Border adjustability will affect imports and exports

Border adjustability in the House Ways and Means Republicans’ destination-based cash-flow tax reform proposal will not result in an immediate and full offsetting exchange rate change as recently claimed by Martin Feldstein, significantly increasing the value of the US dollar relative to foreign currencies.  As noted in the January 6, 2017 blog, Feldstein made a different argument in 1990. 

Alan Viard has made a persuasive case that border adjustability will not permanently change the trade balance, given the assumption that the present value of imports and exports must balance over the life of a country!  However, in the near term, Alan notes that a new and/or non-comprehensive border-adjusted tax can cause sectorial changes discouraging some imports and encouraging some exports.  The magnitude and distribution of those changes need more analysis rather than assuming they won't happen. 

Alan also emphasizes that an increase in the US dollar will have a significant transition effect reducing the value of Americans’ holdings of foreign assets.  That wealth effect would reduce the well-being of American households and should also be subject to additional analysis. Both the trade and wealth effects may be offset by other advantages of the proposed tax reform, but should be explicitly considered by our policymakers.

Tom Neubig