In what was initially seen as a brilliant tactical gambit, House Speaker Paul Ryan offered a tax plan anchored on a concept known as a “border tax adjustment.” His proposed 20 percent tax on imports would generate the revenue needed to offset a sharp reduction in the corporate tax rate, a reduction coveted by the Republican leadership. Yet, unlike other taxes, this one would go down easy among populists in the Trump administration, because it could give American manufacturers (and their workers) an edge up on foreign competitors.

As anticipated, the new tax drew fire from American businesses that depend heavily on imports – think Walmart or Nike. What was not expected was the cacophony of voices from tax specialists who disagreed about who would actually pay the tax and how it would affect the relative value of financial assets denominated in dollars and other currencies. In fact, the impact of the tax would likely be more complicated than any of the key players have acknowledged because it would trigger changes in relative currency values that would affect the global economy in multiple (and not entirely predictable) ways.

Start with what we know for sure: a big border tax could, indeed, raise a lot of revenue. At first go-round, the BTA would also further the Trump administration’s agenda by increasing the demand for made-in-USA products at the expense of goods manufactured elsewhere. Prices paid by American consumers for imports would rise and likely cause job losses for those working in retail and other sectors dependent on imports.   

Now comes the hard part. Reduced U.S. demand for imports would lead to appreciation of the dollar, making imports less expensive and cushioning both the escalation of consumer prices and the job/profits impact. Indeed, in the simple economic models that graduate students like to build, the appreciation would only end when the protection is nullified. The government would still collect a lot of revenue at the border, but none of the benefit would accrue to American producers, and importers would not, on balance, face higher costs. By this reckoning, the BTA would serve Speaker Ryan’s goals by giving him leeway to cut taxes elsewhere. But it would be a dead end for protectionists because these models predict no change in trade patterns after the exchange rate appreciates.

Real-world economics is not that simple, though. It takes time for exchange rates to adjust – time in which the protectionist effect would be real, if eroding. My own research on exchange rate behavior since 1973 has shown that it takes 3 to 5 years for the real effective exchange rate to adjust fully to changes in the balance of payments caused by shocks like the imposition of a BTA. Such a lengthy adjustment period would allow jobs to accrue in the export- and import-competing sectors, as President Trump wants. 

However, if BTA advocates who predict that the import tax’s imposition would trigger a rapid increase in the dollar’s value are right (and thus spare Walmart and their ilk from the effects of the border tax), the consequences could make a hash of just about everyone’s plans. A rapid change in exchange rates could disrupt capital flows and trigger volatility in financial markets. Panic selling could result from sudden induced losses to U.S. holders of foreign assets – their holdings are now worth about $24 trillion – along with windfall gains to foreign owners of U.S. assets (who currently hold $32 trillion). China, incidentally, which owns approximately $1.5 trillion in U.S. debt, would be a big winner, though it might still rue the day, because the resulting financial convulsions would damage the Chinese economy as well as everyone else’s.

In my view, the currency adjustment process would probably be both slower and less disruptive than simple models suggest. So, at least for a while, protectionists would have their way and jobs would shift toward domestic manufacturing. (And, of course, there would be collateral damage in the form of job losses in sectors that rely on imports.) But one must bear in mind that, in the best of circumstances, net gains in jobs and profits would be limited to the period in which the exchange rate is adjusting. And, in any event, the tax could still disrupt today’s tightly knit global supply chains, creating temporary shortages of parts in myriad manufacturing processes, thereby reducing productivity and even employment.

All this, by the way, would take place in the context of a global financial system that is constantly adjusting to changing cross-border demands for goods and capital. Speaker Ryan’s border tax would solve the problem of where to scrounge the revenue to reduce corporate taxes. But it would set in motion a chain of political, financial and economic events that would need to be carefully managed to avoid disruptive losses and provide even temporary gains in jobs.