For free traders, the 2016 campaign was dispiriting. Free trade suffered repeated, unwarranted abuse from President-elect Trump, Hillary Clinton and Sen. Bernie Sanders, making it the truly biggest loser of the election.
Looking at what Trump's done during the transition period, it's apparent his trade protectionism was more than just campaign rhetoric. Shortly after winning, he announced he would withdraw the United States from the Trans-Pacific Partnership and he's appointed several protectionist-leaning officials to lead key trade posts in his administration. Likewise, Trump hasn't backed away from tariff threats against specific companies who make business decisions with which he disagrees. That's put him at odds with Congressional Republicans who have long been stalwart supporters of free trade.
The safety valve for free traders has been tax reform. Last summer, House Republicans released their tax reform blueprint, which contains a border adjustment provision as part of a destination-based cash flow tax. The fine print of the plan is nuanced, but Douglas Holtz-Eakin and Alan Auerbach of the University of California, Berkeley recently released a paper on the topic of border adjustment, in which they assert:
"Border adjustments may be implemented as taxes on imports and rebates on exports; or by excluding overseas sales and purchases from the computation of taxable income;
Unlike tariffs on imports or subsidies for exports, border adjustments are not trade policy. Instead they are paired and equal adjustments that create a level playing field for domestic and overseas competition;
Border adjustments do not distort trade, as exchange rates should react immediately to offset the initial impact of these adjustments."
When pressed about the Trump's proposals for tariffs, Speaker Paul Ryan, Majority Leader Kevin McCarthy, and Ways and Means Chairman Kevin Brady pivoted to tax reform, arguing they can adequately address Trump's concerns through changes to the corporate tax code.
Although there is considerable academic debate about the merits of the border adjustment provision, if implemented, the plan could satisfy Trump's concerns about trade imbalances and off-shoring of jobs. Some claim this would obviate the need for new tariffs, which most economists believe would cause significant economic harm.
However, all of this could be moot, as Trump appeared to put the kibosh on border adjustment as part of the tax reform package that Congress will likely consider this spring. Over the weekend, Trump called border adjustment "too complicated," and added that he wants tax reform to be "nice and simple." If it's true that border adjustment won't make the final draft of the tax reform package, it might be back to the drawing board for free-traders as they look for additional ways to avoid a costly and ill-advised trade war that could be on the horizon.
Clark Packard (@clarkpNTU) is a contributor to the Washington Examiner's Beltway Confidential blog. He is counsel and government affairs manager for the National Taxpayers Union. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.