Will the Proposed US Border Tax Provoke WTO Retaliation from Trading Partners?

Chad P. Bown (PIIE)

Policy Brief
17-11
March 2017
Photo Credit: 
REUTERS/Mike Segar/File Photo

A major economic concern with the border tax adjustment blueprint, which House Speaker Paul Ryan and House Ways and Means Committee chair Kevin Brady support, is its potential to reduce US imports and promote US exports in a way that could violate international trade rules. Because of the size of the US economy, the trade distortions resulting from the tax would punish US trading partners, putting pressure on them to retaliate immediately. World Trade Organization (WTO) rules establish a framework for understanding how trading partners' policy response to a US tax reform would proceed. The potential retaliatory costs to US exporters associated with elements of the Ryan-Brady blueprint could be large. If the reform is found to violate WTO rules by restricting US imports, trading partners could be authorized to retaliate by an estimated $220 billion annually. If the new US tax is found to implicitly subsidize exports, partners could be authorized to retaliate by an additional $165 billion annually. The United States would face some of this combined $385 billion in retaliation almost immediately upon implementing the tax, through the imposition of countervailing duties by trading partners.  Any durable overhaul of the US tax system requires a frank airing and honest empirical assessment of the international implications of the policy. It is best to tackle the issue with a strong US commitment to international engagement and cooperation with trading partners.