Why Trump’s ‘Big Border Tax’ Gets Taken Seriously: QuickTake Q&A

Rogoff: Tariffs Will 'Come Back to Bite' U.S. Pretty Hard

To make good on his promise to put America first, Donald Trump’s weapon of choice is imposing (or threatening) stiff tariffs on nations he deems to have an unfair advantage. His biggest targets are China and Mexico, but he also threatens to punish U.S. companies that send jobs overseas by hitting their goods with a tax when they send goods into the U.S. His broad authority to impose tariffs may explain why companies have been quick to withdraw plans to expand factories in Mexico. Steep tariffs would raise costs for U.S. companies that import goods, increasing the attractiveness of producing in the U.S. The problem is that tariffs would also raise prices for American consumers, especially if other nations retaliate by imposing tariffs of their own -- leading to a global trade war like the one that began at the start of the Great Depression.

1. What does Trump mean by a ‘border tax’?

He seems to mean a tariff, or a tax on imported goods. But while typical U.S. tariffs are levied on certain products from elsewhere (tires from China, steel from Japan) in order to protect American companies, Trump talks of slapping them on American companies that relocate operations to other countries. For example, he’s mentioned a 35 percent tariff on autos made by U.S. companies in Mexico. If jobs go outside the U.S., "we are going to be imposing a very major border tax on the product when it comes in, which I think is fair," Trump said on his first full workday as president. Such a tariff would likely be barred under the North American Free Trade Agreement, though Trump is intent on renegotiating that accord anyway.

2. Is this the same as a border-adjustment tax?

No -- though they could have similar effects. The border-adjustment tax is under consideration by House Republicans looking to overhaul how U.S. corporations are taxed. The basic idea is to tax only corporations’ imports, not their exports. So far, Trump’s views have bounced around. At first he called a border-adjusted tax "too complicated," then he suggested the idea is on the table. His top advisers are split. U.S. retailers, who fear such a tax would raise the cost of goods they import, aren’t fans.

3. How serious is Trump about imposing tariffs?

Though threats of tariffs could be a bargaining tool, Trump has been talking up the idea for years. In a 2011 book, he called for a 20 percent tax on "any foreign country shipping goods into the United States." During his campaign, he drew support from workers upset about the loss of manufacturing jobs and suggested a tax of 45 percent on imports from China and 35 percent on goods from Mexico. In the first news conference after his election, he pledged a "major border tax" for firms that shift jobs abroad. More recently, he said he favors free trade as long as it’s fair.

4. How would tariffs save jobs?

Primarily by erasing the benefit companies reap by manufacturing in low-wage countries. Automakers pay Mexican workers about 80 percent less than U.S. workers in total hourly compensation. Considering assembly time for a typical midsize car, an automaker can save $600 a vehicle on labor costs. China’s unit labor costs, which were less than half those of the U.S. in 2001 when China joined the WTO, have almost pulled even. Mexico also has free-trade agreements with the European Union and dozens of other countries, giving exporters tariff-free access to important markets. Because the U.S. doesn’t have as many agreements, its exporters are at a disadvantage. Many Mexican manufacturers are also heavily integrated into U.S. production chains; every dollar of Mexican exports has about 40 cents of American content.

5. What’s a tariff, anyway?

The word is sometimes traced to the Spanish town of Tarifa, believed to be the first place to charge merchants for the use of its docks. Until the federal income tax was created in 1913, tariffs were the U.S. government’s main source of revenue. In 1930, the U.S. passed the Smoot-Hawley Tariff Act, which raised tariffs to the highest level for the 20th century. The law was meant to protect U.S. workers and farmers during the Depression, but it provoked trading partners to hike their own tariffs. After World War II, major economies agreed to lower tariffs through the General Agreement on Tariffs and Trade and its successor, the World Trade Organization. For most of the past 70 years, the U.S. has been seeking to reduce barriers to free trade by lowering tariffs.

6. What tariffs does the U.S. have in effect now?

Thousands, on goods ranging from machinery and minerals to clothing and footwear. Non-agricultural goods, which account for about 96 percent of the merchandise imported into the U.S., have an average import tariff of 2 percent. About half of all industrial goods entering the U.S. come in tariff free, and the ones that face tariffs are largely clothes, footwear and motor vehicles. Since it took effect in 1994, the North American Free Trade Agreement has gradually eliminated all U.S. tariffs with Mexico and Canada. Tariffs raised about $35 billion for the U.S. in 2015.

7. Will Trump have the power to impose tariffs?

Broadly speaking, yes. An American president’s unilateral authority on trade policy is exceptionally strong for a government based on checks and balances. While the Constitution gives Congress the power to regulate commerce with foreign nations, lawmakers over the years have delegated much of that power to the executive branch. Under the 1974 Trade Act, Trump can impose tariffs and quotas on countries that violate trade agreements or engage in unfair trade practices. One section authorizes the president to deal with balance-of-payments deficits by imposing temporary import surcharges of up to 15 percent for as long as 150 days. President Barack Obama in 2009 used the Trade Act to slap a tariff on Chinese tire imports

8. What if a country hasn’t violated a trade agreement?

Trump alternatively could invoke the International Emergency Economic Powers Act of 1977, which allows a president to restrict imports if they pose a national security risk. Trump could even use the obscure Trading With the Enemy Act of 1917, which allows the president to restrict trade in wartime, even if the "war" is against terrorists and not China, Mexico or any country he wants to punish with tariffs. President Richard Nixon last used this law to impose tariffs in 1971, citing the Korean War, which had ended decades earlier.

9. So Congress’s hands are tied?

Congress could try to pass a law overriding Trump’s tariff plans, but that would require a two-thirds majority in both chambers to overcome his almost certain veto. While Trump might be able to impose tariffs unilaterally, they could violate U.S. obligations under the WTO or Nafta. That wouldn’t necessarily stop him: Trump could walk away from Nafta simply by giving Canada and Mexico six months’ notice.

10. Could targets of tariffs fight back?

Yes. A country hit by a U.S. tariff could launch legal proceedings through American courts or the WTO. Nations like China or Mexico also could respond with their own tariffs on specific companies and goods. China’s state-run Global Times described possible "tit for tat" retaliation targeting Boeing Co. orders or Apple Inc. sales. A U.S. company hit with a tariff might try to prevail in court by arguing that the 1974 Trade Act allows presidents to target countries, not companies.

The Reference Shelf

  • A QuickTake explainer on free trade and its foes.
  • A QuickTake Q&A on Trump’s possible trade war with China.
  • China mulls response to possible punitive measures by Trump.
  • Trump’s trade team picks suggest China campaign talk was no bluff.
  • An explanation of how Trump’s tariffs on GM would violate Nafta.
  • Trump’s threats are already wreaking havoc on the Mexican economy.
  • A Trump border tax could help Halliburton, writes Bloomberg Gadfly columnist Liam Denning.

--With assistance from Laurence Arnold, Andrew Mayeda and Enda Curran.

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