National Interest

by Milton Ezrati

    The Trump White House, even if stymied in the courts, will look for other tools to expand the room to maneuver in trade negotiations.

    Arguments on Donald Trump’s tariffs before the Supreme Court begin next month. Hopefully, a decision will follow quickly. At the moment, it is a fool’s game to guess how the court will find.

    One thing, however, is clear: anything short of free rein for the White House will interfere with President Donald Trump’s trade strategy, not because he is wedded to a particular tariff structure, but rather because he has used his apparent freedom to maneuver as a negotiating tool. If it turns out that he has to go to Congress to impose trade restrictions, that ability will evanesce.

    If he loses, Trump will no doubt complain loudly. Still, as his past behavior shows, he will also pivot quickly to an alternative way to achieve his presumed goal of shrinking the country’s trade deficit and strengthening domestic production. One of those alternatives might well use a new tax policy.

    Trump’s recently settled agreement with the European Union (EU) illustrates both his preference for flexibility and why alternative tax policies might serve his ends should the court decide against him.

    He began his term by unsettling all US trading partners with tariffs on Mexico and Canada, despite an already existing treaty. He quickly followed that announcement with tariffs on all imports of steel, aluminum and copper. In April, on “liberation day,” President Trump placed 20 percent tariffs on all other EU products. In May, he raised the threatened levies to 50 percent, but in July, he lowered them to 30 percent.

    During this time, he decried Europe’s use of value-added taxes (VATs)—a tax on the value added at each level of production and a major source of revenue for European governments—as a kind of tariff. He argued, with some justice, that since European producers are exempt from the tax when they sell abroad but American producers must pay it when they sell into Europe, the VAT had the same impact as a trade-based levy.

    For all this extreme behavior, the final deal was rather moderate. It established 15 percent tariffs on EU imports, except for steel, aluminum and copper, which remained at 50 percent. It included commitments by both the EU and the United States to invest more in each other’s businesses, though more from Europe than to Europe.

    It also included the EU’s commitment to buy American energy and American-made military equipment. The agreement was perceived as heavily favoring US over European interests. Nonetheless, it ignored any offset to Europe’s VAT. At an average level of 21–22 percent, it was not a small consideration and made the final deal much less one-sided than it appeared on the surface.

    Clearly, Trump never had much preference for any one of the three tariff levels he threatened in the months leading up to the deal, much less his threat to even the trade landscape for Europe’s VAT. All the bluster and frightening threats of the year’s opening months supported something much less extreme. Should the Supreme Court deny Trump the kind of flexibility he craves, his White House won’t give up. Instead, it will search for alternatives, one of which might harness the trade effects of a VAT.

    Of course, Washington cannot adopt a VAT because it would affect the domestic American consumer much like a sales tax; any movement in this direction by Washington would face immediate and powerful opposition from the 50 states, which rely on sales taxes as a major source of revenue. Instead, the White House could seek a destination-based tax, relieving any American producer who sells abroad and imposing the tax on any foreign producer selling into the United States.

    The White House would have to go to Congress for such a tax, which could take away much of the flexibility that Trump has enjoyed to date. But Congress could reintroduce maneuvering room for him by writing into the law executive discretion on the application of the tax, depending on the nature of the product or the country of origin, say, on national security grounds or on a flexible formula based on the severity of America’s trade deficit on a particular product or with a particular trading partner.

    President Trump, obviously, would prefer the extreme flexibility he has enjoyed to date. He also has shown, however, that he is flexible enough to pivot quickly to alternatives should the Supreme Court rule against him or otherwise constrain his tariff policies and tactics. A destination-based tax could be one alternative, though this White House is quite capable of finding others.