US Border Tax – Good or Bad?
US Border Tax – Good or Bad?
Washington is questioning if restrictions on trade in the form of a US Border Tax is the key to job creation in the U.S. How to implement such restrictions if such findings prove to be beneficial to US job creation is the question
There has been much discussion in the media concerning a US border tax and its effect on international trade. Of importance to Tecma is the potential effect on our clients.
So far we have seen several ideas:
- The elimination of NAFTA
- 20 % Percent Import Tax of Companies Moving Jobs to Mexico
- 20% Import tax (duty) on all goods imported from Mexico
- 20% Border tax (duty) on all goods imported into the United States.
- The renegotiation of NAFTA
Not all parties involved are at peace with these proposals. Opposition voices have started and are becoming loader. Discussion on this subject are coming from virtually every country
Many of these countries will not accept pressure from the U.S. in the form of a US Border Tax and will most likely take action to counter any U.S. protectionism. The role of the World Trades Organization (WTO), intergovernmental organization which regulates international trade, is also important to note. The WTO will ensure that the U.S. abides by previously signed agreements, and will not let the U.S. impose unilateral duties.
Although the President can issue executive orders immediately imposing duties (US Border Tax) on certain companies and countries that these duties will be challenged in court. The President also needs the support of Congress to pass permanent legislation, and support for such legislation is dwindling as the true impact of such changes is understood.
Possibly The Worst Case Scenario
Let’s assume the President calls termination of NAFTA after the required six-month period. The President then executes an executive order sighting an economic emergency, imposing a 20% tariff in the form of a US Border Tax on all goods imported from Mexico. The various companies involved and Mexico bring suit in the U.S. and WTO to halt the executive order sighting that there is no emergency, and that the tariff is punitive and unfair.
The rulings in the U.S. and WTO prevail and an overall Mexico Border Tax no greater than 2.7% for ‘most favored nations’ status is imposed by the U.S. on goods imported from Mexico, as allowable by the WTO.
World Trades Organization Has a Say
Companies that utilize U.S. goods in their operations in Mexico import their finished goods into the United States under the provisions of the 9802 Program. This program allows U.S. components to be exempted from duties, with only foreign content being subject to the max 2.7% duty. This is what I see as the worst case scenario for the Mexico Border Tax.
Possibly the Most Probable Case
President Trump calls for renegotiation of NAFTA with Canada and Mexico. The negotiations may focus on the rules of origin, which is currently a loop hole that allows non-North American raw materials to enter into North America at preferential or free duty treatment; Asia being the most visible benefactor.
Rules of Origin
The materials are then assembled into a finished article. Because the finished article was under the rules of origin there is no duty. Negotiations are underway on a modification to NAFTA requiring a finished article to meet a minimum local content rule for the finished article to qualify under NAFTA for duty free treatment. This will drive more production from outside of NAFTA to the U.S., Mexico, and Canada.
Mark Earley
CFO, Tecma Group of Companies
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