Jared Dillian says the American consumer will pay for Trump’s “America First” plan.
In a recent video interview with Mauldin Economics, Jared Dillian notes that Trump’s new “America First” trade policy is anti-free trade. Plus, given the Republican Party has been the champion of free trade for decades, Trump’s new trade policy does not sit well with many in the party.
Dillian also says that Trump’s trade policies “will benefit certain people at the expense of other people; [it] will benefit workers and producers at the expense of consumers.” As an example, Dillian notes that US auto makers are now making “uneconomic decisions to benefit American workers” (moving auto plants back to US) because of pressure from Trump.
Making cars in the US is more expensive than making cars in Mexico. Therefore, making cars in the US means Americans will have to pay higher prices for cars.
Getting a grip on Trump’s border adjustment tax
As Dillian points out, the main reason a “border adjustment tax” (BAT) is so popular among politicians is that it is not a tariff. A BAT taxes the full value of a product made by a US firm abroad, thus encouraging producers to make products in the US.
With BAT, companies that make products in the US and sell them abroad (exports) may deduct the cost of making the product and only pay tax on the net profits.
The key thing to keep in mind is that a border adjustment tax will lead to higher costs for many consumer items. The overall impact of a BAT is twofold: imports cost more (higher prices) and exports cost less (more sales for US exporters).
The retail and the apparel industries will be hit the hardest
There is virtually no garment industry left in the US, so moving manufacturing back to the high-cost US from low-cost Thailand and China will lead to higher prices for apparel. Higher prices mean fewer sales for apparel firms and retailers. This would be a major blow to both of these struggling sectors.
Dillian also notes that getting a BAT passed by Congress is not a “slam dunk.” Given that the retail and apparel industries would be the hardest hit, you can be sure they will fight tooth and nail against it.
Major US exporters, however, are licking their chops at the thought of a BAT regime. This is because their overall tax burden would drop.
Finally, Dillian warns that if Trump can’t get Congress to pass his BAT proposal, it is very likely he will resort to tariffs by decree. While the president has the power to levy tariffs, Dillian argues this kind of protectionism is close to a worst-case scenario, pointing out that tariffs always lead to less trade, not more.
Watch the full interview with Jared Dillian (7:54) below.
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