President Trump eyes border tax on Mexico, China and Germany

The Trump White House favours a “flexible” border adjustment tax targeting countries with which the United States runs big trade deficits, including Mexico, China and Germany, the President’s top trade and industry adviser said.

Peter Navarro, a sceptic of free trade, wants the US to entice advanced manufacturing production onshore to mirror Germany’s high-end industrial sector so manufacturing can account for 20 per cent of American jobs.

The author of Death By China: How America Lost Its Manufacturing Base vowed the President would clamp down on “cheating” by China for dumping cheap government-subsidised steel and aluminium.

Mr Navarro said the illegal practices had cost thousands of manufacturing and coal jobs in industrial states such as Ohio, Pennsylvania and West Virginia.

An unconventional Harvard-educated economics professor who bemoaned America’s “chronic and large trade deficits”, Mr Navarro expressed support for a modified version of a radical border adjustment tax being pursued by Republican leaders in the House of Representatives.

“There is no question we need a border adjustable tax of some kind,” Mr Navarro said on Saturday (AEDT) at the White House.

There is robust debate among economists and trade experts over whether a border adjustment tax is protectionist like a tariff, or would be more akin to a serious economic reform that would be offset by an expected adjustment in currencies.

Much would depend on the tax’s final details and if the US dollar appreciated to offset the higher cost of imports.

Mr Navarro said such a tax “has to be flexible”, to take into account the border tax arrangements of trading partners.

Many countries which employ a value-added tax (VAT), including Australia’s goods and services tax, exempt exports and tax imports.

However, the US is one of the few developed countries in the world not to levy a VAT, effectively disadvantaging its net trade position.

World Trade Organisation (WTO) rules prevent the US from applying a border tax on its corporate income tax base.

Mr Navarro, who heads the new White House National Trade Council, said Mr Trump “is on board that the WTO and the VAT is a huge problem.”

Just two weeks ago, Mr Trump criticised a House Republican border adjustment tax plan as “too complicated”, but soon after appeared to reopen the door to the idea and has threatened a “big border tax” on US manufacturers that shift offshore.

Mr Navarro said Germany was “one of the worst actors” on strategically increasing the VAT to 20 per cent.

“They’re sticking it to us when they send a BMW or a Porsche into our market they rebate the VAT to those manufacturers and it’s like a subsidy.”

“But when we try to sell them a Ford or Chevy they slap on the VAT.”

Canberra’s GST rate is a relatively low 10 per cent and Australia runs a $25.6 billion trade deficit with the US, factors likely to make it a low priority in any US border tax shake up by President Trump and the Congress.

Mediocre gross domestic product figures published on Friday showed weak net exports dragging down US economic growth to 1.9 per cent for 2016.

The US economy has lost 5 million manufacturing jobs since 2001, but most economists are sceptical that trade is the main culprit. A recent study by Capital Economics economist Paul Ashworth said “rapid productivity gains, driven by rising automation, have also played a significant role”.

“Trump won’t be able to reverse the shift from labour to capital,” he said.

Mexican stand-off

Mr Navarro laid out the plan in an interview on financial news channel CNBC, a day after Mr Trump’s press spokesman sparked confusion by flagging the possibility of levying a 20 per cent border tax from Mexico and other trading partners to help fund a wall on the southern border.

The threat, from which the White House quickly backed off by emphasising that it was among a “buffet” of options, came after Mexico’s President Enrique Peña Nieto cancelled a meeting with Mr Trump amid a war of words on social media over who would pay for the wall.

House speaker Paul Ryan and the chief Republican tax writer Kevin Brady are pushing a destination-based corporate cash flow tax with border adjustability, to encourage domestic production, reduce complexity and remove incentives for firms to relocate offshore.

The archaic US corporate tax system, which imposes a high rate of 35 per cent and unusually taxes foreign profits when they are repatriated, has encouraged US multinationals such as Apple and Google to stash up to $US2.6 trillion offshore, engage in complex transfer pricing with foreign subsidiaries and relocate overseas.

House Republicans propose slashing the rate to 20 per cent, slightly above the 15 per cent proposed by Mr Trump during the election campaign.

Capital investment in the US could be written off immediately, rather than depreciated over many years, to promote business investment. Net interest expenses would no longer be deductible, eliminating the tax bias that favours debt.

Reflecting border adjustability, imports would be taxed, but exports would be tax-free, similar to the VAT system.

Domestic business expenses would be tax-deductible, but offshore costs would not receive a tax write off.

Big US importers including retailers and oil refiners have lashed the proposal, claiming it would drive up the cost of goods for consumers and cost thousands of jobs.

However, most tax economists argue the border adjustment tax is not a protectionist tariff and the economy would quickly adjust.

Greenback appreciation

In theory, the US dollar would appreciate 25 per cent for a 20 per cent border adjustment tax.

The Republican plan would raise an extra $US1 trillion over a decade because the US imports more than it exports and due to higher value US dollar, helping to fund cuts in the corporate rate and other taxes.

Mr Navarro’s support for some form of flexible border adjustment set at different rates for different countries is a less pure form of the Republican blueprint, leaving its economic effects less clear.

Mr Navarro admitted US consumers would “pay a little bit more” for goods at importers such as Walmart, under his trade and industry plan

“Would you rather have cheap, illegally-subsidised goods at Walmart and not have a job and not have your wages go up in 15 years, or would you like to pay a little bit more and have a job and your wages go up?”

Any border adjustment tax via corporate income tax would likely be challenged by the WTO.

On Friday, Mr Trump and Mexico’s Mr Peña Nieto tried to ease the diplomatic stand off by speaking for an hour on the telephone.

Days after withdrawing from the 12-country Trans-Pacific Partnership, Mr Trump hosted British Prime Minister Theresa May at the White House, where they discussed moving ahead with a possible bilateral trade accord.

Japan deal

There is rising speculation the Mr Trump may be open to a bilateral trade pact with Japan’s Prime Minister Shinzo Abe.

The US-Australia free trade agreement took effect in 2005.

Mr Navarro said the US needed to focus on rebuilding the supply chain to build manufacturing components for assembly at plants run by the likes of Ford and General Motors.

He assailed Citibank for producing a “fake study” on the detrimental impact on retailers from border taxes, and Goldman Sachs and the Peterson Institute for “garbage studies” on trade.

“Those tactics are just scare tactics,” he said.