Now I’ll revisit the border tax adjustment proposal; its impact on the U.S. economy and the apparel and footwear sector; and whether it’s likely to be enacted.
There’s a relevant point that is frequently overlooked—while a border tax would be new to the United States, most of the world, including Europe, has a value-added tax (VAT), that has similar features. With value-added taxation, a company does not pay VAT on what’s imported because it receives a VAT refund, or offset on what it exports. However, the difference is that both imports and domestically produced items pay the same VAT.
But don’t we have import tariffs already?
The U.S. has had a tariff program since the Tariff Act of 1789. The goal of using higher tariffs to promote industrialization was urged by the first Secretary of the Treasury, Alexander Hamilton. The Constitution gives the federal government authority to tax, stating that Congress has the power to lay and collect taxes, duties, imports and excises, pay the debts and provide for the common defense and general welfare of the United States, as well as regulate commerce with foreign nations.
Tariffs were the largest source of federal revenue until the federal income tax began after 1913. For well over a century, the federal government was largely financed by import taxes, which averaged about 20 percent of the value.
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Today, duty rates in the U.S. can be ad valorem (as a percentage of value), or specific (dollars/cents per unit). Duty rates vary from 0 percent to 37.5%, with the average duty rate being 5.63%. Some goods, like certain electronics, are not subject to duty.
Tariffs are intended to give domestic products a price advantage by making their foreign competition more expensive.
The United States is largely a free-trade country with open markets and some of the lowest tariffs within the WTO, and the world. China, Japan, Brazil and many other trading partners are protectionist countries with semi-closed markets. Of all imports into the United States, 54 percent are duty free while 46 percent of all imports are taxed.
Examples of import tariffs:
- Clothes made of cotton – 16 percent tariff
- Clothes made of synthetic -32 percent tariff
- Footwear – all over the board, but 20 percent tariff on average
- Most vegetables – 20 percent tariff
- Apricot, cantaloupe and dates – 29.8% tariff
- Most auto parts – 25 percent tariff
- Canned tuna – 35 percent tariff
The member countries of the WTO tend to have the lowest average tariffs. By comparison, the average import tariff is 17.6%, but only 1.4% for the United States. However, countries like Vietnam apply deep taxation on U.S. products, such as a 70 percent tariff on U.S. made cars, and a 50 percent tariff on American machinery.
If the world is moving toward free trade, why are there import tariffs at all?
Emerging countries tend to have a more aggressive tariff schedule. Nevertheless, here are some of the major reasons import tariffs are used: to protect domestic employment, to protect up-and-coming industries; national security; retaliation.
Across all foreign goods, the average U.S. tariff placed on imports is 1.4%.
The proposal
Updating the U.S. tax system has become a unifying principle of the leadership in Congress and the Trump Administration. Just about everybody agrees that the current system is burdensome, complicated and antiquated.
The architects of Border Adjustments and Tax Reforms have been House Ways and Means Committee chairman Kevin Brady (R-Texas), and Speaker Paul Ryan (R-Wis.). The overarching objective is to remove disadvantages created by other countries’ tax systems and to enable U.S. companies to be internationally competitive.
They have support among House Republicans and major export-driven companies like General Electric. Supporters say the House tax plan would encourage domestic investment and reward companies that manufacture in America. Recently, GE, Dow Chemical and Pfizer joined a coalition backing border adjustment that says the proposal would improve competitiveness for American-made products.
Meanwhile, Walmart, Target, Nike and Toyota joined an opposing coalition, warning that border taxes could cause consumer prices to increase.
A border-adjusted tax would impose a tariff on imports, including raw materials and components used in manufacturing, and exempt exports altogether. Under the proposal, companies will not be able to deduct the cost of goods sold (COGS) from their income taxes when the costs are imported. However, U.S corporate taxes could drop 15 percent from the lofty current mark of 35 percent to a more competitive 20 percent. All revenue associated with exports will be entirely exempt from taxation.
A sampling of global corporate tax rates:
- United States – 35%
- Japan – 32%
- Mexico – 30%
- India – 30%
- Germany – 29.7%
- China – 25%
- United Kingdom – 20%
- Switzerland – 17.9%
- Hong Kong – 16.5%
- Ireland – 12.5%
A border tax would impact various industries, such as the U.S. energy sector. Import refineries will face taxes that they do not have today, thus U.S. refineries will be competing on a level playing field.
It is interesting to note that the top two imported products by U.S. are:
- Petroleum oils worth $132,595,566 million
- Automobiles worth $98,625,996 million
Are additional border adjustments or import tariffs coming?
In numerous interviews, President Trump has called border adjustments “too complicated.” His leadership team has placed less emphasis on the use of tariffs, describing them as a tool to be used to initiate discussions on trade and security with our trading partners around the world.
“Any time I hear ‘border adjustment,’ I don’t love it,” President Trump said in a Jan. 13 interview with The Wall Street Journal.
Further, Wilbur Ross, Trump’s nominee for commerce secretary, is opposed to border tax. He said lowering the corporate tax rate is the biggest single tool that we could use.
I don’t think we are going to see additional border taxes or a “destination tax.” The dialogue and conversations will continue, but tax reform will develop with different measures and policies.
Import tariffs for our industry are equally unlikely.
In 2015, the U.S. government collected roughly $14.5 billion on apparel and footwear imports, approximately 42 percent of all duties collected by the U.S. government. This considered, I cannot see changes coming to the current model that will impose additional tariffs on the apparel and footwear sector.
Jeffery Streader is managing director of Go Global Retail, a consulting firm with services including buy-side diligence, strategic planning, implementing growth initiatives, change management, turnaround and restructuring.