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Proposed Border Adjustment Tax, Trans Pacific Partnership Agreement (TPP) & NAFTA in the News

Posted By Administration, Thursday, February 9, 2017
Updated: Tuesday, February 7, 2017

by Melissa Proctor, Polsinelli, P.C.

Several key international trade issues have been taking center stage in the headlines as of late – issues that U.S. importers, exporters, manufacturers and retailers should be tracking and monitoring closely as their operations, cross-border transactions and international supply chains will likely be impacted in the very near future.

1. Border Tax Adjustment
During the 2016 presidential election, Donald Trump mentioned the possible imposition of a border tax and new tariffs on goods from Mexico and China. In the summer of 2016, the House Republicans introduced the concept of a border adjustment tax in the publication "A Better Way" (otherwise known as "the Blueprint"). So, what exactly is a border adjustment tax? Essentially, under a border adjustment tax ("BAT") scenario, corporate income taxes would not be assessed on a U.S. company's export sales or worldwide income. Rather, corporate income taxes would be assessed on a U.S. company's domestic revenues minus its domestic costs, and the costs associated with imported goods or supplies used in sales in the U.S. would no longer be tax-deductible. Thus, a company that sources raw materials, parts and components from foreign suppliers would no longer be able to deduct those costs and would pay the tax on those imports. The BAT would effectively lower the tax rate on exports and increase the tax rate on imports. The BAT would apply to imported goods (e.g., raw materials, parts, components, finished goods), imported services, certain royalties and license fees. A BAT is designed to stimulate U.S. exports, and it would also have the effect of discouraging imports and cross-border manufacturing operations. It is possible that a BAT, if implemented, could be challenged by other WTO member countries as a prohibited subsidy; however, proponents argue that it is a type of indirect tax similar to the Value Added Tax (VAT) currently imposed in many countries (but not in the United States) which has been generally accepted by the WTO. A BAT, if implemented, would clearly benefit U.S. exporters of goods and services as there would be no tax liability for export sales. However, U.S. importers of finished goods, raw materials, parts and components could see significant increases in their tax rates. The BAT could also raise the tax rates on U.S. companies that own intellectual property rights outside the U.S.

It has been reported in the media that House Republicans may try to push ahead with tax reform legislation that could include a BAT even though it is not clear whether there are enough votes to pass the bill. However, in a recent interview with The Wall Street Journal, President Trump stated that he is not a fan of the GOP's border adjustment proposal that would tax imports and exempt exports, and that the lowering of the corporate tax rate and the imposition of a BAT would be redundant and too complicated (e.g., companies would receive credit on certain parts and not on others, companies would have to contend with messy country of origin issues, etc.). Further, just this week in a speech to the U.S. Chamber of Commerce, Senate Finance Committee Chairman Orrin Hatch acknowledged that the BAT raises questions as to whether U.S. consumers and businesses would be harmed, and whether it would pass muster under the WTO rules. He noted that there are a handful of Republican Senators who do have serious reservations about the rollout of a BAT. To date, there has been no formal BAT proposal issued by the Trump Administration or Congress. U.S. exporters, importers and retailers should continue monitoring this issue and fluid situation closely.

2. Power Granted to the President with regard to International Trade Agreements
As was reported last month in the RVCF Link, Congress has historically granted broad authority to the President to negotiate, enter and even withdraw from international agreements, including Free Trade Agreements (FTAs). For example, the President has the unilateral authority to revoke prior Executive Orders that provided preferential tariff treatment under FTAs and to institute higher tariffs on imported goods. No formal approval from Congress is required before the President may take such actions. In such situations, the Trade Act of 1974, as amended, authorizes the President to increase tariffs ranging from between 20% to 50% of the tariff rates that were in effect on January 1, 1975. However, if this were to occur, the existing preferential tariffs established under an FTA would likely remain in effect for a certain period of time after the President's decision to withdraw from the agreement in order to give U.S. importers and exporters time to adjust.

3. Status of the Trans Pacific Partnership Agreement (TPP)
The Trans Pacific Partnership Agreement ("TPP"), which included the United States and 11 other countries in the Asia Pacific region (i.e., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam), would have become the largest regional free trade and investment agreement ever negotiated. In February 2016, the United States and the various signatory countries signed the agreement, but each country was required to ratify and implement it into their local laws. During the 2016 presidential campaign, both parties criticized the agreement, and Donald Trump vowed to withdraw from it completely. Consistent with his campaign promises, President Trump issued a Memorandum to the U.S. Trade Representative (USTR) on January 23, 2017, in which he instructed the USTR to notify the parties of the United States' decision to withdraw from the TPP, and to begin bilateral trade negotiations with those countries wherever possible. Thus, the remaining signatory countries may stay in the agreement without the United States, and then begin negotiating bilateral trade agreements separately with the United States.

4. North American Free Trade Agreement (NAFTA)
The NAFTA is, of course, the free trade agreement between the United States, Canada and Mexico which was signed into force by former President Bill Clinton in 1994. The NAFTA eliminated duties on "originating" goods and removed non-tariff barriers on goods and services traded amongst the parties. Section 2205 of the NAFTA provides that the parties may unilaterally withdraw from the NAFTA six months after providing written notice to the other parties, and the agreement would remain in force for the remaining parties. As noted above, the Trade Act of 1974, as amended, authorizes the President to unilaterally withdraw from FTAs such as the NAFTA, and to set higher rates of duties on imported goods without the formal approval of Congress.

During his campaign, President Trump criticized the NAFTA, and vowed to renegotiate the agreement or withdraw from it – it should be noted that President Obama made the very same promise when he was running for President, but never took steps to renegotiate or withdraw from the NAFTA. The NAFTA has been modified by the parties several times since it went into force (e.g., changes in the rules of origin for certain products, modifications made to the dispute resolution processes, liberalized entry rights for certain professional occupations, etc.). It is anticipated that if the United States were to withdraw from the NAFTA and impose higher tariff rates on goods imported from Canada and Mexico, the costs borne by U.S. manufacturers that source Canadian and Mexican raw materials, parts and components would increase – those costs would likely be passed along to U.S. consumers in the prices of the finished goods. In addition, U.S. exporters would likely find that their products would become less competitive in Canadian and Mexican markets given that customers in those countries would be paying higher duties on U.S. goods. Canadian Prime Minister Justin Trudeau recently announced that he is willing to renegotiate the NAFTA, and that trade deals such as the NAFTA should be periodically reviewed to ensure that they continue to provide benefits to the parties. Similarly, Mexico's Foreign Minister, Claudia Ruiz Massieu, recently announced that the Mexican government would also be willing to discuss the NAFTA and how to modernize it, but ruled out renegotiation of the agreement. President Trump is expected to issue an Executive Order on the renegotiation of the NAFTA with Canada and Mexico at any time.

5. Conclusion
As noted above, there has been no formal BAT proposal issued and no Executive Order has been published relating to the commencement of renegotiations of the NAFTA or withdrawal from the NAFTA as of the date of the writing of this article. Even though the United States is formally withdrawing from the TPP, it is likely that new bilateral trade agreement negotiations between the United States and the signatory countries will be initiated in the new future. Therefore, U.S. exporters, importers and retailers should continue monitoring all of these issues and this fluid situation closely.

Melissa Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at

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Tags:  Border Adjustment Tax  NAFTA  Trans Pacific Partnership Agreement (TPP) 

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