We hear all the time that exports are “good” and should be increased, while imports are “bad” and should be discouraged. But imports aren’t a necessary evil for the US economy, rather they’re an important and necessary ingredient for greater exports and more economic prosperity.
America’s economy and job market, and the country’s overall standard of living, are enhanced and strengthened by trading with the rest of the world.
This paper explains the prediction that the dollar will rise significantly in reaction to border adjustment and reviews criticisms of this prediction.
Today’s quotation is from Henry Hazlitt’s 1946 book Economics in One Lesson.
Economists typically predict the dollar would rise in value by as much as 25% in response to the border adjustment. That would make imports cheaper and offset the tax change. So we’re good. But what works on a blackboard or in a computer model might not work exactly the same way in the wild.
Catching all the attention is the fact that imports would be subject to a 20% tax and exports would enjoy a 20% tax subsidy. But a key piece of this policy is missing, and this will have important economic and budgetary consequences.
When the dollar appreciates significantly, as it is expected to do when border adjustment kicks in, the economic calculus underlying immigration decisions changes. Selling your labor in the US becomes more attractive.
This from NY Fed boss William Dudley, via MarketWatch: “New York Fed President William Dudley on Tuesday said he’s wary of the border-adjustment provision contained in the House Republican tax plan.”
In anticipation of this sizable permanent change in the exchange rate, people will purchase dollars. As a consequence, the dollar will appreciate before border adjustment is implemented or even enacted. Such an anticipatory appreciation will affect trade flows.
If your line of business is illicit, you typically do not pay certain taxes – and that includes import taxes. What changes for you instead is that the gap between your sales price and the price you pay for whatever you import increases.