OP 2020: US President Trump announces America First Tax to reduce trade deficit

John Hardy
Head of FX Strategy

Summary:  A tax on all foreign-derived revenue scrambles supply lines and spikes inflation. US 10-year inflation-protected treasuries yield 6% in 2020 thanks to a rush of investor interest as the CPI rises.

The year 2020 starts with reasonable stability on the trade policy front after the Trump administration and China manage at least a temporary détente on tariffs, currency policy and purchases of agricultural goods. But early in 2020 the US economy struggles for air and US trade deficits with China fail to materially improve, while Chinese purchases of agricultural products can’t realistically increase further. Eyeing polls showing a resounding defeat in the 2020 US Presidential election, Trump quickly grows restive and his administration drums up a new approach in a last-ditch effort to steal back the protectionist narrative: the America First Tax.

Under the terms of this tax, the US corporate tax schedule is completely reconstructed to favour US-based production under the claimed principles of “fair and free trade”. The plan cancels all existing tariffs and instead slaps a flat value-added tax of 25% on all gross revenues in the US market that are sourced from foreign production. This brings stinging protests from trading partners for what is really just old tariffs in new clothes, but the administration counters that foreign companies are welcome to shift their production to the US to avoid the tax. Furthermore, the administration claims that the “fair and free” portion of the new America First Tax is that the 20% rate is indexed to the size of the US trade deficit as a % of GDP and would fall to 5% in the event the US moves into a trade surplus.  

Faced with these stern terms, US corporations scramble to re-shore production wherever they can to avoid the punitive tax. With the US jobs market already tight, wage inflation and inflation generally push higher. Market anticipation of years of poor budget discipline and a rising CPI as the official US CPI measure moves toward 5% as the year draws to a close sees a swarm of investor interest in inflation-protected US treasuries. 

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