On Global Trade & Investment
Published Three Times a Week By:
The Global Business Dialogue, Inc.
Washington, DC   Tel: 202-463-5074
No. 23 of 2017

Click  here for last Friday's quote from Kenneth Kies on a BAT


"The most important thing about this is that it's just a blueprint. ... Nobody has any text. ..."

"But if the tax is discriminatory to begin with, the fact that it is collected at the border doesn't make it legal. ... To wave your hands and say that something is a border tax adjustment does not make fundamental discrimination against imported products go away."

Amelia Porges
March 29, 2017
Amy Porges -- a trade lawyer and former USTR attorney -- rounded out the panel at the March 29 GBD event on Border Taxes: The Background, A Proposal, and the Challenges. Ms. Porges is now with her own, well named firm, Amy Porges - Trade Law, and she is someone with a deep knowledge of the World Trade Organization and the rules of the General Agreement on Tariffs and Trade (GATT) that anchor it-"the holy text" in her words. Ms. Porges was in no doubt, and left the audience in no doubt, that the destination-based cash flow tax, the border adjustment tax of the House Ways and Means blueprint, would violate WTO rules, at least as it is currently understood.

Much of her presentation consisted of the useful exercise of holding up in one hand the current understanding of the border adjustment tax and in the other the relevant provisions of the GATT. We shall turn to those in a moment. First, however, there is the contemporary question of whether the debate about a new U.S. border adjustment tax is still relevant. And then, looking back a bit, there is the issue of the origins of this long-running global debate over the trade treatment of different forms of taxation.

The Current Outlook. As to whether the issue is still alive--whether the the debate is still relevant, it is an understandable question. As we listen to the arguments, the crowd opposing the BAT seems larger than the one supporting it. And the BAT has taken some high-level hits recently, most notably from President Trump. As we noted in the last entry, he sounded like a BAT skeptic in his recent interview with Maria Bartiromo of Fox News.

On the other hand, the whole issue of tax reform has such a long way to go that it makes sense think of the BAT as an idea that is still very much on the table. As one BAT critic, John Bozzella, the president and CEO of Global Automakers, put it, "I come from the school of politics that it's never dead until it's actually dead."

Origins of the Argument. We are told that the debate over the trade treatment of different kinds of taxes goes back to the 1940s and the drafting of the General Agreement on Tariffs and Trade. Ms. Porges added this significant spin. She said:

In the late 1960s, the EEC [European Economic Community] harmonized their domestic excise taxes on to the VAT, and this actually had an appreciable effect on trade.

... The U.S. business community .. was quite agitated. The U.S. reacted. The U.S. tried very hard to renegotiate GATT rules to permit the U.S. to impose border tax adjustment for income taxes. So this has been tried.... The U.S. argued up and down that the traditional border tax adjustment rules in the GATT were unfair to the U.S. because the U.S. doesn't have VAT [Value Added Tax].

The upshot is that, under the international rules, rules to which the United States has agreed, taxes that are directly levied on products-sales taxes, excise taxes, VAT-"can be border adjusted." That is, they can be collected on imports and rebated on exports. But, as Ms. Porges explained, "Taxes that are not directly levied cannot be adjusted at the border, and that includes social security and payroll [taxes], and it also includes income taxes." -- See the note below on terminology.

Now we come to the crux of the matter: How would the likely application of the blueprint's BAT stack up against the GATT, the rules of the road for trade?
Let's begin, quoting Amy Porges, with this hypothetical:

Company A and Company B [are] ... both making the same widget in the United States, in their factory. Company A imports its inputs, and Company B buys all their inputs in the United States. Under the blueprint cash flow tax, Company A has different cash flow tax deductions - effectively, different income tax deductions - from Company B. Company B gets to deduct the cost of its inputs because the product, the inputs were bought in the United States, they're U.S. products. But [Company A] can't deduct the cost of its inputs, because the inputs are imported. So, that's it. You have a tax which treats [imports differently, which] incentivizes the buyer to buy domestic products.

And what does the GATT say? It is not silent. Rather, it speaks directly to the issues likely to be raised by the BAT. Article III says:

"The products of the territory of any contracting party imported into the territory of any other contracting party [i.e. imports] shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products."

