In one of his not so friendly mood, President Trump announced that he is willing to put upto 45% Border Adjustment Tax (BAT) of on goods which are specifically imported in to the US from China. He also blamed several other countries manipulating their currencies to take advantage in the US market. His contention is that as long as BAT is levied to cover for unfair practices of currency manipulation by his trading partners, he could eliminate the problem. This is not going to be easy. This is a conversation between a Student and his Professor.
Student: Professor, I read in the news that 18% of China’s exports reach the US shores and nearly 20 million citizens are involved in manufacturing these goods. Will BAT help in reducing imports from China?
Professor: Warren Buffett, legendary stock investor told CNBC that BAT is another name for sales tax except that the tax is not universal, sales tax at different rates for goods arriving from different countries. The rate of tax may be a function of host of factors such as what good it is and where it came from. US has big trading relationship with Mexico, Canada, China, Japan, India, Germany to name a few. The question is who is going to work out all these rates.
Student: I am particularly concerned about Indian software exports and BPO services. If heavy BAT is levied then our exporters may be badly affected. Is it not?
Professor: Now that you have mentioned nobody in India has looked into it and come up with a policy statement. Besides we are price taker. We will have to accept whatever the US BAT rates are. There may not be much time to think and discuss about it. Our delegation including Mr. Narendra Modi had visited the US and discussed with the concerned authorities on issues related to BAT such as H1B Visa etc.
Student: How is China reacting to it?
Professor: It is not clear yet. China holds several trillion US Dollars in their reserve either in the form of cash or US treasury. It could for example, start selling their big treasury holding. Given Janet Yellen’s commitment to increasing the interest rates in 2017 this may augment and expedite the process. Indian will then face currency devaluation or forced to hike interest rate.
Student: Is President Trump moving his country to the extreme right?
Professor: Perhaps. His motto is America first. Job for Americans is number one priority. Through heavy import taxes he wants to make the goods produced in the US cheaper. It is not clear as to how this can be achieved. Besides look at the American citizens, they will now have to pay higher prices. It is like a fat GST added on to their purchase price. This could result in a lower consumption and hence lower GDP, higher inflation leading to higher interest rates. I feel that Mr. Trump will look into these details before he will take any drastic step that will affect the US.
Student: Thank you Professor. When we view BAT as an additional GST everything makes sense.
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