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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Will Trump’s Border Tax Plan Include A Loophole For Mid-East Allies?

Petchem industry

A border adjustment to income tax that will see imports in the U.S. become more costly may need to be, well, adjusted, lest the country loses some key allies in the Middle East, including its second-largest foreign supplier of crude, Saudi Arabia.

Aimed at strengthening the dollar and generating money for the construction of the notorious border wall with Mexico, the income tax adjustment stipulates that businesses will have to pay income tax on products sold in the United States. At the moment, income tax is due on products made in the country when products are sold overseas.

Now, while this is great news for exporters, since they won’t have to pay income tax on goods they sell in, say, Europe, it is certainly not good news at all for importers, and not just importers of foodstuffs from Mexico, which are bound to suffer from the adjustment.

No, the change would hit refiners, too, subverting President Trump’s stated prioritization of the energy industry. Right now, refiners don’t need to pay income tax on the crude that comes from Saudi Arabia, the UAE, and Kuwait. If the adjustment is passed in its present form, they will have to start paying, which will affect their costs, and probably prices at the pump, effectively passing part or all of the new burden on to consumers.

The simplest way to weather such adverse consequences would be for refiners to turn to local oil as much as possible. This could stimulate local production, but it would more than likely alienate Middle Eastern producers, who last year supplied over 50 million barrels of crude to the U.S. on a monthly basis.

According to RBC’s head of commodity research Helima Croft, alienating these countries is unwise in light of the continuing fight with the Islamic State. She suggested, speaking to CNBC, that a loophole is provided for oil imports as a way of maintaining the currently good relations with Persian Gulf producers. Related: Has Big Oil Bought Into The Oil Price Recovery?

Such a measure could avoid the buildup of pressure at a time when pressure is more than enough. President Trump has threatened Iran with fresh sanctions following a ballistic missile test earlier this week. According to sources, the sanctions will not violate the 2015 deal Tehran struck with Western powers, and will target a selection of entities and individuals.

This is certainly good news for Saudi Arabia and its smaller allies – and U.S. suppliers – in the region, and it would strengthen the relations between Washington and these states after they soured somewhat when President Obama lifted most sanctions against Iran, in tune with his European counterparts.

The question as to why the U.S. should be so mindful of Saudi Arabia’s regional interests requires a long answer if we are to be anything close to exhaustive, but let’s just say that these bilateral relations are based on a long-running mutually beneficial exchange of goods and services. Last year, the U.S. had a trade surplus of US$297.4 million with the Kingdom.

But questions about the consequences of hurting Saudi feelings by making their oil more expensive for U.S. consumers become fairly irrelevant given the fact that U.S. refineries need heavy crude. The US gets this from Canada and from the Persian Gulf. There is no substitute for it—besides Urals—but that’s an unlikely alternative right now, so GOP lawmakers might indeed do well to consider a loophole for Middle Eastern oil in their border adjustment draft.

By Irina Slav for Oilprice.com

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  • Alessio on February 05 2017 said:
    Let us forget for a while what President Trump about Opec...I totally disagree with Helima Croft. How can an "expert" make such kind of statment? "alienating these countries is unwise in light of the continuing fight with the Islamic State". Come on, Gulf States, especially Saudi Arabia, are the main financial supporters of ISIS. Every time USA buys a barrel from Ryhad part of that sum is used to support terrorists who kills americans. Hitting Gulf States with the border tax is an effective way to fight Ilamist terrorists....
  • Alessio on February 05 2017 said:
    Let us forget for a while what President Trump about Opec...I totally disagree with Helima Croft. How can an "expert" make such kind of statment? "alienating these countries is unwise in light of the continuing fight with the Islamic State". Come on, Gulf States, especially Saudi Arabia, are the main financial supporters of ISIS. Every time USA buys a barrel from Ryhad part of that sum is used to support terrorists who kills americans. Hitting Gulf States with the border tax is an effective way to fight Ilamist terrorists....
  • Dan on February 05 2017 said:
    I would disagree. A tax at the border means a tax at the border. America has allies around the world and even those who are not benefit from any trade with the U.S. Higher oil prices would benefit, in the global market, the Gulf States as we humans love to travel no matter where we are. A border tax would benefit American workers and citizens as it creates jobs that cut dependency on taxing the rest of the shoppers in America. Higher standard of living also creates import demand for higher cost goods. I know much of Washington doesnt care about the citizens but the citizens around the world are at the point of not caring about the lifespan of the establishment politicians either. You do not get it, neither do they. But as they said in July 2007 when they pulled the uptick rule to implement HFT "what's yours is ours "can go either way. They are running short of time.
  • EdBCN on February 06 2017 said:
    It seems the big disadvantage of a border tax is that we all have to pay more for the stuff we import. This is, I suppose, to be balanced off against the advantage that cheaper exports from the US will increase production and jobs in the country. The first part of that equation I know will hurt me, but I doubt the second part will really happen.
  • Bobby on February 13 2017 said:
    The Petrodollar is the backbone of American currency. We cannot afford to punish our allies in the Middle East that have been loyal to us. Arabian countries have proven their loyalty to the US, as the Dollar is super strong now! It would be a huge mistake !!
  • Sal on February 16 2017 said:
    First off Trump has compete power to adjust trade in any way he wish. This power was given to the president in the Clinton era. The fact remains if he want to tax only Mexico; guess what , he can. The point of this taxation is to fund the wall ( because Mexico did not want to pay)and implement fairness in trade where America gets the end of the stick on. I don't see how commodities will be taxed, when the mark ups on on imported goods for sale. Oil imports bring jobs to America refining, transportation and so on.. so... yeah he wont tax that.

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