Position:  CPA supports exploration and pursuit of all available options to deter and neutralize border-adjusted value-added taxes implemented by other countries with whom the U.S. trades. These options include instituting a US VAT system, renegotiating the WTO agreement, and prohibiting border adjustments by either party in trade agreements.

Underlying CPA Principle:  Economic Regulation - CPA supports the right of all countries to transparently regulate their currency, tax regimes and domestic policies in a nondiscriminatory manner. We also support the right of countries to respond appropriately to trading partner policies that distort trade.

Problem:  Trade agreements have caused the U.S. and foreign countries to reduce tariffs and subsidies.  The U.S. did so, but other countries did not, because they shifted the export subsidies and import tariffs into a border adjustable tax system.   The economic result is the same, with only a name change. 

Most countries rebate taxes when their companies export goods.  This is an export subsidy.  Most countries assess the full tax load upon imports.  This is an import tariff.  The U.S. cannot do either. 

The reason is that most other countries have a value added tax (VAT) system, while the U.S. has an income tax system.  The WTO agreement allows the tax rebates and assessments when a country has a VAT, which are border adjustable to act as import tariffs and export subsidies.  The WTO agreement does not allow the tax rebates and assessments when a country has an income tax system, like the U.S.  In other words, if the U.S. rebates its tax load upon export, the action is WTO illegal.  If the U.S. assesses its tax load upon imports, the action is WTO illegal.

The average BAT level is 17.7 percent for OECD (Organization for Economic Co-operation and Development) members.  This means that U.S. goods are charged a 17.7 percent tariff when selling to another country, and those countries’ exporters receive a 17.7 percent export subsidy when selling to the U.S. 

Stated another way, a $100 U.S. product is charged an extra $17 upon entering China’s border (because China has a 17% VAT).  A $100 Chinese product is rebated $17 upon export to the U.S., so its export price is $83. The U.S. is alone with this very substantial, government imposed disadvantage.

Solution Rationale: CPA believes BAT’s are second only to currency manipulation as a root cause of America’s trade deficit.  It is an economy wide, double-digit disadvantage for the U.S., rigidly memorialized in the WTO agreement.  The gross dollar value of the problem is immense. 

Solutions include these:

1.              Implement a U.S. VAT System: U.S. implementation of a value added tax would enable WTO-legal neutralization of other countries’ BATs.  Much debate has occurred about the propriety of an income tax system versus a VAT.  There is much concern about potential detrimental impacts on agriculture if a U.S. VAT were not implemented properly.  Many of the policy benefits of an income tax system could be included in a VAT system, such as progressivity and policy-based tax exemptions or rebates.  There are many economic reasons to consider a VAT which should be explored.  Revenues generated by a U.S. VAT should be used to reduce individual and corporate taxes, offset healthcare costs, and reward savings and investment.  Seeking to reform the U.S. tax code to neutralize hidden tariffs imposed by other countries because of our current WTO rules illustrates the inadequacies of our current trade agreements.  However, until the U.S. Congress recognizes the severe competitive disadvantage foreign BATs impose on U.S. manufacturers and producers, CPA would support consideration of this solution.

2.              Countervailing Duties for BAT:  Legislation has been proposed to impose countervailing duties to neutralize the BATs. The consequences of implementing this legislation are that other countries could increase tariffs against the U.S. and remain WTO compliant. CPA would, however, support consideration of this solution.

3.              Withdraw from the WTO.  This solution is not politically popular in Washington, DC, though we feel the voters would likely be supportive. Many of the assumed benefits of the WTO are not backed by data.  Withdrawal from the WTO is not anti-trade, because trade would continue.  But the U.S. would then rely upon bilateral agreements and domestic trade laws to conduct trade policy.  CPA would support consideration of this solution.