Tuesday, May 9, 2017

Peter Navarro's Star Fades but that Doesn't Mean the BAT is Dead

The WSJ notes that Peter Navarro, Trump's far out adviser on trade, has been marginalized in the White House after a power struggle with less heart-of-darkness Administration officials like Gary Cohn.  According to the WSJ article, Navarro is now in charge of a staff of two, including himself, and has a 15 minute weekly window to meet with President Trump.  Many of his wackiest (read, most dangerous) ideas have been tabled, discredited, abandoned (you get it).

All of this is good because it reduces the likelihood that the White House will somehow turn around and favor the BAT. Navarro was the most vocal of White House officials behind the BAT, and with his star fading away, it seems unlikely that the collection of actual business people in the White House will take the risk of supporting the dangerous and ill-conceived Border Adjustment Tax.

Then again, they do want our money.  So it's not over yet.

An interesting way to understand, yet again, how dangerous and unpredictable the BAT would be is to consider the integration of our economy with Canada.  That issue gets most of its air play in discussions of NAFTA.  However, the indiscriminate BAT does not care about NAFTA. Everything from Canada would be taxed under the BAT.  Canada is the U.S.'s number two trading partner, to the tune of $544 BB per year (2016).  This is just shy of China, if that gives you a sense of how gigantic the trade flows are.  Canada is the third largest exporter to the U.S. ($278 BB) behind China and Mexico.  The 20% bill under the BAT for importing from Canada will be a cool $55 BB per year, about half of the net raise expected under the BAT.  Think about how well that will fly in the Great North,

Another aspect of this is to consider the on-the-ground impact of this law on Canadians.  It may surprise you to learn that 75% of Canadians are estimated to live within 100 miles of the U.S. border. Other estimates suggest as many 90% live by the border.  The folks that live near the U.S. are very often involved in business activities with the U.S.  Goods (and components) go back and forth across the border, as do services, and many businesses are active on both sides of the border.  The scale of this activity is mind-boggling.  With so many folks living right up against the border, it can be anticipated that a BAT in the U.S. could devastate the Canadian economy.  Much more than a "shock".

If this is true, how could it be in our interest to "restructure" our "broken tax system" to expose the world's leading economy to this risk?  We are also the strongest economy.  Yes, it's crazy and yes, it's unimaginably irresponsible.  The response of economists, where they reassert the theoretical underpinnings of the BAT proposal, is completely unresponsive to this known risk. Theory aside, how do we make such a proposal workable, under any circumstances, when so many people will be instantly whacked?  This has dramatic foreign relations implications, and unknown economic and legal consequences.  The likelihood of serious and immediate (or preemptive) retaliation also seems very, very high.

I think I read that in "Duh" Magazine.

You can add to that the ripple effects on the U.S. economy from the BAT's impact on Mexico. Trade deficit hawk and notorious paranoid Peter Navarro might assert that it is in our best interest to issue these shock waves. Hence the good news that he is working out of a White House closet these days. Let's hope he stays there.

Frankly, this is a sad, sick joke.  The politicians should hang their heads in shame for even proposing it.  It's malpractice. But then again, they're politicians.  What do you expect???

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