New report shows the dangers of BAT
According to the report, even in the long term, the dollar will appreciate no more than 8 percent in response to the House of Representatives-proposed measure — well short of what proponents have indicated will be necessary to offset higher costs on groceries, gasoline and thousands of common items.
“The notion of the border adjustment tax causing dollar appreciation is based on a simplification of currency markets, which are highly complex,” noted economists Paul Ashworth, Justin Chaloner and Glyn Chambers, of London-based international macroeconomics firm Capital Economics. “The proposed measure has not been tried in any other country, and there are many issues that pose a large number of questions as to what the consequences would be. Available empirical and anecdotal evidence casts doubt on basic exchange rate theory. Multiple barriers to adjustment, plus the fact that traded goods and services only have a limited – possibly small – influence in determining exchange rates in today’s world of speculative capital flows, means that we expect that most of the proposed appreciation is likely to fail to occur. Some adjustment could occur, but, given the considerable obstacles, we expect it to be no more than 30 percent of the anticipated total, and it could well be a good deal less than that.”
The report further found that the economic theory behind the dollar appreciation argument was so unreliable that it was unlikely that currencies would adjust as predicted even in the long term. That being the case, the BAT “will amount to a tax on consumers,” the authors asserted, adding: “It will have the effect of raising consumer prices, which will reduce real incomes and in turn living standards. Moreover, as with any tax on spending, it is probable that the impacts will be regressive in nature. That is, poorer consumers, who tend to save a lower proportion of their income and spend proportionately more, will be the hardest hit from the price rises stemming from the tax.”
Based on their findings, the report’s authors concluded, “Given the large redistribution of wealth from importers to exporters that would happen in the absence of exchange rate adjustment and the many economic ramifications that could result from that, the policy is, at the very least, highly risky.”