For immediate release: 02.28.2017
Take this Avocado and shove it!
You probably heard about this new tax being thrown around called a "border adjustment tax", or BAT for short. The idea is that it is supposed to raise revenue by taxing the value of goods coming across our national borders in order to help offset the cost of President Trump's spending plans on infrastructure, reducing the corporate tax, and military defense. The real emphasis for this, or selling point, if you will, is that it's a silver bullet for creating more jobs in America. It may work. Or, it may just raise the cost of nearly everything you buy that has a foreign component in it - it's tough to think of products that don't have something in them from a foreign source; be it the entire product itself, the packaging, the chemicals needed to make it, the labor to assemble it, or the robot that took the place of the labor.
I see the pros and cons, but historically, tariffs and trade wars hurt everyone. But the country with the bigger economy usually wins, because bigger economies can diversify pain across more businesses and people. Not to mention they generally have big public welfare plans in place. Mexico is in the President's crosshairs, in spite of the fact that we have bigger trade deficits with other countries. So, why Mexico? Because we'd win. Mexico would feel the pain of a trade war with the U.S. much quicker and much more severely than our other trading partners. It would also plunge a neighboring economy into recession or worse. Its currency would be devalued vs. the Dollar, which would actually make Mexican goods even cheaper, thereby negating the effects of a BAT. More people would be incentivized to enter the U.S. illegally. And American consumers would be stuck paying more for an awful lot of goods like new cars, car parts, and food.
Could a BAT with only Mexico encourage companies to move Mexican production to China? Would we need a BAT with every country that has less expensive labor than ours to avoid such a scenario?
A BAT could reward American companies for being good exporters and harm those that manufacture overseas and then import back into the U.S. Add to that a lower corporate tax rate, then our economy could really shift into high gear. But would companies hire more employees or would they buy back stock, raise dividends, and invest in robotics to avoid paying higher labor costs?
You see, in economics, every action has a reaction. We just can't be sure until we get the first action, which is why economics is called the voodoo science. In other sciences, like physics, we know the actions and reactions, so physicists can anticipate consequences. Economics? Not quite as straight forward.
We'll have to wait and see while we see a parade of pundits from both sides weigh in. The link to the article below by Keith Bradsher of the NY Times is the best explainer I can find on exactly what the BAT is with a real world example and what the battle is all about. Read it and you'll understand. I send you there now:
To Understand a Tax on Mexican Imports, Consider the Avocado
Thanks for reading,
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