Proposals recently tabled by US president Donald Trump – but long advocated by Republicans in the House of Representatives – would see imports taxed at 20% at the border while exports would be exempt.
The US government expects the move to generate $1tn for its coffers over a decade, and boost ailing American industries that have struggled amid globalisation by encouraging companies to keep their business on US soil. Meanwhile, Fitch warned, countries overseas would suffer.
“It could raise the burden of US dollar-denominated debt in emerging markets, precipitate strains on US dollar-linked exchange rate regimes, worsen current account balances and GDP growth for major exports to the US [and] reduce FDI inflows,” a report published today said.
These could have substantial implications for not only growth, but the public finances of countries heavy linked up with the US economy.
For instance, as companies earned less profits on exports to the US, relocated some of their business to America and saw less incentive to shift profits out, corporate tax revenues for some governments elsewhere would fall.
Fitch said the $1tn the US expects to generate from the tax would therefore come at the expense of other countries.
It pointed to Luxembourg, Ireland, the Netherlands and Singapore as potentially the biggest losers as a result of a decline in US foreign direct investment, based on the size of US investment there between 2011 and 2015.
Switzerland, Australia, the UK, Chile, Hong Kong and Mexico are also most likely to feel an impact.
Another important hit to nations’ public finances would come from a subsequent appreciation in the dollar, which would make all US-dollar debt more expensive. This would have some big implications for emerging markets like Turkey, Argentina, Brazil and Indonesia, which all have substantial US dollar-denominated debt on their balance sheets.
Vulnerable developing countries, such as Iraq, Venezuela, Bangladesh or Suriname, which link their exchange rates to the dollar, could also be caught in the fray.
Elsewhere, a hit to exports would be the biggest factor as other countries lost their competitiveness in the US. Those most exposed are Mexico, where 81% of all exports go to the US, and Canada (where 77% of exports are US-bound).
But Fitch warned they are “not alone”, with at least nine other nations sending at least one-third of their goods to America.
Even those countries not closely entangled with the US economy could be hit, Fitch noted. The effect could keep rippling outwards if, for instance, China reacted strongly.
