and reduce imports amounts to a misguided mercantilism. The benefits of increasing volumes of trade—both exports and imports—is Capitalism 101, as explained by Adam Smith in The Wealth of Nations back in 1776.