Canada should not be too concerned about being the target of a border adjustment tax (BAT) in the Trump administration’s NAFTA renegotiation, according to a new report.
The Nomura Market Research report suggests the likelihood of a BAT being levied against Canada is “relatively low”. Even if it were, a rule-of-origin exemption could save Canada from the full weight of a BAT in the event the U.S. decides to levy one on both its neighbours.
“Canada could avoid being affected by the BAT by seeking a tax exemption for imports from Canada as part of the renegotiation of a trade agreement between both countries,” wrote Charles St-Arnaud, who authored the report. “This would involve the use of rule-of-origin, whereby if goods are proven to be made of inputs from the U.S. and Canada in a proportion above a certain threshold, the goods can be imported into the U.S. tax-free. Such provisions are already in use in many trade agreements, including NAFTA.”
“The issue is whether the U.S. administration would be willing to accept such a clause,” St-Arnaud added, “as it would reduce revenues generated by the BAT as imports from Canada account for a little more than 11 per cent of total U.S. imports.”
While proposing the workaround, St-Arnaud also gave credence to the notion that U.S President Donald Trump’s main target in renegotiating NAFTA is the trade imbalance with Mexico, rather than its partnership with Canada.
“There is much uncertainty about the future of trade relations between Canada and the U.S. following the election of President Trump,” St-Arnaud wrote. “However, with the U.S. administration’s focus mainly on countries with which the U.S. has a trade deficit, we believe Canada is not a target as Canada has a small trade deficit with the U.S. and is also the main customer of U.S. goods and services.”
The proposition of a border tax has lingered since Trump’s Nov. 8 election and strengthened in the lead up to his inauguration with rhetoric promising large scale changes to the longstanding North American trade pact.
A recent C.D. Howe forecast stated that a BAT could shave a full percentage point off Canada’s gross domestic product.
Trump eased some of those concerns in Canada when Prime Minister Justin Trudeau paid his first visit to the White House on Feb. 13. During a joint press conference, Trump admitted that his country’s trade issues with Canada were “much less severe” than those between the U.S. and Mexico, and that trade agreements with Canada would only require “tweaking”.
Ultimately, St-Arnaud concludes, instituting a BAT may be too complicated for the Trump administration.
“While the introduction of a BAT cannot be ruled out, our U.S. economists view the likelihood of a BAT being approved by the Senate as relatively low,” he wrote. “Such an outcome has also been hinted at by President Trump, when he said that he finds a BAT to be too complicated.”
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