The Cost Of Screwing This Up The Border Adjustment Tax Unimaginable

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I believe that truly free trade helps everyone. But that’s not what recent so-called free trade deals have given us.

Instead, they delivered something quite different from the kind of free trade that Adam Smith and David Ricardo envisioned.

Globalization Perks Are Distributed Unevenly

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I explained this at length last July in the “The Trouble with Trade” issue of my free investment newsletter, Thoughts from the Frontline (subscribe here for free). Here’s an excerpt:

“Free trade” deals are no longer simple documents. The Trans-Pacific Partnership (TPP) weighs in at 5,544 pages. It’s a boatload of rules and regulations. I know there is talk that this deal was negotiated in secret, but that is far from the truth.

You and I weren’t asked for input; but lots of people were, let me assure you. I can guarantee you that rice farmers in Texas and California were pressing their congressmen and others for access to the lucrative Japanese market, and Japanese rice farmers were trying to figure out how to limit the damage.

For the record, Japan imports about 10% of its rice from the US, most of which they turn around and export as foreign aid or use for animal food. It is not that Japanese rice is that much better; indeed, the fact that US rice is so close in quality makes Japanese farmers nervous. And US rice is 1/3 to 1/2 the cost of Japanese rice.

Of course Japanese companies want access to US markets, where they can compete quite well, thank you, against US firms. And those US firms want to keep the protections and prices they have. This tit for tat has gone back and forth in hundreds of industries in the 12 countries involved in the TPP.

I can guarantee you that wheat farmers or corn farmers or cattle or hog producers have a different view of the whole process than US rice farmers do. And their views are different again from those of equipment manufacturers or software developers, or pick any of 1,000 industries. Rice farmers in Japan have to negotiate terms of trade with other national industries, and do you think New Zealand avocado farms or sheep farmers or movie firms have any less interest in the process?

Every country is worried about US companies coming in and overwhelming their businesses, and the US is worried about “unfair” competition – that is, competitors in other countries producing products that are cheaper or better. Often, the higher cost of products here is attributable to the regulations that we impose on our own industries. So we want other countries to abide by our regulations (and they want us to abide by theirs).

The problem with global deals like TPP and its US-European counterpart, TTIP, is that while they may be good for the economies as a whole, citizens will find that “good” very unevenly distributed, which is why Trump calls such agreements “a job and independence threat.” After supporting the TPP for several years, Clinton now says she will not sign. Both candidates are responding to the very real problems generated by the uneven distribution of globalization’s benefits over the last 30 years [emphasis mine].

Read that last paragraph again. In fact, it’s the core problem behind most of our current ills. Global trade grew enormously in recent decades. But its benefits were distributed in ways that it left many people out.

The Border Adjustment Tax Will Amplify the Problem

I have used the following line from William Gibson over and over again. But I do so because it is the single best description of our world today: “The future is already here; it’s just unevenly distributed.”

For a variety of social, political, and economic reasons, we can’t let this uneven distribution continue. A large number of our fellow citizens are demanding change. But the uneven distribution will continue if the US enacts this border adjustment tax plan.

It should be clear to everyone that Brexit and Trump and all the other nationalist movements are not happening in a vacuum. Those who are left out of future economic abundance are going to be pushing back; and while this time the Republicans were able to take advantage of the situation, the next time it will be the Democrats or some other group that does so if the Republicans don’t figure it out.

I just want to say that it is really, really, really important that we get it right this time. The cost of screwing this up will be far greater than you can possibly imagine. Conservatives may not have another shot for a very long time.

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