If there's one theme tying together many of the policies President-Elect Trump and Congress will try to enact, it's making the US a better place to invest. This includes peeling back Obamacare, drastically cutting the top tax rate on corporate profits, moving from the depreciation of business investment to immediate and full expensing, and allowing more investment in energy infrastructure.
In addition, policymakers are seriously considering making the corporate tax code "border-adjustable." Right now, US companies are taxed on their total income, no matter where they earn their profits. (They get a reprieve on their foreign profits, but only as long as they leave that money outside the US.) A border-adjustable tax system would only tax income companies earn on sales in the US; income earned from exports would not be taxed.
Meanwhile, companies operating in the US would not be able to deduct the cost of imported inputs. In effect, companies located outside the US would be taxed on their US sales (our imports). Border adjustment is a feature the US would borrow from European-style VAT taxes, but without other unpopular parts of the VAT, like the inability of companies to deduct labor costs.
In theory, all this is supposed to encourage exports and discourage imports, in turn leading to a much smaller trade deficit. It also gives Trump a way to say he's fulfilled his campaign promises on trade issues without having to enact any special tariffs. Instead, the "tariff" would be buried inside the corporate income tax code.
So, just for the sake of discussion, let's say Trump and Congress enact all these policies and, in addition, thanks to more energy infrastructure, the US becomes a net petroleum exporter to the rest the world. Many voters and politicians would expect these changes to mean the US trade deficit would be on its way to extinction.
But this may not be so. In spite of these changes, the trade deficit could actually expand. Why? These policies will certainly make the US a better place to invest. Capital inflow will increase and this could, and should, boost the value of the US dollar versus other currencies, giving Americans more purchasing power to buy more foreign products. Meanwhile, the foreign capital sent to the US would mean foreigners would have less money to buy our products. The result could be that some foreign products become even more competitive.
