Proposed US tax might upset Asian exports: Report

The US market commands about 30% of India's total exports in the textile and apparel sector

Donald Trump recently became America's president after promising to reduce the country’s trade deficit and increase jobs. A 'Border Adjustment Tax' (BAT), which taxes imports and incentivises outbound trade has gained credence among the nation's lawmakers as a measure to this end.

A report by financial services firm Credit Suisse suggests this would have grave implications for Asian economies which have heavily depended on exports to fuel development.

Under a BAT, companies that import goods for sale in the United States would be taxed on those imports and wouldn’t be able to write off the cost of the imports as a business expense. Those that exported American goods for sale abroad would be exempt.

Currently, US corporations are taxed on their worldwide profits at 35% but the proposed BAT would change that. It would tax domestic revenue (minus domestic costs) at a much lower rate of 20%. The net effect would favour exports over imports.

The immediate implication would be a drop in exports from Asian nations, a majority of which have export-driven economies. The report calculates that in a scenario of no or limited change in the price of the dollar, US import prices could rise as much as 25%, resulting in Asian exports declining three to 4% in aggregate.

India is better positioned in this regard, partly because the country's export products are less price-elastic. This means demand for its goods is less sensitive to changes in import prices. Diamond jewellery, pharmaceutical products and mineral fuels are among the highest exports to the US. 

The report estimates the brunt would be borne by Vietnam, Taiwan, Korea and Malaysia, as their export product mix has higher price-elasticity.

A subsequent fall in gross domestic product (GDP) might also spare India. The report suggests the subsequent fall in the region’s GDP would be around 0.5%. The major impact, it says, will come from the potential decline in computer and electronic exports to the US, which have relatively higher sensitivity to import price changes. The report considers only the first-round impact but warns that potential improvement in the competitiveness of US exports could add to downward pressure on Asian exports. 

Again, among the nations looked at, India scores the least in terms of any negative impact. Electronic products, textiles and machinery exports would be hit hard. The major impact, the report says, will come from the potential decline in computer and electronic exports to the US, which have relatively higher sensitivity to import price changes. For India, textile and apparel sector exports might be hit, which was a little more than $7 billion in 2014-15. The US market commands about 30% of India’s total exports in the sector.

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