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What the Devil won't tell you

Border tax ideas could hit Arizona businesses where they live

Wall at center of ideas that could touch off trade war, with billions at stake locally

During his first full week in office, President Donald Trump's spokesman floated the idea of a 20 percent tariff to extract the cost of the wall for an uncooperative Mexico. The press and economists lost their collective “stuff” over the idea as a straight up tax on U.S. consumers.

Spicer wasn't just talking about a tariff on Mexico but the whole Republican tax plan, pushed by House Speaker Paul Ryan. It includes a corporate tax cut that multinational exporters eye like it's a hot fudge sundae, even if it's likely illegal under the Global Agreement on Tariffs and Trade.

Trump has wanted a more direct border tax on certain products he wants built in the U.S., but the "border adjusted tax" would solve the new president's problem of how to get Mexico to pay for the wall without the direct hit to consumers a tariff would create.

But importers, the Koch Brothers and other conservatives don't like the proposal at all. The big variable will be talk radio (we always forget about them) — and if the tax is how Trump can say he forced Mexico to pay for the wall, then all bets are off.

The Koch Brothers don't own the GOP anymore. Trump, Breitbart News and Rush Limbaugh hold the deed to the party now, and if they decide to embrace the border adjusted tax to pay for the wall, that wall now looks like it could be the 21st century's version of Archduke Ferdinand.

A look at what's really happening shows two safeguards prevent the border dispute from starting Trade War I: Establishment Republicans beating the populists; Mexico rejecting nationalism: and Trump taking rebuke with grace and obedience.

Forgive me if I don't flash back to the day in 2005 when I was checking out the housing market and realized by checking out the tax bills on the bottom of listings just how inflated the local real estate market had become. My friends in the industry told me “it's fine. It's just interest rates. Don't worry....”

Both Ryan's generalities and Trump's vague ideas could touch off a global exchange of fire; in at the very least a trade “police action.” Southern Arizona's economic future now rolls through Washington, D.C., the Federal District of Mexico and Geneva, Switzerland.

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Let's start with things at home and look south.

Greece, UK, Ohio, Oaxaca ...

Three things are absolutely clear after Trump's first week in office. He wants to reset America's $530 billion trade relationship with Mexico, Mexico is refusing, and this bit of campaign rhetoric now clogs the whole relationship with Arizona's most important trading partner.

In Arizona, the problem is that Trump is fixing a problem that doesn't exist. Arizona enjoys a trade surplus on our $16 billion import-export business with Mexico. And Tucson's economic leaders have decided to pivot to Mexico, tying the region's economic future to the the fastest-growing middle-class economy in the world: our neighbors to the south.

Mexicans visiting Pima County alone spend $1 billion per year – and that's an old figure, not updated since 2008. Considering exports from Mexico increased 46 percent in the years between 2012 and 2015, that billion could be substantially higher today.

Tucson's economic future runs through Washington and, perhaps, Geneva, Switzerland. So much for turning power out of D.C. and back to the people.

Trump wants to strong-arm Mexico into renegotiating NAFTA and look like the tough guy doing it. Mexico is supposed to bend to Trump's will, I guess, because the whole prospect of a trade war is so much worse for them than it is for America.

Trump therefor can put a gun to Mexico's head and say: “Your hands are tied. You are powerless. Abandon your out-dated nationalism. We have assumed control.”

That argument worked so well in Athens, Greece, and Cornwall, UK … and Ohio, U.S.A.

We in Tucson should be more than a little alarmed that our economic footing rests on the underlying assumptions that Mexico will bend to globalism. We could be forgiven for absolutely freaking out at the prospect that Trump might have to do the same but let's not get to Switzerland just yet.

We gotta go to Washington next to untie the idea of a border tariff from the broader tax plan.

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The Ryan-Brady tax plan is owned by the speaker of the House and chairman of the Ways and Means Committee – the U.S. House of Representatives' two most powerful players in tax law. It isn't as easy to pop as a Spicer test balloon. This tax could have a big effect on business in Arizona and Tucson.

A tariff to pay for the wall would just mean U.S. consumers would pay for the wall. That's economic arithmetic. Walgreens doesn't pay the sales tax on a pack of condoms. Mexico wouldn't pay your tariff.

The destination-based cashflow tax is a completely different idea. It's calculus. Economists who tell you consumers pay for tariffs will tell you this tax is not a tariff.

The idea is simple enough. Encourage exports. Discourage imports. Tax the latter and not the former.

It works like this:

  • Tax corporations at 20 percent on domestic sales
  • No tax on exports
  • Imports companies bring in to produce their product are no longer tax deductible as a business operating cost

Let the predicted result — a rising dollar (the calculus part) — ease the burden on importers.

Let's look at it in practical terms.

Say Apple has a billion dollars in profits overseas, it can bring them back without any tax. If you run a business importing Mexican goods in Tucson, you just saw the tax of your purchases no longer recognized as a business expense by the U.S. tax code. It's taxed at 20 percent.

But discouraging imports throws monkeywrench in exports.

In fact, 40 percent of imports from Mexico include parts exported to Mexico.

Arizona's number one import is aircraft. Arizona's number one export is … aircraft. That's how trade works today. You import an old legacy jetliner, refurbish it at a place like Tucson's own Ascent Aviation and then sell it internationally, tax-free but the tax was already incurred through the import.

Tourism is acts like an import and export. Money comes to Tucson from elsewhere but the people themselves have to be brought here like an import, spending like an export.

