European Exporters to Benefit From Collapse of US Import Tax Proposal

Summary

Congressional Republicans in the United States have aban­doned a pro­posed 20 per­cent tax on imported goods, includ­ing European olive oil, which would have put exporters at a com­pet­i­tive dis­ad­van­tage. The demise of the Border Adjustment Tax (BAT) sug­gests that European olive oil prod­ucts will not face a sud­den cost increase in the American retail mar­ket, reliev­ing pres­sure on retail­ers and con­sumers.

On Thursday, con­gres­sional Republicans in the United States dropped a pro­posal for a 20 per­cent tax on imported goods as part of a broader tax reform plan. The Border Adjustment Tax (BAT) would have put European olive oil pro­duc­ers at a com­pet­i­tive dis­ad­van­tage in rela­tion to their American coun­ter­parts.

European exporters, who account for the vast major­ity of the $2 bil­lion of olive oil sales in the United States, could have faced hun­dreds of mil­lions of dol­lars in new taxes under the pro­posed plan. The demise of the BAT sug­gests that European olive oil prod­ucts will prob­a­bly not face a sud­den cost increase in the American retail mar­ket as a result of fed­eral tax reform leg­is­la­tion any­time soon.

Olive oil exporters in Europe have already been grap­pling with increas­ing price pres­sures in the United States due to a lack­lus­ter har­vest in 2016, surg­ing global demand, and recent declines in the dollar/euro exchange rate. The pur­chas­ing power of American retail­ers who import olive oil from abroad would have been fur­ther dimin­ished by the intro­duc­tion of the BAT.

Retail estab­lish­ments of all sizes in the United States, includ­ing Walmart and Target, were vehe­mently opposed to the pro­posal. The tax would have placed pres­sure on retail­ers to pass on the new expense to con­sumers through increased prices, spark­ing fears of a pos­si­ble decline in con­sumer spend­ing. As a result, oppo­nents of the tax were able to suc­cess­fully dis­suade law­mak­ers by cit­ing prob­a­ble dam­age to retail com­pa­nies — an indus­try that is cur­rently endur­ing mas­sive dis­rup­tions brought about by new tech­nol­ogy.

Proponents of the BAT plan had hoped to encour­age greater pro­duc­tion of olive oil and other goods inside the bor­ders of the United States by mak­ing imports more expen­sive. American exporters of olive oil would have been exempt from the tax but may have faced the impo­si­tion of retal­ia­tory tar­iffs by for­eign gov­ern­ments. While most American olive oil exports go to Canada and Mexico and would have been rel­a­tively immune to trade dis­putes with Europe, US exporters will face a new round of uncer­tainty as the Trump admin­is­tra­tion ini­ti­ates talks to rene­go­ti­ate the North American Free Trade Agreement (NAFTA) in August.

Tax reform has long been a cen­ter­piece of the Republican agenda in Washington. The import tax, which was pro­jected to have raised $1 tril­lion over the course of 10 years, was designed to off­set large pro­posed cuts to the American cor­po­rate income tax rate, which cur­rently stands at 35 per­cent. However, with­out an income source to off­set the pro­posed reduc­tion in the cor­po­rate tax rate to 15 or 20 per­cent, the fed­eral bud­get deficit would sky­rocket.

The full impli­ca­tions for European olive oil exporters of the col­lapse of Washington’s pro­posed pro­tec­tion­ist mea­sures will prob­a­bly become more clear as Congress returns from its August hol­i­day recess and the 2017 har­vest begins in earnest. However, the mere threat of a 20 per­cent import tax invari­ably has many European pro­duc­ers eval­u­at­ing their strate­gies on how to secure afford­able access to the grow­ing American olive oil mar­ket.

• LA Times


• Bloomberg