Multiple laws give the US President the ability to impose tariffs or halt the negotiated access to the US market for goods from certain countries.
The 1974 Trade Act, for example, allows the president to retaliate for large balance-of-payment deficits or unfair trade practiced abroad, and Trump could use that law or others to impose tariffs, duties or import restrictions, according to a report from the Peterson Institute for International Economics.
“The president has tremendous power to restrict trade — almost unlimited,” says Gary Hufbauer, a Senior Fellow at the Peterson Institute for International Economics in Washington. “But he cannot liberalize trade without Congressional assent.”
Once-in-a-generation tax reform
Tax reform could be another way for Trump to address trade concerns. US House of Representatives Speaker Paul Ryan has vowed that tax reform will be completed by the end of this year. And in late July the Trump administration and key Republican senators issued a statement indicating their joint commitment to reform.
“Tax reform could be valuable to the US in remaining competitive against other countries,” said Peterson of S&P Global. “But it needs to be permanent. Knowing that something is permanent gives you the ability to plan.”
Overhauling the tax code however is considered extremely difficult in the US, so much so that it is often considered a once-in-a-generation event.
A proposal from the House of Representatives contained a border adjustment tax (BAT) that would have exempted exports from taxation while subjecting imports (including components) to tax but key tax writers and the administration in July indicated the BAT would not be pursued as part of tax reform.
Link in the chain
More protectionism would add to what already is a relatively protected economy: trade accounted for about 30% of US gross domestic product (GDP) as of 2015, less than the average of 70% in other advanced economies, according to the Global Economic Prospects report from the World Bank Group in January.
American multinationals are a core element of the American economy — they account for more than a quarter of sales of US companies, nearly 20% of exports and 10% of jobs, according to Ayhan Kose, Director of the World Bank Group’s Development Prospects Group.
“When you consider how important these multinationals are, you see that the US is still very much integrated with the rest of the global economy,” Kose says.
The impact from any changes will be profound for the global economy as well.
“Trade is a formidable force as a vehicle for promoting growth and helping reduce poverty,” Kose says. “A number of countries have escaped the low-income trap and become middle-income by embracing trade openness.”
Staying the course
Amid this great global questioning of global connectivity, some countries remain committed.
Canada and the EU recently signed a free trade agreement. In Latin America, Brexit and Trump could provide the impetus for the Latin American Mercosur block to finally complete an FTA with the EU, and push for a deal with the UK as well.
While the US may have abandoned TPP, the 11 remaining countries involved are still casting about for free trade-friendly alternatives and invited China and South Korea to their March meeting.
“Trade is not going away,” says Peterson. “Entire industries are now reliant on global supply chains, and countries want to be a part of them rather than on the sidelines.”
After Canada signed its Comprehensive Economic and Trade Agreement (CETA) with the EU in February, Prime Minister Justin Trudeau’s speech to the European Parliament was both a celebration as well as warning of what could happen if voters’ skepticism of trade and a globalized economy deepens.
“Now we need to make it work,” Trudeau said. “If we are successful, CETA will become the blueprint for all ambitious, future trade deals. If we are not, this could well be one of the last.”
Key action points
- Tax and trade risks are converging. Managing these risks means gathering expertise in both areas in order to build accurate forecasting models and plan tactics and strategies.
- Brexit presents short-term risks, such as the return of tariffs, potential supply chain disruptions, and the potential need to shift some operations out of the UK and into the EU. The unclear outcomes narrow corporate options for immediate responses, but where businesses have been able to take decisive actions, such as in the financial services sector, the trend is toward other European locations.
- US trade policy presents similar risks, including a loss of tariff-free access, but also potential opportunities if a tax reform package lowers the corporate income tax rate.
- While new trade barriers are likely in the US, most countries remain committed to free trade. There will be new agreements and rules coming that present fresh opportunities as well as compliance challenges.
All information in this article was current as of the print deadline of August 15, 2017.