COMMENTARY: Paying the price

Whether through a BAT or import tariff, consumer prices will rise, argues NRF

   With President Trump threatening to impose new tariffs on imports and House Republicans proposing a new “border adjustment” tax, the question for the supply chain world is what the impact would be on ports and others in the business of moving goods across the oceans and around the globe.
   The short answer is that it’s too soon to say. But it’s not too soon to examine the proposals and their potential impact.
   Trump, to start, has pledged since the campaign to impose “huge” tariffs of anywhere from 20 percent to 45 percent on imports from China, Mexico and other countries, saying that discouraging imports would increase the demand for domestic goods and bring back millions of manufacturing jobs that have been lost in recent years.
   The problem with that theory is that many of the goods that would be taxed – from apparel to parts used by manufacturers – aren’t made in the United States and haven’t been in a long time. Retailers and other importers could not easily or quickly switch to domestic sources because they don’t exist, certainly not on the scale that would be needed.
   Even if there were to be a long-term switch to U.S. sourcing, it would take years to build up the base to support it. And new U.S. factories would undoubtedly be high-tech and automated, creating relatively few workers compared with the days of billowing smokestacks.
   House Republicans, by contrast, say the border adjustment provision of their “Better Way” tax reform plan is not intended to discourage imports even though it would create a 20 percent tax on foreign goods. Instead, they say it would be offset by an accompanying reduction in the federal corporate tax rate, a stronger U.S. dollar and adjustments in foreign currency exchange rates that would leave the net cost of imports the same and sourcing unchanged. They say their goal is to pay for badly needed comprehensive tax reform, not to end imports.
   That’s good academic theory. But it’s a huge bet in the real world. The National Retail Federation – and most retailers who have run the numbers – aren’t convinced that exchange rates would change quickly enough or far enough to make up the difference. That would leave retailers and other importers with a huge new tax that they would have no choice but to pass on to consumers. NRF estimates that some import-dependent retailers, particularly those selling clothing, could see tax bills of three to five times their current profits and that consumer prices would increase as much as 15 percent.
   The bottom line? Under either the Trump tariff plan or the House border adjustment plan, the prices consumers pay for imported merchandise could go up. And higher prices almost always mean a reduction in demand that could, in turn, affect ports, ocean carriers, truckers and railroads. The question is, to what extent and for how long?
   Retailers will be watching these developments in Washington very closely. We highly recommend that our partners in the supply chain world do the same.