That's in paragraph 2. Then in paragraph 3, Article III of the GATT charges that imported products "shall be accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws" ...

On the face of it then, if the BAT of the blueprint becomes law in anything like its current form or rather as currently understood, the rest of the world will be on solid ground in challenging the U.S in the WTO. And America's treatment of imports won't be the only issue. As Ms. Porges also pointed out, the forgiveness of certain taxes on U.S. exports is likely to seen as a prohibited export subsidy.

To top it off, the potential sums involved are huge. The retaliation that could be authorized would dwarf anything the WTO system has seen. Ms. Porges mentioned one estimate that put the level of retaliation that might be sought at $220 billion. And that was just for the consequences of the potential discrimination against imports. She cited a separate figure for the retaliation that might be sought for the injurious effects of the BAT's subsidy to U.S. exporters: $165 billion.
It has been suggested that, because those sums are so very large, America's trading partners might decide not to challenge the BAT, should it become law, for fear of wrecking the system. It is an argument with a lot of merit. Our guess, however, is that the BAT would be challenged. If enacted as currently understood, it would in itself be an enormous threat to the WTO system, because equal treatment is the foundation of that system -- that is, non-discrimination except for import tariffs and certain other specified and narrowly proscribed allowable impediments to trade.

We'll conclude with two quite different points. One somewhat philosophical and perhaps meaningful to only a few and the other wildly ironic, at least in part.

The philosophical point has to do with free trade and the rule of law. They are not the same. Over the last few decades, public champions of the WTO have for the most part been strong advocates for free trade, however defined. But before there was the WTO, there was the GATT. We refer not so much to the GATT Secretariat but to the General Agreement on Tariffs and Trade, i.e., the set of rules. We know that there were, and we suspect there still are, a large number of people around the world who are somewhat skeptical of free trade but who strongly believe that the world is better off for having a clear system of rules for the conduct of trade. We suspect both groups -- the free traders and those who simply want clear, agreed upon rules -- are troubled by the prospect of the blueprint's BAT becoming law.

The Exchange Rate Will Smooth Things Out. Finally, there is the exchange rate issue, the idea that one effect of a BAT would be to push up the value of the dollar. That, in turn, it has been suggested, would offset any sticker shock vis-a-vis imports for the average American consumer. Amy Porges mentioned the issue only to dismiss it as one that any WTO dispute panel would ignore.

But it is an odd argument all around. In purely political terms, it is hard to imagine the President embracing it, since he is currently in the process of talking the dollar down.

In economic terms, it is hard to put much faith in the notion that a rise in the dollar will neatly offset a BAT's upward pressure on import prices, because financial flows are so much larger than trade flows. Former Senator Phil Gramm dealt with the suggestion that a strengthening dollar would even things out in his recent op-ed in the Wall Street Journal. Everything returning to where it started, he wrote, is "an improbable event, given that the value of U.S. exports plus imports makes up only 0.3% of total dollars traded ... ."
 Confusing terminology. Ms. Porges' references to taxes, like sales taxes, that are "directly" levied on products are quite straightforward, and to the uninitiated (including your editor), they are the clearer way of explaining the issue. It should be noted, however, that much of the literature does it the other way around, referring to VAT and other border adjustable taxes as "indirect taxes," because the taxpayer, the buyer, is not paying the government directly, and referring to taxes like income taxes, where the taxpayer does have a direct relationship with the taxing authority, as "direct" taxes.

Porges at GBD takes you to the MP3 recording of Ms. Porges' presentation at the March 29 GBD event on Border Taxes.

From the GATT is a link to the handout she provided for the audience at the above event.

An Interview with the President is a link to President Trump's April 12 interview with Maria Bartiromo of Fox News.

How "Border Adjustment" Poisons Tax Reform takes you to the op-ed by Senator Phil Gramm mentioned above, which was published by The Wall Street Journal on February 22, 2017.


Or Other GBD Notices, click below.
©2017 The Global Business Dialogue, Inc.
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Tel: (202) 463-5074
R. K. Morris, Editor
Joanne Thornton, Associate Editor