At risk is the international system designed to prevent trade wars
Source: Zero Hedge
Two weeks ago we looked at the immediate fate of the proposed border tax adjustment, and said that two wars are about to break out: one is domestic, and involves exporter (GE and Boeing) vs importer (WalMart and Koch Brothers) alliances and trade groups; this war will shift into the Senate, where Republicans can afford to lose at most 2 Senators, yet where as many as 6 are on the fence already (with 3 voicing a negative opinion toward BAT). The second war, we predicted, is one which would break out after the BAT is passed, and it would hammer – at least in the first few years – America’s biggest trading partners. And since the impact of the latter would be to force prices of the vast majority of retail goods sold in the US to soar, leading to a big jump in core inflation, eventually leading to a surge in the US Dollar – even if one ignores the diffuse effects and pervasive on global trade – the BAT would have an immediate impact on Fed policy, interest rates, and ultimately, prices of risk assets.
As it turns out, the second war did not even wait for the formal passage of the border adjustment tax, because as the FT reported this afternoon, the EU and other US trading partners have begun preparing for a legal challenge to a US border tax proposal in a move that “could trigger the biggest case in World Trade Organization history.”
The reason is that “the EU and other US trading partners are worried about the impact on their exports and have been deploying lawyers with a view to eventually challenging it before the global trade watchdog. ”
The move to block the BAT come as Congressional Republicans are working to convince President Donald Trump to back a major shake-up of the US corporate tax system that would include a new “border adjustment” system. It would see US imports subject to tax and export revenues exempted, in what the FT, us and everyone else has dubbed “the biggest shake-up in the global corporate tax system in almost a century, according to tax experts.”
And as such, America’s trade partners have finally pushed the panic button realizing that their exports to the US would likely suffer substantially, and as a result, they are taking their case to court.
Members of the WTO and trade experts warn that if the US makes the tax change, it would lead to a major challenge to the global trading system at a time when its most influential member is tilting toward protectionism under Mr Trump. Jyrki Katainen, the European Commission vice-president who oversees EU trade policy, told the Financial Times that Europe wanted to avoid a trade war with the US as that would be “disastrous” for the world economy.
But he made clear the EU would be willing to act against the US whether it was related to a border tax proposal or the erection of other arbitrary trade barriers.
“If somebody is behaving against our interests or against international rules in trade then we have our own mechanisms to react,” Mr Katainen said. “We have all the legal arrangements within EU, but we are also part of global arrangements like the WTO and we want to respect the global rule base when it comes to trade.”
“Our first assessment is that it is definitely not going to be compatible with the WTO,” said a senior trade official in Geneva, where the WTO is based. “On the sides of many [US] trading partners there are serious doubts about whether or not it can be made WTO compatible.”
According to the FT, should the EU indeed challenge – and defeat the US – in a border tax case, it could open the door to $385 billion a year in trade retaliation against the US, according to Chad Bown, an expert on WTO trade disputes at the Peterson Institute for International Economics. That would be almost 100 times greater than the largest WTO finding to date. And if the US ignores the WTO ruling – as Trump has threatened in the past – it could lead to the unravelling of the international system designed to prevent trade wars…