Donald Trump gets ready to take office in just a few days. The time leading up to his inauguration has been a whirlwind of political and financial action focused around Trump’s promises to increase jobs and strengthen the U.S. economy. And while Republicans have started to rally around the new president, there seems to be a little rift within the party. Paul Ryan and the GOP have introduced a new plan called the border adjustment tax, which the GOP believes will boost U.S. manufacturing. But Trump has criticized the plan and is calling for something economists fear will start a trade war. Why are economists so worried? What’s the best course for the U.S.economy?
Why Tariffs Over Taxes?
After fears of his unpredictability quickly receded, the stock market has had a historic rally behind Donald Trump’s election victory. Trump has held to his promise of increasing jobs so far by threatening companies who move manufacturing plants from the U.S., rewarding those who stay, and even meeting with Jack Ma, CEO of Chinese online retailer Alibaba to discuss the creation of 1m U.S. jobs. Another effect of Trump’s win is the surging strength of the U.S. dollar, which just two weeks ago hit a 14 year high. On Tuesday, Anthony Scaramucci, a senior advisor to Trump, warned about the risks of a strong dollar at the World Economic Forum. But when the GOP presented a plan which could mitigate the strength of the dollar while improving jobs and the economy, Trump said it’s “too complicated”.
The fact is, a strong dollar has its pros and cons. The stronger our currency, the more we can buy with it. That’s great for importing goods from other countries, but actually hurts U.S. exports since other countries then have to pay more for American goods, leading them to look for cheaper goods and materials from other countries. As the dollar continues to soar, the concern for manufacturers and companies is foreign competition, specifically China, undercutting American bids. As a result, jobs and the American economy suffer. On the other hand, a weak dollar makes imports too expensive for some consumers, but can boost the economy by increasing manufacturing jobs through cheap exports to other countries.
It’s a fine line to walk, and the GOP is busily looking for solutions. One such solution is the border adjustment tax, or BAT. The BAT isn’t actually a tax, or even a tariff. While a tariff affects imports, a BAT would affect both imports and exports. A BAT is basically a readjustment of how the country taxes imports and exports. Companies would no longer be able to deduct the cost of their imported goods, and the sales of their exports would no longer be subject to U.S. tax. This gives American companies the ability to sell their goods more cheaply abroad since they would no longer have to pay taxes on exports. Supporters of the BAT say this would increase U.S. manufacturing and exports, thus boosting the economy. Critics say that by driving up demand for U.S. goods abroad and by making imports more expensive, thus driving down demand for foreign goods, the dollar will continue to strengthen, eventually hurting the economy.
Trump’s solution is tariffs.
There are a few problems with that. A tariff would only affect imports, which would then raise the price of consumer goods for Americans, hurting spending and the economy. The bigger concern is that by implementing tariffs against other countries, they would then respond by placing tariffs on American exports, lowering demand for U.S. goods abroad. A trade war could cause a global recession as demand for foreign goods the world over would drop.
Watch the news report as Trump’s economic adviser Steve Moore discuss Trump’s tax plan on Fox Business:
In the end, what’s most likely to happen is there will be some sort of compromise between Trump and the GOP to amend the BAT to Trump’s liking. One thing is sure, however, and that’s that trade war is a lose-lose situation which must be avoided at all costs.
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