Canada would be among the countries most exposed to a possible new U.S. border tax, according to a new report from Fitch Ratings Inc.
The credit-rating agency warns that the proposed introduction of a border adjustment tax (BAT) in the U.S. “could have sizeable adverse spill-overs to other countries,” such as hurting current account balances and gross domestic product (GDP) growth for major exporters to the U.S. (including Canada); raising the cost of U.S. dollar-denominated debt in emerging markets; and harming foreign investment flows.
The proposals that House Republicans have put forth “would shake up the global tax system, with major implications not just for the U.S., but also for the rest of the world,” the Fitch report states.
For example, the U.S. dollar would “appreciate markedly” if the tax is adopted and this would be key to knock-on effects in the rest of the world, the report notes.
“Foreign exporters would lose cost competitiveness in the U.S. unless the U.S. dollar fully appreciated to offset the impact of the BAT on import costs,” which would harm exports to the U.S. and GDP growth in these countries, the report explains, adding that that Mexico and Canada are the most exposed to this effect.
In addition, countries with significant U.S. dollar-denominated debt on their balance sheets would be impacted, Fitch predicts. The report estimates that Argentina, Turkey, Brazil and Indonesia have the highest proportion of U.S. dollar-denominated debt among large emerging markets. Furthermore, Fitch adds that China’s policy response “could have repercussions and spill-overs to third countries” as well.
Nevertheless, Fitch is unclear whether the proposals will be able to pass into law as they face opposition in the Senate and “the White House has so far been largely non-committal.”
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