UBS: Are US Tax & Trade Policies a Zero-Sum Game?

How could the Administration's fiscal plans affect global inflation and output?

The upshot is that the Administration's likely policies might be beneficial at home, but they hurt the rest of the world. On the whole, it is a negative sum game.

Tariff policy is expansionary at home, contractionary abroad (see chart below).

We estimate that a 10 percent effective import tariff coupled with an equal export subsidy raises US growth by 0.9 pp and lowers global growth (ex US) by -0.4 pp over 13the next 18 months, assuming no retaliation by US trade partners. The disinflationary impact abroad is larger than the inflationary impact at home and roughly of a similar magnitude as the oil shock of the past two years. Because the rest of the world is four times larger than the US, the policy's net nominal impact is actually negative globally.

Cash-flow vs corporate tax swap is economically equivalent to a tariff policy.

The Republican Better Way blueprint trades a border-adjusted cash-flow tax for a corporate tax cut. It also proposes deducting wages from the cash-flow tax base. We show that this mix reproduces exactly the domestic and international price changes that obtain under the tariff scenario above. If this equivalence is not recognized, the possibility exists that both proposals go through, which would compound the negative spillover to the rest of the world.

Der vollständige Beitrag als pdf-Dokument