President Donald Trump tasted his first major legislative setback on Friday, March 24, when the House Republicans cancelled a highly-anticipated vote on their plan to repeal and replace the Affordable Care Act (a.k.a. “Obamacare”).  Despite a month of public build-up, including mark-ups in three House committees, Speaker Paul Ryan (R-Wis.) pulled the American Health Care Act (AHCA) from the House Floor, after failing to secure the 215 commitments necessary for passage.  Both Speaker Ryan and President Trump then stated that Republicans would put health care aside and move on to other projects — specifically comprehensive tax reform, long a coveted goal for the business-minded GOP.  Notwithstanding the continuing murmurs of repeal among the aftershocks of the AHCA’s collapse, the enactment of ambitious legislation to repeal and replace Obamacare is now highly improbable — at least in the short term.  And one of the parties that may benefit incidentally from this fallout is the German business community — particularly the companies that make up the “Mittelstand,” i.e., small and medium-sized manufacturers that export goods to the United States.

Among the many interlocking elements of a potential deal on U.S. tax reform, the border-adjusted tax (BAT) — which can be thought of loosely as a tax on imports — is the most controversial proposal.  According to the House Republican blueprint, a BAT would incentivize U.S. corporate firms to buy more products and supplies made in America (and fewer imports from trading partners like Germany), while also supplying the necessary revenue to reduce corporate income tax rates from 35 percent to 20 percent.  Not surprisingly, Germany, with its export-based economy, is anxiously monitoring the discussions over the BAT, which would likely take a bite out of its export flows to the United States ($114 billion in goods and services in 2016).  Before inauguration, several analysts gave the BAT a one-in-three chance of becoming law.  But as we approach the 100-day mark of the Trump presidency, and especially after the implosion of the AHCA, the BAT is much more of a long shot, for at least three reasons.

First, even in a low-drama political environment (which this is not), comprehensive U.S. tax reform is already very challenging.  In more than 30 years, no Congress has achieved it.  The scope and political complexity of tax reform — with its dizzying array of competing interests and trade-offs — is certainly at least as daunting as health-care reform.  And despite its ability to raise revenue, the BAT will not unite lawmakers.  While Speaker Ryan and Ways and Means Chairman Kevin Brady (R-Tex.) back the BAT, along with blue-chip multinational firms like General Electric and Boeing, many prominent voices (including the influential Koch brothers), as well as powerful players in the retail industry like Wal-Mart, are lining up against it.  Moreover, fashioning the BAT to conform to World Trade Organization rules could present legal compliance challenges–a fact already noted pointedly by the German Commerce Minister.  So from both a political and policy perspective, the BAT already faces stiff resistance.

Second, the aborted vote on the AHCA deprives the GOP of critical legislative momentum in the critical early days of a new presidency — a time when lawmakers are most willing to cast tough votes.  After Trump’s surprise victory in November, Republican Congressional leaders immediately devised plans to achieve big things through the budget reconciliation process — a tool that allows Congress to legislate with a simple majority in the Senate (rather than the 60 votes needed for most legislation).  This put two major legislative goals (health care and tax reform) within reach without Democratic help.  Markets swooned over an agenda that previously had been a mere mirage: deregulation, slashing corporate rates, and infrastructure spending.  Among the various priorities, Obamacare repeal was theoretically the easy part, especially since the prior Republican Congress had already put a repeal bill on President Obama’s desk using reconciliation.  

However, as Rep. Joe Barton (R-Tex.) noted after the cancelled vote, fantasy football is not the same as the real game.  When it came time to vote on the plan in the House, dozens of GOP members remained either opposed or uncommitted, for varying reasons.   As a result, instead of spending last week high-fiving members of Congress, the President was lashing out at them on twitter.  As Congressional Republicans head home this weekend for a two-week district work period, many of them will have to explain to their constituents why they still haven’t repealed Obamacare, even under a unified Republican government.  The bottom line: Failing to achieve a major campaign promise like repealing Obamacare jeopardizes the precious momentum needed to pull off a once-in-a-generation project like tax reform.

Finally, the failure of AHCA makes the math of a big tax plan more challenging.  Although nominally a health bill, the AHCA contains $1 trillion in tax cuts on the individual side of the tax code which would have been offset largely by reductions to Medicaid (the health insurance program for low-income Americans expanded under Obamacare).  If enacted, these tax cuts would give Congress a huge running start on tax reform; but if the AHCA remains stuck in the mud, lawmakers simply have less revenue to play with to achieve a large-scale permanent reform that won’t increase the deficit.  Shortly after pulling the bill, Speaker Ryan explicity acknowledged this, telling reporters that the failure of AHCA “does make tax reform more difficult.”  

In the end, a simple short-term corporate tax cut — along the lines of the Bush-era tax cuts — is much more likely than comprehensive reform.  The upshot: while an export powerhouse like Germany can probably continue to expect tough talk from the White House on trade and monetary policy, the odds that a border-adjustment tax will become a reality on this side of the Atlantic are slipping away quickly.