Steve Forbes was categorical in his assessment of the Ryan-Brady tax idea: “One tax initiative that should be strangled before it sees the light of day is to give a tax rebate to exporters and to impose taxes on imports. …It’s a bad idea. Why do we want to make American consumers pay more for products while subsidizing foreign buyers?”

If it helps President Trump pay for the wall, that may be good enough reason for him. 

You say tomato, I say tariff

So that's a tariff, right? Are you an economist or an international law court judge?

Economists say the tax destination-based tax would increase the strength of the dollar, so no, it's not technically a tariff.

See, U.S. companies cutting back on imports sucks the supply of dollars out of the world markets but there's an increased demand for U.S. dollars to pay for American goods with the increasing exports. So the dollar rises. Importers, therefor, pay higher taxes but their stronger dollar buys more goods to cover the cost of taxes.

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Right now, if you run an import business or depend on imports you are stammering out “but, but, but ...”

What does a stronger dollar mean to tourism? What if something else happens to whack the value of the dollar? If the goal is to increase exports and cut imports, why the hell would we think “it being a wash” encourages anything at all? And what if economists are wrong about the dollar?

The pros at Goldman Sachs, for instance call, that wishful thinking because the global currency exchange rates depend on a whole lot more than the U.S. corporate tax scheme. Any dip in the dollar's strength would absolutely hammer companies reliant on imports. Then it would become a tariff.

'On the Lake Geneva shoreline ...'

A judge at the WTO in Geneva would see the tax as an illegal tariff, putting us on a war footing with the 123 countries who singed onto GATT and are otherwise prohibited from imposing illegal tariffs on U.S. products. Even the taxes supporters concede this point.

Conservative economist Daniel Mitchell, who writes a pretty interesting piece about it in Forbes, had one major caveat.

“If the plan is adopted, it will be challenged. And if it is challenged, it presumably will be rejected by the WTO (on the Lake Geneva shoreline). At that point, we would be in uncharted territory.

Would that force the folks in Washington to entirely rewrite the tax system? Would they be more surgical and just repeal border adjustability? Would they ignore the WTO, which would give other nations the right to impose tariffs on American exports?”

I know when I think “Donald Trump,” I think “surgical response.”

For reals?

If Trump did brain surgery, he'd beat you on the head with a dull rock until he got bored.

And we also know how much the new president loves being told he's wrong. He really can't get enough of it and has nothing but praise for his critics.

Just because this isn't quite frightening enough, Congress long ago gave presidents the right to unilaterally impose all sorts of tariffs all by his lonesome. So he can just launch a trade war unilaterally on any or all of those GATT countries who decide they can suddenly retaliate against the U.S.

Back in Tucson

Trump's reaction to Mexico telling him to pound sand because they won't pay for his wall hasn't been encouraging. He let the rebuke scuttle planned talks with Mexican President Enrique Peña Nieto.

In 2015, Arizona imported $7.6 billion in goods Mexico and exported $9.1 billion to Mexico. That's right. Let's put the Arizona-Mexico relationship into context. International trade makes up one-sixth of Arizona's economy. We import from Mexico at a rate three times our second-biggest trading partner, China, but Arizona exports to Mexico at four times that of our second biggest trading partner, Canada.

Trump's rhetoric and actions have hammered the peso. We know this. We also know that means Mexican companies can afford fewer American products. So, Arizona's number one trading customer can suddenly afford fewer American goods. Trump is already hurting this corner of the economy and he's doing it over rhetoric.

The last thing foes of illegal immigration should want is Mexico's economy sinking with its currency.

To understand Mexico's impact on Tucson's economy, all we have to do is some late Christmas shopping in brick-and-mortar stores. We find a lot more Sonora plates in the parking lot and hear a lot more Spanish spoken than we do on Oct. 21.

Tucson, see, is in a 75-mile trade zone where Mexican nationals can come shop, dine and stay without an extended visa. It's one advantage we have here over Phoenix and Phoenix wants that zone extended to include it (good with that luck now).

Let's drill down to the micro-level. La Encantada in Tucson, reported 20 percent of its sales are from Mexican nationals. They can track this – by the way because I covered the La Encantada fight with Pima County back in the day – following credit card information. The reason Westcor Development built the mall in the Catalina Foothills was that it tracked those credit card receipts and a third of Scottsdale's Fashion Square sales came from the Foothills. So 20 percent is a big deal.

Wouldn't it be nice if tariffs worked?

Look, some of us to the Left of The Right would love nothing more than for a tariff to be easy. Unions love them. They seem like a quick and easy way to turn back time and jack up wages to restore the middle class to its former glory.

Trade is a great bogeyman. We know when our job was axed and our factory was rebuilt in Mexico. We don't see trade's benefits unless it walks up to us and says “hi” (or “hola” as the case may be).

It's said we campaign in poetry and govern in prose. No. We campaign in applause lines and govern in reality. If we don't, the world gets hinky in a hurry. But politicians, the press and social media have enabled citizens to vote in a fantasy world where soundbites and tweets can fix everything.

Putting America first is well and good but expecting every other capital in the world to do the same betrays an ignorance that could only lead to disaster.

How willing are Arizonans to lose their jobs over a symbol?

Blake Morlock covered Arizona government and politics for 15 years, including 11 in the Tucson Citizen. He also worked on Democratic Party campaigns in the field of political communications. Now he’s telling you things that the Devil won’t.


TucsonSentinel.com's original reporting and curation of border and immigration news is generously supported in part by a grant from the Ethics and Excellence in Journalism Foundation.

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