The border adjustment tax is part of the program designed by Paul Ryan to allow the US to reduce its corporate tax rate to 20%. It was not designed to fund the building of the wall but Mexico will pay this tax and the wall will be built. So if Trump says Mexico is paying for the wall, who are we to disagree?
This should be no problem from Mexico's point of view. China will face more border adjustment tax than Mexico. Germany will face more border adjustment tax than Mexico. Mexico will face the border adjustment tax at the same rate as everybody else. What is there for Mexico to be unhappy about? Even Donald Trump will be happy – maybe.
Footnote:
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There is a broad discussion on exchange rate effect of this improvement in the US trade balance. In theory, an improvement in the US trade balance should push up the $US. We find there is little evidence that this happens in practice.
For example, the Euro Area has persistent trade surpluses. The US has persistent trade deficits. If trade balances were important, then the $US would be weak and the Euro would be strong. In practice, the reverse can be seen to be the case.
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