Counting the Winners and Losers From an Import-Based Tax

2017-01-26 19:06:10

 

Counting the Winners and Losers From an Import-Based Tax

The idea of a broad tax on importers is suddenly at the center of the Washington policy debate, with the inevitable counting of potential winners and losers.

It could hit retailers the hardest if it takes full effect, with their heavy reliance on products as varied as microwave ovens from China and T-shirts from Bangladesh. But few sectors of the American economy and few consumers would be unaffected.

If such a tax were imposed on imports from around the world, automakers could face hefty tax bills not only for cars imported from Mexico and elsewhere but also for the many auto parts they buy from overseas for their assembly lines in the United States. Chemical companies, supplying practically every industry, could find themselves paying more for feedstocks. And energy companies could wind up paying more for imported oil.

The Republican leadership of the House Ways and Means Committee has been working in recent months on such a plan, a border-adjusted tax, as part of an effort to cut corporate tax rates. On Thursday, the plan got caught up in a discussion of ways to make Mexico pay for a proposed border wall, before the White House stepped back from endorsing that course.

Even in its broader form, the tax plan could be politically tricky. If a tax covers oil imports, for example, it would end up falling most heavily on rural Americans, who voted heavily for President Trump but also tend to drive farther each year than residents of heavily Democratic large cities.

The tax “would be a boon for producers but it would be a negative for consumers — it’s going to hit the pocketbooks of his supporters the hardest,” said Ed Hirs, a managing director of Hillhouse Resources, an oil and gas company based in Houston.

Even those seemingly safe from import taxes, exporters like Boeing and American farmers, could also lose sales if other countries retaliated. Banks on Wall Street, arguably the most powerful lobby for free trade, could lose overseas contracts to represent initial public offerings if foreign governments responded by steering their companies to European or Asian rivals.

By international standards, the United States puts few taxes on consumption, while taxing producers more heavily. The House Republican proposal would start to shift that balance, and one likely effect would be somewhat higher prices at retailers including gas stations and Walmart.

Many small manufacturers without overseas factories have long favored an overhaul of the United States tax code that would increase corporate taxes on importers. The money raised from such a tax increase, they have argued, could then be used to offset a reduction in the overall corporate tax rate of 35 percent.

Powerful business groups like the American Chamber of Commerce have said fairly little about such proposals, because of deep divisions in corporate America based on who would pay the import tax and who might benefit from a broader reduction in corporate taxes.

But Mr. Trump and his spokesman, Sean Spicer, may have complicated the House Republicans’ efforts by raising the possibility of imposing such a tax on goods from Mexico first, with the money used to pay for Mr. Trump’s plan to build a wall along the Mexican border to deter illegal immigration. The White House later said it was just one of the methods being considered.

Linking the plan to Mexico left corporate groups mostly silent, leery of offending the president by criticizing him but also leery of offending Americans who dislike Mr. Trump’s denunciations of Mexico and Mexican immigrants.

Industrial labor unions in the United States have been more open to increased taxes on imports from Mexico. At a media briefing right after the November election, Dennis Williams, president of the United Automobile Workers, expressed support generally for the president’s advocacy of tariffs on Mexican imports.

“I think his position on trade is right on,” Mr. Williams said.

If a tax is imposed, the retailing industry, and particularly apparel retailers, could be among the hardest hit. Much of the clothing sold in the United States is made overseas, and retailers have little wiggle room to raise their prices to compensate for higher costs.

And the timing could not be worse: Retailers, particularly apparel companies and department stores, have struggled more than other sectors of the economy to recover from the recession.

Tighter budgets, Amazon and many new discount chains have conditioned shoppers never to pay full price. In recent years, that has created a discounting war that has decimated once-mighty retail titans like Macy’s and other department stores.

Could those same stores start charging more because of the proposed plan to raise the costs on imports?

Unthinkable.

But David French, senior vice president of government relations at the National Retail Federation, said that retailers would have no choice but to raise prices.

“I really hope everybody understands that what they’re really talking about is a 20 percent tax on the U.S. consumer,” he said on Thursday. “That’s like building the wall and having the U.S. consumer pay for it.”

Apparel companies could be among the most vulnerable if corporate taxes rise for importers of goods from all over the world, since many of the clothes sold in the United States come from China or Bangladesh. Budget-friendly retailers in particular run the risk of alienating customers by raising costs.

Grocers could also be affected by higher taxes on imports, and particularly on imports from Mexico.

But while most of the retail industry is alarmed at the thought of higher import taxes, some companies could actually win if the Republican plan goes through. Stores that operate primarily in the United States and cater to less price-sensitive shoppers could actually see their profits increase, according to some estimates. That is because the imported goods they sell actually make up a small share of their overall costs, while they spend heavily on attractive stores, American staff wages and marketing promotions.

The beauty retailer Ulta is one such company, according to Goldman Sachs, which predicted that net income could actually rise by 21 percent.

Ulta sells thousands of cosmetics from brands like Chloe and Clinique, many of which source from overseas factories, according to the company’s financial filings. But Ulta may benefit more from the part of the House Republican proposal that would reduce the 35 percent corporate tax rate.

As for the higher import taxes, “they can actually pass along some of the price,” Simeon Siegel, a retailing analyst with the investment bank Nomura, said.

By contrast, a tax on imports from Mexico could wreak havoc on finely balanced supply chains in the auto industry. More than two million Mexican-made vehicles were sold in the United States in 2015, according to the International Trade Administration, representing a little over a tenth of the American market. The products range from full-size pickup trucks made by General Motors and Fiat Chrysler, midsize sedans produced by Ford, and a variety of small cars assembled by foreign automakers such as Honda and Nissan.

Some automakers are more vulnerable than others. The German automaker Volkswagen, for example, imports more than 30 percent of the vehicles it sells in the United States from Mexico. The figure is closer to 15 percent for the two largest American auto companies, G.M. and Ford.

A 20 percent tariff would probably have to be passed on, at least in part, to consumers. That could add thousands of dollars to the sticker price of affected vehicles — and perhaps cause sharp declines in their sales.

Mexico also exports about $50 billion in auto parts annually to the United States for use in American assembly plants. Tariffs on those parts would add significant costs to American-built vehicles that use them.

Mr. Trump’s repeated criticisms of Mexican exports to the United States has prompted several automakers, including the big Detroit companies, to announce plans to increase investment and jobs in their American factories.

Sergio Marchionne, the chief executive of Fiat Chrysler, said Thursday that policy changes that force car companies to curtail or abandon Mexican production would have a major impact on the industry.

“The question about repatriation of all of the manufacturing footprint into the United States has got monumental consequences to the industry over all,” Mr. Marchionne said in a conference call with analysts on the company’s fourth-quarter earnings.

Add comment