Photographer: John Taggart/Bloomberg

‘Frankenstein’ U.S. Border Tax Will Hurt Consumers, Canada Warns

  • Any border tariff would be bad idea, Canada ambassador says
  • Ryan plan for border adjustment is ‘half-consumption tax’

A proposal by House Republicans to raise taxes on imports would be bad for American consumers and is opposed by Canada, the country’s envoy to Washington said.

While the details of House Speaker Paul Ryan’s tax plan -- and the White House’s interest in it -- remain unclear, Canada is against any measures to simply tax imports across the board, Ambassador David MacNaughton said in an interview on Friday.

“Any border tariff that punishes imports is a bad idea from our point of view, and we will aggressively present alternatives as opposed to just opposing it,” MacNaughton said from his office in Washington. “The reality is that the notion of simply taxing imports is not a good idea -- not a good idea for the Americans, and not a good idea for Canada.”

Canadian Prime Minister Justin Trudeau raised his concerns in a meeting with Ryan last month, but MacNaughton said the appetite for any border tax among the House, Senate and with President Donald Trump remains unclear. Canada is the top buyer of U.S. exports and the second-largest trading partner overall, leaving it highly vulnerable to both a border tax and any pending changes to the North American Free Trade Agreement. For trade moving in the other direction, Canada is the biggest foreign supplier of oil to the U.S.

‘Frankenstein VAT’

Ryan’s “border-adjustment” plan would tax goods based on where they’re consumed, rather than produced. The proposal would replace the U.S. corporate income tax of 35 percent and charge U.S. companies’ domestic sales and imports at a new 20 percent rate. Exports would be exempted.

The plan would raise more than $1 trillion over 10 years -- revenue that Ryan and other supporters say is needed to pay for other tax cuts for U.S. businesses and individuals.

Trump has also floated the idea of a “border tax” as a way to encourage companies to keep production in the U.S. But it’s unclear if he means an increase in tariffs, or a tax levied on companies that relocate production off shore.

Ryan has not yet detailed whether there would be exemptions to certain countries or products, MacNaughton said. Canada believes Ryan favors border import tariffs as a revenue tool -- to finance other tax cuts -- instead of an across-the-board consumption tax, known also as a value-added tax, or VAT.

“They don’t want to put in a straight consumption tax because they know they can’t get it through” and approved by lawmakers, McNaughton said. “This would all be solved by simply saying, we’re going to have a consumption tax. So they’ve got a half-consumption-tax” that is being proposed by Ryan. MacNaughton called it "kind of a Frankenstein VAT."

The proposal may raise prices of gas and consumer goods, with the Canadian envoy saying those considering the policy should think about people shopping at Wal-Mart. American retailers have spearheaded a publicity campaign against the plan. Canada would propose alternatives to the U.S. and work to find alternatives to a flat border tax, he said.

Nafta Impact

“Until we see what they’ve got in mind, I think it’d be speculation as to what. I’m just saying if there’s something that simply taxes imports into the United States, that would be something we would clearly oppose,” said MacNaughton.

Canada expects Trump to give notice sooner rather than later on Nafta renegotiations, MacNaughton said. Trump’s press for Nafta changes is mostly aimed at Mexico, although the Canadians are optimistic the North American Free Trade Agreement can be preserved, he said.

“I think we will find a way to get to a good place on strengthening the economic relationship between Canada and the United States,” along with trade, he said. “But there’s going to be bumps along the way. It’s not going to be smooth sailing.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE