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Economy in Brief

US Tariff War: US Will End Up Taxing Its Own
by Joseph G. Carson ([email protected])  July 16, 2018

President Trump has stated “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.” The problem with that statement is that foreign trade is no longer an aggregate measure of what US companies sell overseas versus what foreign companies sell to the US.

Today, foreign trade is a complex web of production and distribution platforms with multinational companies shipping goods to and from their parent and foreign affiliates, as well as trading with firms with no ownership-affiliation. US multinational companies are heavily invested in the global trading system so much so that the US tariff war will tax US companies almost as much as foreign companies.

Conventional foreign trade statistics are based on a simple framework of netting what a country sales to overseas customers versus what it buys from foreign companies. Foreign trade statistics make no adjustment for the residency of firms. That means transactions between a parent and an affiliate will be treated as sale between a resident and non-resident.

For example, the standard way of measuring global trade flows shows that in 2016 that the US recorded a trade deficit in goods and services of $502 billion (which includes the $750 deficit in goods). However, traditional trade statistics mask the global operations of multinational firms and intra-company transactions that dominate trade flows. In fact, official statistics show that trade with US multinational and affiliates account for over 55% of exports of goods and nearly 45% of merchandise imports.

The Bureau of Economic Analysis has developed an ownership-based framework in order to capture intra-company transactions along with direct investment income results from production of goods and services by affiliates. Simply stated, the ownership-based framework is an attempt to show global trade flows of American-based companies and foreign-owned enterprises regardless of their location.

In 2016, the ownership-based measure of US trade showed a deficit of $246 billion, half as much as the reported trade deficit. The much smaller trade deficit reflects the fact that the US multinational companies generate much more income and sales from their foreign affiliates than foreign enterprises do, and over a third of US owned foreign affiliate sales are directed toward the US.

The changing pattern of global trade shows that US multinational firms have much to lose from a trade war. In fact, any attempt to improve US trade position by enacting tariffs on foreign products will find many US companies on the wrong side of the fence. As designed, the Trump administration tariff policy is poorly constructive and one of the unintended consequences is that it will actually tax the products of US firms. Hard to see how the US wins a tariff war when ends up hurting its own.

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