WASHINGTON: A border tax in the US could upend the export-based economic model that has brought prosperity to millions of people in Asia, say analysts, as the region wakes up to reforms proposed by Republicans in Congress.
Although most attention is still focused on whether president-elect Donald Trump will slap tariffs on China or target companies that move production offshore, proposals for a US tax regime that penalises imports could have a more permanent and far-reaching effect.
“I think it would be a huge issue for Asia,” said Frederic Neumann, co-head of economic research at HSBC in Hong Kong. “It would also raise the spectre of retaliatory measures by other countries.”
Depending on how far a stronger dollar offset the change, a border tax could pull up the ladder climbed by developing countries from Japan to China and now Vietnam as they built industries based on exports to the US, forcing the region to seek a new economic model.
A variety of corporate tax proposals by Republicans in Congress would levy a “border adjustment” on imported inputs, while exempting exports from tax altogether. The structure is similar to a value added tax but because US companies could deduct their wage bills, the potential effect resembles a tariff on foreign goods.
Republicans such as Paul Ryan, the speaker of the house, have declared their opposition to Mr Trump’s threat of tariffs and have been pushing the tax reform instead, despite vehement opposition from US retailers and other import-dependent businesses. Pro-trade Republicans see it as a way to avoid a tit-for-tat trade war with China while also encouraging more manufacturing in the US.
Michael Gapen, chief US economist at Barclays in New York, said he had included tariffs on Mexico and China in his base case forecasts but there was “a 25 to 30 per cent chance we get border adjustments”.
Mr Gapen argued it was unlikely that appreciation of the dollar would fully offset the change and the impact would depend on how US trading partners reacted. They could change their own systems, launch a case at the World Trade Organisation or retaliate in other ways.
