One big question about the tax reform many of us are expecting from Congress this year is whether it will include a “border adjustment tax,” which would basically be a levy on imported goods. We would counsel strongly against it, but that's not necessarily the majority opinion.
Businesses in Indiana are divided on the idea. Under a border adjustment tax, American companies would pay tax on the sale of imported products, but not on products they sell overseas. So, as you might expect, companies that depend on exports for their profits are for the tax. Those that depend on imports are very much against it.
There is no such thing as pure “free” trade, or anything like the pure “fair” trade that free-trade opponents support. Most countries use some kind of mixture of both policies, and the mixture can change depending on shifting conditions and which countries they're negotiating with. So if anybody tells you they know for sure what would result from one pure policy or the other, don't believe it for a second.
We are all just guessing, based on the mixed evidence history can supply.
President Trump campaigned hard against free trade, blaming NAFTA and other trade agreements for manufacturing decline and jobs going overseas. The way he sees it, adding import tariffs would take away the competitive disadvantages American manufacturers have and provide an incentive to bring jobs back here.
But balanced against that potential gain is the likely upward pressure on prices. Consumers will pay more, as will manufacturers who use imported material to make goods here. And if the tariffs are too steep, there is the real possibility of a trade war.
The real key is what kind of treaties a president can negotiate with other countries. Whatever mix of trade policies is in play, it will be the president's job to get the best deal he can based on what concessions he can get from the other side. Mr. Trump has claimed that his skill as a business negotiator is one of his strongest traits, so let's see what he is able to do.
That's the main reason we think Congress should stay out of the “border adjustment tax” business. It would send the president into trade negotiations with a rigid set of inflexible positions when what will be needed most is great flexibility.