When it comes to trade, President-elect Donald Trump does not seem all that concerned about Canada. That doesn’t mean Canadian exporters should not be concerned about him.
While we will likely escape the targeted tariffs he plans against countries like Mexico and China, a revolutionary Republican tax proposal could damage Canada more than any other nation on earth.
It is called the Border Adjusted Tax (or BAT). It would mean American companies could no longer write-off the cost of imported goods. Only the costs of American-produced goods would be deductible. To simplify, a gift store in Maine buys a bottle of Quebec maple syrup for $1 and sells it for $3. Under the status quo, the store can write off the dollar spent buying the Canadian product, so it would pay business tax only on the remaining $2 in profit. Under the BAT, the company could not write-off goods from abroad, so it would pay corporate tax on all $3, even though it only made a profit of $2.
If the retailer bought the maple syrup from an American sugar bush, on the other hand, it could deduct the cost. For the cabane à sucre in Quebec to compete, it would need to sell its syrup at a big enough discount to compensate for the tax advantage its American competitors would enjoy. All other things equal, that discount would be around 15 per cent, because that is the business tax rate Trump says he will establish.
Unfortunately, we are not just talking about maple syrup. Canada exported almost $400 billion in goods to the U.S. in 2015, which works out to almost a fifth of our gross domestic product.
The BAT has the backing of two congressmen with the power to do something about it: House of Representatives Speaker Paul Ryan and Ways and Means Committee Chairman Kevin Brady.