Noah Smith has a good post on a topic that’s getting a lot of attention in the blogosphere. It seems that the recently enacted tax reform is likely to dramatically boost reported exports, without (necessarily) impacting actual exports at all:
Here’s an example adapted from Guvenen et al.’s paper. Suppose that NoahCorp produces the NoahPhone, using research, design and branding done in the U.S., then sells it to people in Japan. Normally, the revenue from that sale would be counted in U.S. exports. But in order to avoid paying corporate tax on the profits from the sale, NoahCorp sells its patents and brands to NoahCorp Ireland for a pittance. It then declares that the profit from the Japanese phone sale actually goes to the Ireland subsidiary, not the U.S. parent company. The parent then doesn’t have to pay U.S. corporate tax. And the phone sale doesn’t get counted in U.S. exports. . . .
The result of all this profit-shifting is that the U.S. trade deficit seems wider than it really is, while U.S. income on foreign investments gets overstated. It looks like the U.S. is really bad at selling things overseas, but very good at choosing its foreign investments. For many years, pundits believed that wise U.S. investing was partially making up for uncompetitive manufacturing — now, it turns out that both of those stories might be different aspects of the same illusion.
With the new and lower corporate tax rate, companies will now be willing to declare this revenue as income from US exports. And that could have political implications for an administration that is all about smoke and mirrors and marketing:
Nothing real will be changing, of course. The same phones will still be sold, and the same intellectual property will be created. But it will look like a huge win for the Donald Trump administration, which pledged to cut trade deficits.
I’m a bit skeptical that this will work. Unless I’m mistaken, any gain in the trade account will be offset by deterioration in the services account as investment income declines, leaving the current account unaffected. (Someone tell me if I’ve made a mistake here.) And it’s the current account that pundits focus on, not the trade account.
On the other hand, this would tend to boost reported GDP, without boosting actual GDP. It will be interesting to see how large the effect will be, and how durable. My hunch is that any boost to growth would be modest (below 1%) and temporary.
I don’t worry at all about the President taking credit for things that are not real, as the public sees through the phony data. When Trump took office he claimed the the unemployment rate almost immediately fell from the 30% to 40% range, down to about 4.1%. But nobody took this seriously. (Ditto for his recent claim to have repealed Obamacare). Trump has made so many absurd claims that even his supporters don’t take anything he says seriously. All that matters in 2020 is how the American people feel they are doing, not what the data show.
HT: David Levey