How this proposed US tax change could seriously hurt the Canadian economy

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Trudeau not worried about possible trade war with Trump administration
Prime Minister Justin Trudeau told reporters Tuesday that he is "fully engaged" with the incoming Donald Trump administration in the U.S. and does not anticipate any issues when it comes to trade – Jan 17, 2017

Canadian banks and politicians have a few choice words for the Republican bid to tax Canadian imports to the United States, “destructive” and “detrimental” among them.

The goal of the sweeping tax reform proposal, brought forward by Republican members of the House of Representatives tax committee, is to boost U.S. manufacturing and has earned a positive reaction from president-elect Donald Trump and his team.

For every other country – especially Canada – the proposal spells nothing but bad news, observers have said.

How would the tax hurt the Canadian economy?

The thrust of the “Better Way” agenda – also called a border adjustment tax – is to impose taxes on goods crossing into the United States while subsidizing American exports, which, the legislators suggest, will encourage domestic production and reduce the national trade deficit.

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Approving the plan “would be detrimental to exporters to the U.S., including Canada where dependence on exports has grown in light of slowing domestic demand,” a senior economist with the National Bank of Canada wrote in a client note recently posted online.

Working with the currently proposed 10 per cent border tax adjustment, the National Bank estimated exports of all non-petroleum goods from Canada to the U.S. would decrease 11 per cent. Oil products flowing from Canada to the States would take a modest 0.3 per cent hit, according to the bank’s analysis.  

WATCH: Trump tweet threatens big border tax on Toyota

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Trump tweet threatens big border tax on Toyota

Overall, a 10 per cent border tax is enough for Canada’s total exports south of the border to drop nine per cent, according to the bank’s report.

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As it stands, American businesses only pay taxes on the net profit made from selling a good or service brought in from Canada. Under the Republicans’ “Better Way” plan, retailers would have to pay tax on the entire price of the item.

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Sweetening the pot for American producers, the tax reform proposes exempting U.S. exporters from being taxed on profits from their exports.

READ MORE: Team Trudeau meeting with Team Trump as inauguration, doubts over trade, loom

In an interview this week, Conservative MP Pierre Poilievre succinctly described the plan to change the system: “It’s a destructive plan.”

Poilievre illustrated the proposed change using an example of a retailer in Maine selling a bottle of maple syrup for $3, which was purchased from a Quebec supplier for $2. Under the current system, the retailer pays tax only on the $1 profit. Under the proposed tax reform, the retailer would have to pay tax on the entire $3.

READ MORE: Trudeau’s greatest challenge in 2017? Engaging with US while protecting Canada, Baird says 

Throughout the election campaign, Trump pushed a protectionist agenda driven by one edict he has said will guide his time in office: Buy American, Hire American.

“The good news is [Trump] hasn’t talked a lot about Canada, and with some good diplomacy we can probably avoid having specific targeted tariffs aimed at our industries,” he said.
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“However, the border adjusted tax, because it’s so indiscriminate could hammer us even if that’s not its original intent.”

Speaking with reporters Tuesday, Prime Minister Justin Trudeau said  the Canadian government has been, and continues to be, in touch with the Trump transition team on this and other issues.

“We’re focused on having a constructive working relationship with the new administration and one in which we highlight the depth of integration and interconnectedness between our two economies,” Trudeau said while visiting New Brunswick.

“Obviously there are millions of Canadian jobs that depend on the U.S. market, but there are also millions of American jobs that depend on smooth integration and flow back and forth across the border.”

WATCH: Trump hopes to lower tax rates on businesses and lower taxes for middle-class

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Earlier this week, a spokesman for Foreign Affairs Minister Chrystia Freeland highlighted some of the opposition the proposal has faced.


“This particular proposal is something that has been floated for quite some time, and is opposed by at least as many American lawmakers as support it,” Joseph Pickerill wrote in an email.

Last month, groups representing car and retail industries wrote a letter stating the proposal would create “huge business challenges” for any company that relies on global supply chains.

In his magazine, billionaire Steve Forbes wrote the tax package, if approved, will cost American consumers at least a trillion dollars over the next decade.

READ MORE: Canada must stay nimble in Donald Trump era, says economic adviser

“Prices for everyday items, such as socks, shoes and household appliances will go up,” he wrote last week. “So will tech devices like the iPad, not to mention automobiles and trucks.”

Canadian trade with the U.S. is paramount to the Canadian economy. In 2015, more than three-quarters of Canada’s exports went to the U.S.; In fact, Canada exports so much over the border, it amounts to nearly one-third of Canada’s GDP.

Canada was the United States’ second largest supplier of goods in 2015, according to data on the Office of the United States Trade Representative’s website.

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WATCH: Trump to prioritize implementation of his tax plan: transition team spokesperson

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“We have $400 billion in exports to the United States,” Poilievre said. “This is effectively a foreign tax on that $400 billion, or one-fifth of the Canadian economy.”

The proposal, spearheaded by House Speaker Paul Ryan, falls well in line with the president-elect’s agenda to rebuild domestic production, become an exporting nation and establish a trade surplus, Poilievre noted.

The U.S. trade representative’s numbers indicate the U.S. ran a trade deficit of US$15 billion with Canada in 2015; exports from the U.S. to Canada totalled $280 billion, while imports to the U.S. from Canada totalled $295 billion.

— With files from Global News’ Rebecca Joseph and Reuters

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