- By: Sanjay Pawar
At the outset, I absolutely understand the need to create jobs in our country. Bringing back manufacturing appears to be a quick and easy solution to creating jobs. Imposing border tax is at or near the top of the current administration’s list of ways to accomplish increase in domestic manufacturing.
Personally, I have experienced the effects of protectionist national policies. As a working public accountant, I have seen, first hand, the impact of Import tariffs and duties.
I believe there are better ways to utilize fiscal policies to create a competitive domestic economy and consequently better employment rates. Protectionist fiscal policies have far reaching consequences beyond what we would see as immediate effects.
Here is how I would summarize my thoughts about protectionist fiscal policies like Border taxes:
- The Tariff basket problem: Obviously, the immediate effect of border taxes would be to increase the cost of imports. But then, what do we impose these import taxes on? Do we tax everything that comes into the country including raw materials and other goods that may not be available domestically at competitive prices? Where do we draw the line?
- Position in the global Value Chain: Where do we want our country to be in the Value Chain? We know from basic economics that as countries advance economically, there is a shift to services sector from manufacturing. Essentially there is a move up in the Value chain. Are we planning on moving backwards so we can compete with our neighbors? I think market forces and economics should dictate these issues in today’s day and age. That said, we can certainly make our country more competitive with tax reforms and other (non-protectionist) fiscal policies.
- Zero Sum Game: I think protectionist policies could make global economics a zero sum game. Where countries are competing with each other essentially to take away from each other. We impose tariffs and other countries follow suite making it difficult for our exports.
Also, we should not forget that global trade has created prosperity in a lot of countries around the world. That prosperity, in turn has created a market for our goods and services. It is a cycle that cannot work if some pieces are taken out because it serves our short term agenda.
- Global Currency of choice status: What would protectionist policies do to the position of the US Dollar in global trade? In my opinion, protectionist policies could jeopardize the position of US Dollar as the currency of choice in global trade. US dollar losing its position as the top currency of the world could be catastrophic in so many ways. For starters, what happens to the huge National Debt that is US dollar denominated? Someone could write a whole book on these issues.
- High Inflation: From the experience of some third world countries, protectionist policies generally lead to high inflation and loss of purchasing power of local currency. That would have far reaching consequences on the standards of living of our middle and lower classes. Not so much of a problem for the top 1%.
- Contagion Effect: To think that the effects of imposing border taxes would be isolated to the manufacturing sector would be a mistake. Because other countries may impose tariffs on our exports that may not be limited to manufactured goods, think services.
- Power corrupts: What would be the potential effect of border tax on corruption and black market? We can see from the state of affairs in some other countries that the power to control the flow of goods across borders could lead to more corruption, black market and consequently loss of control on consumption and other value added taxes.
- Market forces and Economics: In the long run, market forces and economics will determine where manufacturing or services are located. Manufacturing is not a function of just one factor, border taxes. There are several factors such as capital investment, technology, currency, transportation and most importantly socio economic conditions that determine where manufacturing takes a foothold. Trying to fight all these factors with border tax may not work in the long term.
- Future Administration changes: We all know that administrations will eventually change. And so will politically ideology and policies. What happens if future administrations decide to eliminate border taxes? What happens to capital intensive manufacturing which is set up during this administration? I can only imagine how disruptive that would be to jobs, companies and for the economy in general.
These are just some of the concerns. No one can argue that there is a need to create jobs and that millions of families need a better living. In my opinion, it can be achieved with measures like better fiscal policies (not just taxes), better allocation of resources, creating higher efficiencies, raising education standards and better infrastructure.
It remains to be seen if the current administration will in fact levy border taxes. As they say, time will tell!