The Economic Effects of Border Adjustments

Abstract

A border adjustment would not permanently reduce the U.S. trade deficit because it would trigger an offsetting change in the relative prices facing Americans and foreigners (probably through a change in exchange rates). The border adjustment would attract investments with above-normal returns to the United States and would remove transfer pricing problems. However, foreigners holding U.S. investments when the border adjustment was introduced would receive windfall gains at the expense of American taxpayers. Evaluations of border adjustments should focus on those effects.

Keywords: Border Adjustment