Why limit trade?

Busy US President Donald Trump rushes toward a crossfire between his urge to fulfill campaign promises and the need to deliver prosperity. Someone must find a way to tell him he can't do everything- and certainly not all at once.

During his campaign, Trump promised to build a wall on the US border with Mexico, solidifying the segment of his political base to which he appealed on Jan. 27 with an executive order limiting immigration selectively. That move triggered street protests and a political uproar powerful enough to stifle questions about the suggestion his press secretary made a day earlier that money for the wall would come from a tax on Mexican imports. By month's end, distinctions had blurred between border protection and brute protectionism.

Protectionist urges

Foreign-policy experts are appropriate judges of the wisdom and ethics of closing borders to political refugees and targeting countries with Muslim majorities for immigration constraints. Of more direct concern to the oil and gas industry is the administration's protectionist urges.

Even before he signed the immigration order, Trump announced he would meet with leaders of Mexico and Canada to renegotiate the North American Free Trade Agreement. A day later-on Jan. 23, his first full weekday as president-Trump abandoned the 12-nation Trans-Pacific Partnership, a trade pact negotiated by former President Barack Obama but not yet approved by Congress. The deals weren't perfect. But Trump's lynching of them hardly bespeaks interest in smoothing out the rough spots. Press Sec. Sean Spicer made the administration's disposition on trade clear when he mentioned a 20% border tax as a way to pay for Trump's promised wall. Although administration officials later characterized that idea as part of a "buffet of options"-however many that might be-the damage was done.

Loose talk about tariffs and other forms of protectionism is imprudent. And, in various ways, it imperils the oil and gas business.

Spicer's mention of a 20% tax, for example, probably referred to a border adjustment under discussion in conjunction with other elements of tax reform. Republican congressional leaders have proposed replacing global corporate taxation at rates as high as 35% on income with a 20% territorial tax on cash flow. The adjustment would occur via exemption from the revised tax for exported goods but not for imports.

As discussed here earlier, border tax adjustment attempts to improve the trade balance by encouraging exports (OGJ, Jan. 16, 2017, p. 16). But potential changes in price relationships between foreign and domestic goods, including crude oil and petroleum products, could be disruptive. And if the move didn't change the domestic saving-investment balance, the adjustment might materialize mainly as a sharply strengthened US dollar, which would lower the nominal price of crude, raise interest rates, and cut demand for oil. Economists are debating the possible effects. The disparity of their views makes clear that policy-makers can't be sure what those effects would be.

As part of a larger, popular push for tax reform and as a protectionist measure seemingly more refined than tariffs, border tax adjustment has political support. But it's a gamble. Beyond questions about ramifications for prices, trade, and exchange rates is the near certainty that trading partners- especially those given new reason by the NAFTA and TPP reversals to distrust US commitments- would retaliate with protections of their own.

Helpful steps

The new administration can do much for the US economy by relaxing regulation of business, trimming tax rates, lowering subsidies for politically pampered enterprises, streamlining approvals for infrastructure projects, encouraging resource development, and trusting markets. It has taken helpful steps in these directions already. Markets have welcomed them.

So why risk progress? To retain his base and expand political support, Trump must encourage the economy to grow at appreciably above recent rates. For an unorthodox presidency premised on "making America great again," broad, robust growth is imperative. Nothing would derail Trump's program faster than a trade war.