The senior adviser who led President Donald Trump's trade transition team suggested to Business Insider that the next trade agreement that could come under fire from the White House was the US's participation in the World Trade Organization.
[Allan Smith| February 26, 2016 |Business Insider]
Dan DiMicco, the former Nucor CEO and board member of the Coalition for a Prosperous America, said "right now" the global organization "does not work for us."
Formed in 1995, the organization consists of more than 160 members. It acts as an international body that, based on a set of agreements negotiated and signed by those members, supports free trade and opposes the sort of protectionist policies that were the hallmark of Trump's campaign promises.
But criticism of the organization dates back to its inception. Much of the condemnation centers on the belief the organization has not penalized countries such as China, which has been able to benefit from its participation in the WTO while not cutting back on its protectionist policies.
DiMicco said value-added taxes in accordance with the WTO created an unfair environment for US exporters. The US is the only major country in the group that does not have a value-added tax, he said.
The tax system creates a way for exporters to be reimbursed on tax costs. And with all the other major countries having a VAT, the effects even out on trade in instances that don't involve the US. But for US trade with other WTO members, exporters end up essentially being taxed twice when corporate taxes are figured in.
"Back when we signed on to the WTO, we allowed ourselves to be put in a position which was at a significant disadvantage, because their VAT as opposed to our income tax, they took rebates to the VAT tax to manufacturers when they export their products," he said.
He continued: "So in our case, it would be like Ford Motor Co. getting a rebate of its cost to make a car, if it exported the car. Well, that changes the whole competitive dynamics. And likewise, if they were to ship a car into, say, Europe, they would have to pay the VAT on top of what they've already paid as an income tax."
His analysis — which has also been promoted by Peter Navarro, the head of the newly formed White House National Trade Council, and Wilbur Ross, Trump's nominee to lead the Commerce Department — has been criticized by others who say it's a misunderstanding of the VAT system.
Still, DiMicco, who informally advises the administration, said the system created "no wonder" as to how the US had accumulated a multitrillion-dollar trade deficit since the 1990s.
"That type of thing has to be worked out," he said. "Now it's been discussed in previous administrations. But, WTO has never been willing to sit down and renegotiate that. That's got to change. It cannot continue like that."
"That's one of the primary issues that, if they're not willing to renegotiate, then, President Trump has been clear," DiMicco continued. "If he can't get deals that are focused on 'America First,' which this would be obviously one, then he's not opposed to leaving the arrangement ... His interest is not in leading these things. His interest is in getting a better deal for America."
DiMicco did add that the border-adjustment tax proposal that has been floating around sounded as if it would help rectify some of his VAT-related concerns with the WTO, should it be applied to all imports.
"I'm not an expert on what's being proposed," he said. "I haven't seen any of the details. But what I'm being told is that it would go a long way to do that."
The border-adjustment tax on imports, however, would most likely be passed onto consumers. And in the business world, sentiments are split: Retailers hate it, while manufacturers love the idea. On Tuesday, Walmart spoke out against it, saying the proposal was "a concern."
"Clearly anything that would potentially raise prices for our customers in the US is a concern for us," Walmart CFO Brett Biggs said Tuesday on a call with reporters.
Last July, Trump threatened to pull the US out of the WTO during an interview with Chuck Todd on NBC's "Meet the Press."
Trump warned that the withdrawal could take place if the organization tried to interfere with any of the protectionist proposals he puts forth after Todd said those policies could run afoul of the WTO.
"It doesn't matter," Trump responded. "Then we're going to renegotiate or we're going to pull out. These trade deals are a disaster, Chuck. World Trade Organization is a disaster."
As The Wall Street Journal wrote following Trump's remark, withdrawal from the WTO "could void the deals the US has on low tariffs with countries around the world, potentially exposing US exports to steep levies from a host of trading partners," in addition to costing the US when challenging other WTO members on rules violations.