by Melissa Proctor, Polsinelli, P.C.
July ushered in significant new developments on the international trade front involving the controversial proposed Border Adjustment Tax and the renegotiation of the North American Free Trade Agreement (NAFTA). U.S. companies with international supply chains are urged to stay abreast of these new developments as they arise, assess how proposed changes to the NAFTA may impact their operations, and voice their interests to ensure that they are considered by key decision-makers and protected.
1. The Proposed Border Adjustment Tax Has Been Shelved
On July 27, 2017, House Speaker Paul Ryan (R-Wis.) announced that the previously proposed Border Adjustment Tax (BAT) would not be included in the upcoming House tax reform effort. The announcement, which was made by way of a joint statement issued by Speaker Ryan, Treasury Secretary Mnuchin, Senate Majority Leader McConnell (R-Ky.), Senate Finance Committee Chairman Hatch (R-Utah), House Ways and Means Committee Chairman Brady (R-Texas) and National Economic Council Director Cohn, stated that –
While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform.
By way of background, the concept of a BAT was originally rolled out in June 2016 in the House Republicans' "A Better Way" publication (otherwise known as "the Blueprint"), which was intended as a means to encourage companies to manufacture their products in the United States. Generally, under a BAT scenario, the corporate income tax would not be assessed on worldwide income; rather, a U.S. company would pay the tax based on its domestic revenues minus its domestic costs – thus, the tax would be calculated on the place of production and sale of the goods (i.e., the destination). Both foreign and domestically produced products would be taxed, and the costs associated with any imported goods or supplies used in sales in the U.S. would no longer be deductive. At the same time, the BAT would not be levied on export sales at all.
Although only murky details were released about the BAT, it was speculated that a BAT could have increased taxes by almost 20% on goods imported into the United States, while offering significant tax incentives to U.S. companies supplying goods to overseas markets. Many in the trade industry also believed that the implementation of a BAT would likely be challenged by other WTO member countries as a prohibited subsidy under the rules of the General Agreement on Tariffs and Trade (GATT). Many industry sectors dependent on imports voiced their opposition to the BAT, including the textile apparel, footwear, computer and automobile industries whose supply chains depend on imports of raw materials and finished goods. The BAT proposal was also opposed by many in Congress, as well; thus, the decision to abandon the controversial BAT will also likely make it somewhat easier for Congress and the Trump Administration to move forward with an overhaul of the tax code.
2. The Renegotiation of the NAFTA May Launch in Mid-August
A recent U.S. Trade Representative (USTR) news release stated that the NAFTA renegotiation is planned to commence between August 16th and 20th, and it has been reported that there will be seven rounds of talks which will be held every three weeks in order to conclude the process before Mexico's 2018 presidential elections.
Previously, on July 17, 2017, the USTR published its specific objectives for the renegotiation of the North American Free Trade Agreement (NAFTA) as required by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015. Acknowledging that the NAFTA, since its entry into force in 1994, has linked the continent through trade and provided new market access opportunities for American farmers and ranchers, the USTR nonetheless stated that the NAFTA has also created new problems for many American workers. The USTR requested public comments from interested parties with regard to the modernization of the NAFTA, and held a public hearing at the International Trade Commission. The USTR received more than 12,000 written responses and heard the testimony of more than 140 witnesses during the hearing, representing various industry sectors. The majority of comments that were submitted, as well as the testimony presented, reflected U.S. industries' support of the NAFTA because of increased U.S. exports to Mexico and Canada since 1994. They also urged that negotiations should not jeopardize existing market access gains and that the key negotiating principle should be, "Do No Harm" as suggested previously by USTR Lighthizer during his testimony before a House of Representatives Committee in June.
The USTR stated that its overall goals will be to break down barriers to American exports through the elimination of unfair subsidies, market-distorting practices by state-owned enterprises, and burdensome restrictions of intellectual property. The USTR also intends to work to modernize the NAFTA, address America's trade imbalances in North America, and ensure that the United States obtains more open, equitable, secure, and reciprocal market access. The stated objectives reflect many (though not all) of the items on the wish lists of various U.S. industry sectors, as offered in the public comments and testimony provided to the USTR. Even though the USTR would maintain existing reciprocal duty-free market access for trade in goods (including agricultural products), there was no specific mention of the application of the "do no harm" principle for the jobs, businesses and industries that currently depend upon that trade with Canada and Mexico. Many industry sectors urged the Administration to maintain current NAFTA benefits and to avoid disrupting the demand for U.S. exports. U.S. exporters, importers and retailers should continue monitoring the NAFTA renegotiation 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 email@example.com.
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