By Susan Kohn Ross on 23 February, 2017

New Border Taxes - Headache or Opportunity?

By Susan Kohn Ross
Susan Kohn Ross is a partner at Mitchell Silberberg & Knupp (MSK) where she Chairs the International Trade Practice Group. Ms. Ross is also Chair of MSK’s Cybersecurity and Privacy Protection Practice Group.
What do you see as the greatest opportunities and risks for trade in 2017 during this period of change and uncertainty in the US?

There has been a lot of discussion about change in trade policy recently, and there’s a great deal of concern this change will happen quickly. But in reality, the bulk of what is in the various trade agreements to which the US is a part of are in the law, which means Congress will have to act. There may be a change in the form of tax policy, for example with the border tax and border-adjustment tax that are being discussed.

"consumers prioritize quality and cost over a product’s country of origin"

Traditional opportunities for trade still exist because a lot of countries still want American products, and Americans still want imported products. Over the years, we’ve learned consumers prioritize quality and cost over a product’s country of origin, and this is unlikely to change. The angst that exists is a result of uncertainty more than anything else.

What would the border tax being discussed look like for a medium-sized company?

The border tax refers to the conversation about a 20 percent tax on all goods coming to the US from Mexico. There are legitimate questions as to whether this could ever pass muster legally, but assuming it does, it would increase the rate of duty paid at the time of importation for goods coming from Mexico. One of the unanswered questions pertains to maquila operations or dual plant operations, wherein a part may cross the border multiple times for various parts of the manufacturing process.

There is also what Republican House leadership is calling the border-adjustment tax. In its simplest terms, it means that if you import, there are more taxes you will pay than if you export. If you make a product in the US and export to Mexico, you will not pay tax on your profit, and you will be able to deduct the cost of manufacturing the product. Whereas if you import something and make it into a product in the US, you cannot deduct the labor and other overhead costs associated with making it. A lack of tangible details on this topic makes it very difficult to do any planning, which is why so many people are uncomfortable with the current situation.

Is there anything in the border-adjustment tax that looks and feels like a good idea in practice?

The answer there depends on whether you believe a border-adjustment tax will do what it is intended to do, reduce the taxable percentage that corporations pay. Which can be as high as 39 percent, down to the promised 20 percent. If you believe this will translate into a stronger dollar with higher demand for American goods overseas, then you probably think it’s a wonderful idea. This concept has existed for a very long time. Personally, and I’m not an economist, I don’t think it will work out that well. If you do believe in supply-side economics, however, you’ll think it’s the greatest thing since sliced bread.

This sounds like a complicated situation that would involve a great deal of paperwork and have a lot of room for mistakes. Are there similar schemes already on the books that importers and exporters have to deal with today?

When I pick up a legal newspaper, the single biggest complaint in-house counsel has is the huge cost of regulatory compliance. This is true across tax, trade, anticorruption, food safety, drug and medical devices, and other sectors. When things are this complicated, there is a lot of room for mistakes, as well as mountains of paperwork that must be maintained. Things are also open to interpretation when this happens. If this is going to work, it needs to be relatively straightforward to enforce.

What is your sense as to whether this is political theatre versus being serious?

It’s difficult to have a conversation with someone who says “free trade agreements are bad”, without that person identifying aspects of a trade agreement that don’t achieve its intended purpose. If you’re going to have a discussion that says “we’re going to reform X”, you have to be able to talk about what is wrong with X.

When NAFTA was being negotiated, I told one of our lead negotiators they just created the “Lawyer Full Employment Act” because of the complexity of the rules. Making things more user-friendly and reducing the costs of compliance doesn’t necessarily mean you oversimplify things or remove the consequences of noncompliance, but you make them understandable. And right now, they are not.

Can you identify aspects of NAFTA that could potentially be renegotiated with positive results?

There is a common misconception there have not been ongoing discussions between the US, Canada, and Mexico about changes to NAFTA. In reality, each country has tabled a list of proposals, and the three haven’t been able to reach a political consensus to make any changes. I’m sure there are rules of origin that need to be changed, such as for the electronics industry. Rules of origin for digital goods will also be important. One of the benefits of the TPP was the specific provisions about small and medium-sized enterprises. All three countries have complex rules regarding imports and classification of goods, which need to be simplified. To say nothing of border security and immigration issues, dealing with drugs coming into the US from Mexico is another serious issue. Additionally, Mexico and Canada recently announced they would back each other up in potential negotiations, so we won’t end up with two different sets of rules for Mexico and Canada if NAFTA remains intact.

“When things are this complicated, there is a lot of room for mistakes”

What are the chances China offers RCEP membership to Canada and Mexico?

If you didn’t expect China to reach out to these countries, you haven’t been paying attention. If NAFTA blows up because we aren’t smart about how we conduct ourselves, it’s much more likely that Canada and Mexico are invited to RCEP than if there was a serious discussion. The Chinese would be smart to invite them, because by walking away from the TPP, the US has handed leadership in Asia over to the Chinese.

Can you explain how investing in Canada or Mexico creates opportunities via their trade agreements with other countries?

Many US companies have operations in either Canada or Mexico, or both. Not just because of NAFTA, but because both of those countries have trade agreements with other countries. In fact, Mexico has more trade agreements than the US. All three countries now make the text of their trade agreements available [US, Canada, Mexico] so it becomes relatively simple for an American company with an operation in Canada to understand how to utilize Canada’s trade agreement with the EU, for example.

In your experience, do companies seeking a smart operational footprint take advantage of this?

It generally depends on the size of the company. Large companies have the staff to figure this out. Small and medium-sized companies have more of a challenge. The long and short of it is it depends on what your resources are. As much as the United States government tries to provide resources, it is just not able to do it at a broad enough level to help individual American companies. That is, unless they go through a program you pay for, which many small companies are not willing to do for various reasons.

What do you see as the view from Washington as far as trade opportunities and the trade landscape? There are lots of localization discussions, issues around labor and manufacturing, and technology trends springing up. There’s a budding friendship between President Trump and Prime Minister Abe. What kind of advice are you giving to the people around you?

The most intriguing potential relationship is the one with Russia, with what may or may not happen with sanctions, etc. There are some countries that are higher risk than others in terms of expanding into them. The Philippines is clearly a potential issue. Russia is already dicey and could get worse. The Middle East is catastrophic in terms of the amount of displacement going on. If you’re looking for expansion opportunities, they exist in many countries in Southeast Asia, such as Vietnam, Laos, and Cambodia. Malaysia and Singapore are considered to be stable places, and have been for a long time. Europe largely reflects continuity, with upcoming elections in France and Italy, but Western Europe is generally stable, although Italy is a little dicey. Also, parts of Africa are much more sophisticated and promising than most people realize. The same is also true in South and Central America. That said, you run the risk of running afoul of the corruption problem and a lack of openness in both places. Obviously, you always have to do your homework on issues like workforce capability, training, and equipment. It’s understandable for companies to want to hunker down and stay on the sidelines given the uncertainty that exists, but there is still plenty of opportunity out there.

What does 2017 look like for you and the National District Export Council?

The National District Export Council is trying to figure out how best to partner with the Trump Administration to advance its priorities once they’re clearly articulated. In advance of that, we are providing the transition team and administration officials with whatever relevant information we can. I’ve been doing this a long time, and I think 2017 is going to be a truly interesting year.

Topics: GetGlobal Guide, Cybersecurity, border-adjustment tax, Legal, Cross-Border, Security

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