If the United States succeeds in passing a new border tax scheme, Canada will fight it.
That was the message that Canadian Foreign Minister Chrystia Freeland delivered to House Speaker Paul Ryan in a closed-door meeting on Tuesday, as Ottawa prepares a full-court press to sink one of Ryan’s hallmark policy plans.
Freeland was part of an expeditionary force sent ahead of a face-to-face visit from Prime Minister Justin Trudeau with President Donald Trump, who is heading to D.C. on Monday.
Trump’s administration, thus far, has been the antithesis of Trudeau’s pro-refugee, globalist green economy, white collar government.
But the biggest irritant thus far has been trade. And a complex proposal from Ryan, who styles himself a policy wonk, is currently causing headaches for the Trudeau government, according to a senior government source who was in the meeting and spoke to VICE News on the condition of anonymity, as they were not authorized to speak publicly.
The problem is Ryan’s proposed border adjustment tax, a shifting of tax deductions that would, in very broad strokes, shift taxes on to imports and off exports. This is the plan that Trump called “too complicated,” worrying to the Wall Street Journal that “we’re going to get adjusted into a bad deal.”
Canada is currently the one worried about that, and Freeland made that clear to Ryan when she raised the issue.
Ottawa is already hearing from Canadian industry that are terrified of the plan, and Freeland conveyed the message, according to the Canadian official: Why screw around with a trading relationship that is currently working?
Freeland made very clear that, should Ryan move forward, that Canada is prepared to put up a fight.
Canada is no bit player in Congress, though it rarely wields its power. Thirteen states border Canada, and many others rely on cross-border trade for jobs. Some, like the automotive industry, could be relocated to America — which is exactly the intention of the border adjustment tax, say the Republicans — but others, like oil extraction, lumber, banking, biotechnology, and others, may not be so easily moved.
“I did make clear that we would be strongly opposed to any imposition of new tariffs between Canada and the United States,” Freeland told reporters after the meeting. “That we felt tariffs on exports would be mutually harmful. That if such an idea were ever to come into being, Canada would respond appropriately.”
VICE News reached out to Paul Ryan’s office for comment on multiple occasions, and did not receive a reply.
But signs have emerged that Trump is warming up to the plan, perhaps seeing it as a way to, as he puts it, make Mexico pay for the wall.
The American tax system currently works like this: If you earn a dollar of revenue in America you must — after deducting the cost of purchased goods and labor — pay a 35 percent tax on it. If that dollar is earned, or reported, outside of America, the company generally doesn’t need to pay taxes. If a air conditioner company earns $100 of profit on every unit, but spends $10 on buying parts from Mexico and another $10 on domestic labor, it can deduct the cost of the parts and pay taxes on just the $80.
The proposal would radically alter that process by removing the deduction for imported goods and ensuring that the 35 percent is applied to all imports into the U.S. The tax would be specifically exempt from exports. Under this system, the air conditioner company pays taxes on the $90.
The plan operates on the assumption that, while a tax on imports may increase the cost of consumer goods, dropping taxation on exports will boost domestic manufacturing and will, in time, strengthen the dollar and make imported goods relatively cheaper.
“I did make clear that we would be strongly opposed to any imposition of new tariffs between Canada and the United States.”
The plan has split economists. It remains unclear exactly how, or even if, it will actually come into force. And the objectors are making themselves known.
Orrin Hatch, Republican chair of the Senate finance committee, has already voiced concerns about the House plan to try and push through a massive tax overhaul plan, though says he’s not not necessarily against the plan itself. The Senate is where this fight will ultimately take place, as an intense lobbying campaign ramps up.
Lobby group Americans for Affordable Products, a coalition of retailers and companies that rely on cheap imported goods and fear they could be priced out of the market if an import tax comes into force, have already started a pressure campaign against Ryan’s plan.
The plan has another enemy: Canadian oil.
As of now, there is no real tax on Canadian oil as it crosses the border. American companies refining and selling that oil will pay state and federal corporate taxes, at a rate that could hit 39 percent excluding deductions.
Moving that tax, even at a lower rate, onto Canadian crude oil could be a huge burden on the price of oil coming from Alberta — and, in turn, making Saudi oil more competitive, something Trump, on the campaign trail, vowed to eliminate from American energy consumption.
Tim McMillan, president of the Canadian Association of Petroleum Producers, told VICE News that they’re still treating the possible border adjustment tax as “low probability but high consequence” and have begun lobbying Congress to try and convince lawmakers it would be a bad idea.
“We’re engaging with folks in Washington already about the effects it would have, on not just industry, or pipelines, or refineries, but on the effects it would have on the public, because ultimately that’s where the results would land,” McMillan says.
“I think the message and the approach that we’re taking is that we have to be very thoughtful with this, we have to be working with American legislators in understanding its effects.”