US apparel sector braces for potential cost hikes

By Ed Zwirn

(Published on Feb. 15 2017 in Just-Style.com)

Fresh from their disappointment at seeing the Trans-Pacific Partnership (TPP) free trade

The Border Adjustment Tax could raise prices by as much as 20%

deal abandoned last month with an executive order by President Donald Trump, the US apparel and footwear sector is bracing itself for even greater cost increases to come.

The focus of its sharpened concern is a so-called Border Adjustment Tax (BAT) contained in a Republican package of tax legislation currently under consideration by the US House of Representatives.

In theory, it would pay for corporate tax cuts framed in the legislation by stopping companies deducting the cost of imports into the US from their taxable profits. Instead, it would impose a tariff on imports, including raw materials and components used in manufacturing, and exempt exports altogether.

Proponents of the tax, including House Speaker Paul Ryan, argue it will safeguard American jobs while paying for the corporate tax cuts, as well – according to White House press secretary Sean Spicer – as President Trump’s fabled wall on the US-Mexican border.

Opponents, including most apparel and footwear brands, retailers and importers, argue it will drive prices up while threatening the viability of their companies and the jobs they provide.

Americans for Affordable Products (AAP), a coalition formed at the beginning of this month with the sole stated purpose of blocking the proposed tax, argues that “many necessities, including food, clothing, prescription drugs and gasoline, would cost consumers US$1 trillion over 10 years [as a result of the tax]. American families will pay at least US$1,700 more on essential products per year with the passage of this legislation,” it says.

Retail-backed coalition campaigns against US border tax

The axe would fall most heavily on retailers, the AAP says, who employ one-in-four Americans, putting 42m jobs at stake as businesses fold under border adjustment tax bills. Other companies, particularly those that export rather than import, would get “corporate tax cuts so huge that some profitable companies will pay nothing at all.”

“The retail industry pays among the highest effective tax rates of all industries. We, therefore, enthusiastically support reforming the current tax code and welcome the fact that both the president and the Congress do so as well,” says Retail Industry Leaders Association (RILA) president Sandy Kennedy.

“However, the Border Adjustment Tax is harmful, untested, and would put American retail jobs at risk and force consumers to pay as much as 20% more for family essentials.”

Upward pressure on prices

If adopted, the tax proposal would add to the upward pressure on prices already seen with the demise of TPP, according to Nate Herman, senior vice president of supply chain at the American Apparel & Footwear Association (AAFA).

“TPP if it was implemented, would have saved our industry US$1bn in the first year alone and going forward even more,” he says. “All clothes and shoes would have benefited from this, with footwear benefiting on day one and apparel phased in over time.”

Also adding uncertainty to the pricing environment is the Trump administration’s stated desire to renegotiate the North American Free Trade Agreement (NAFTA) the US shares with Mexico and Canada.

“It’s still unclear what parts of NAFTA Trump wants to renegotiate,” says Herman. “There is a very strong US-Mexico textile/apparel supply chain, with 40% of men’s and boy’s jeans, for example, coming from Mexico, and if you disrupt this there would be a knock-on effect that would include damage to US yarn and denim producers and their workers.”

That being said, “the BAT is our number one issue right now, because it poses an existential threat to our industry,” says Herman, whose AAFA is one of the organisations and companies that have joined the AAP.

“98% of all clothing sold in this country is imported, and this will prevent many of our companies from deducting these imports from cost of goods sold on their income taxes, and this will increase their tax bills by three or four times over,” he says.

“This is supposed to raise US$1.2 trillion over the next 10 years and that would pay for a lower corporate tax rate,” Herman says, adding that looking out over a shorter timeframe, “a lot of companies that are currently profitable are going to be reporting a loss.”

Trump trade moves

Also asked to comment on the latest Trump trade moves and their pricing effect along the apparel supply chain, United States Fashion Industry Association (USFIA) president Julia Hughes says: “Let’s just say I’m very cautious today. We’re watching to see what comes next. It’s been three weeks [since the new administration took office] and there’s been something new every day.”

Expensive as it may prove to importers over the long run, the US President’s 23 January executive action ending US participation in TPP will have no immediate effect on supplier prices, mainly because the reductions to tariffs in the apparel sector were being gradually phased in.

More immediate and profound disruption could come, Hughes says, depending upon how the specifics of Trump’s announced intention to renegotiate NAFTA play out. “Trump says we anticipate renegotiating NAFTA. What that means we’re not clear, and nobody’s been talking about our sector.

“If we lose NAFTA, obviously it’s a big hit on companies importing apparel, 15% [tariffs] on some and 32% on others depending on the categories,” she says. “I don’t believe that this administration will eliminate NAFTA and have no deals to put in its place.”

In addition, Hughes, whose USFIA is also a member of the coalition against the Border Adjustment Tax, agrees with Herman’s assessment of BAT as the biggest possible threat facing US footwear and apparel today.

“Certainly, individual companies have done analyses showing that their tax rates could go way up if BAT is adopted,” she says.

How much of a catastrophe would this scenario prove, both in terms of supply chain pricing and the viability of the industry itself? “I’m sceptical about trying to speculate,” Hughes notes.

 

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Ed Zwirn

About Ed Zwirn

Ed Zwirn is a journalist/editorial professional with a focus on financial trends and practices. He lives out in the woods in Bethel, NY, not far from where the Woodstock Music and Arts Festival was held in 1969. As a financial writer, his work has appeared in The Wall Street Journal, The New York Post, CFO Magazine and news services including Dow Jones Newswires and Informa Global Markets. Ed also spent three years in Ukraine, where he ran an English-language news service. He now divides his time between his freelance journalism, song and poetry writing, and barbequing and lawn-mowing on his 2.5 acre property.

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