Washington Insider-- Tuesday

Border Adjustment Proposal

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

China Files WTO Consultation Request on Antidumping Calculations

China has notified the WTO it has requested dispute consultations with the U.S. and the European Union (EU) regarding special calculation methodologies used by the U.S. and EU in anti-dumping proceedings, according to the WTO, a move that was widely expected.

The request for consultations is the initial step in a process that could result in a dispute settlement panel being established to decide on the matter. The consultations are to give the parties involved the opportunity to discuss the matter and find a satisfactory solution without elevating the matter to a dispute settlement panel. However, if after 60 days consultations have not produced a resolution, China could request a dispute settlement panel be established to decide on the matter.

The request focuses on the approach used by the U.S. and EU when calculating antidumping measures against Chinese exports, according to China's Ministry of Commerce said Monday. In accordance with Article 15 of China's accession agreement to the WTO, the surrogate country approach expires on Dec 11, 2016. Under the surrogate country approach, WTO members use costs of production in a third country to calculate the value of products from countries on its "non-market economy" list, which includes China. The practice allows countries to easily levy high tariffs in trade disputes.

All WTO members should live up to their international obligations to abandon the surrogate country approach when calculating anti-dumping measures against Chinese exports, China's Commerce Ministry said, adding that the US and EU "have not fulfilled this obligation yet."

Japan has also sided with the U.S. on the topic. The EU has said while it dropped the surrogate country approach, it has left open the option of using "international" prices and costs on further antidumping cases if cases of "market distortion" are found. China has maintained that is merely a another way of keeping the previous practices in place.

Compromise Surfaces to Settle US-Mexico Sugar Trade Issues

A proposal has surfaced via the ongoing U.S.-Mexico sugar trade suspension talks that would require that Mexico could send only its raw sugar to U.S. refineries if the refinery has at least 25% of its sales from crystalline sugar, per contacts familiar with the negotiations.

The talks are in response to issues raised by the U.S. domestic industry regarding shortages of raw sugar for U.S. cane refiners and price suppression in the refined sugar market. The Department of Commerce is engaged in consultations with the Mexican government and sugar industry. The American Sugar Coalition, as well as sugar refiners Imperial Sugar Co. and AmCane Sugar LLC, asked Commerce to review the agreements.

The proposal would put CSC Sugar LLC at a disadvantage versus traditional refiners because it does not meet the criteria, Jim Glassman, an adviser to CSC Sugar, told Bloomberg BNA. CSC Sugar LLC refines, produces, trades and distributes caned sugar in North America. The company turns raw sugar into liquid form. Glassman also said Commerce would be "vastly exceeding its authority" if the proposal was adopted since the unfair trade statutes do not provide for such an outcome. Glassman, a former undersecretary of State, said CSC is a small refiner, accounting for 8 percent to 10 percent of the market. But its traditional competitors see it as a major threat, he said.

The Mexican Sugar Chamber wrote a December 8 letter accusing cane refiner Imperial Sugar and other U.S. cane refiners of trying to use the negotiations to prevent U.S. companies with new technology from having access to raw sugar because they view them as competitors. "However, U.S. laws do not allow favoring one producer over another through a suspension agreement," the letter stated. Imperial Sugar declined comment on the letter.

Commerce is reviewing suspension agreements that suspended dumping and subsidy cases on Mexican sugar imports. The agreements averted duties but imposed price floors and quotas. Commerce, in notices published December 5, said certain transactions were not in compliance with the agreements. Commerce also said it would seek additional information from Mexico and Mexican sugar producers and make a preliminary ruling within 120 days.

Washington Insider: Border Adjustment Proposal

There has been a flurry of tough battles and numerous proposals for reforms, great and small, as Congress rushed to leave town for the year. Amid all this, Bloomberg says, is the House Republican proposal to tax imports and give exporters a deduction for products they send overseas. And, now the key question being raised by economists and tax policy watchers is whether this "border adjustability" provision will make it into the final draft of legislation to overhaul the tax code.

The idea is fairly new and certainly different, but needs to be understood as much as possible because it is a serious proposal and a central element of the Republican tax plan. It is seen as a barrier to prevent U.S. companies from shifting profits overseas, it also offsets the cost of corporate tax rate proposals.

Still, as you might imagine, retailers, led by the Retail Industry Leaders Association and Koch Industries Inc. hate the idea and have publicly denounced it as a threat to consumers through higher prices and reduced corporate profits. This has prompted a team of economists at Goldman Sachs & Co. to say that lawmakers will seek an alternate route.

"In light of the uncertainty regarding the potential effects of such a policy, and the opposition it has already provoked, we think that Congress is more likely to move away from the destination-basis tax proposal," the Goldman economists said recently.

However, the border adjustability provision is seen to be at the center of Republican tax proposals and "all the other features—full business expensing, lower corporate rates and individual income rate reductions—stem from that" a Republican aide told Bloomberg. Without it, the plan doesn't work, he said.

Previous plans for a tax revamp have included strong anti-base erosion rules, such as a minimum tax on foreign profits, rather than the import tax-export deduction approach, but those were extremely unpopular, Douglas Holtz-Eakin, president of the American Action Forum, said.

"It's important to not pretend that it's this or nothing," said Holtz-Eakin, who supports border adjustability. "You're going to need something to protect the tax base. Pick among realistic alternatives."

Advocates for border adjustability say that the dollar will appreciate to compensate for the additional tax that importers will pay to bring products into the country. The Goldman economists said they are skeptical that the transition, which would require the dollar to appreciate 25 percent under the GOP plan, would go smoothly. In addition, it is unclear how the dollar appreciation would affect competition of U.S. products overseas.

"Such an abrupt change would result in large negative wealth effects for U.S. residents and the risk of potentially serious dollar-denominated debt problems abroad," the Goldman report said.

It is also unclear if the tax would comply with World Trade Organization rules, which permit border adjustments in systems with value-added taxes, but not for income taxes. The House Republican plan is a hybrid of the two.

There is a "significant danger" that it would be understood as a tariff, which could lead to litigation with the WTO, Joel Trachtman, an international law professor at Tufts University told Bloomberg. The process to resolve the case could take years, and the US could continue to impose the import tax while the case went through the WTO panel and appeal process.

Despite opposition to the border adjustability plan, Henrietta Treyz, an analyst with financial research firm Height Analytics LLC, still pegs the likelihood of the border adjustability provisions making it into a tax overhaul bill at 60 percent.

One way that some of the opposition could be reduced is to include import tax exceptions for certain goods, such as oil, or for products under a certain dollar amount, which would appeal to apparel importers, Treyz said. Small carve-outs to appease certain industries could quell some of the outcry without detracting too much from the approximately $1 trillion the border adjustments are projected to raise over a decade, she said.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, said he is looking at issues related to carve-outs for raw materials, such as oil, while he continues to get feedback from business groups about how to build a tax system that will expand the economy.

"The nature of tax reform is to radically change the tax code so as to simplify, lower the rates, broaden the base and, in this case, foster economic growth," Holtz-Eakin said. "Those big changes inevitably have winners and losers. The losers are never mollified and often very loud and by the end usually quite hoarse. That's just the nature of the beast."

At the same time the import tax proposal is considered, it will need to be explained and examined much more fully than it has been to date, especially regarding how the impacts of dollar appreciation on exports would evolve; how it might be possible to explain the tax benefits for exports in a way that avoids tagging them as prohibited export subsidies; as well as how "carve outs" for commodity markets could be fairly allocated, a process that producers should watch closely as it proceeds, Washington Insider believes.

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