'What the president says I have money riding on': The ripple effects of Trump's import-tax plan
When Jerry Phillips bought his business in 2009, the imports that sustained his sales mostly came from Europe.
As a dealer in parts for vintage Alfa Romeo and Fiat automobiles, most of the parts sold by Phillips' company in Fort Worth, Texas, were going into cars from Italy.
Phillips found, however, the parts didn't necessarily have the same origins as the cars they were paired with.
"I discovered when I purchased the business that all the parts that we were buying from Europe, lo and behold, they were sourcing from overseas themselves, from Asia, so we began to source from Asia as well," Phillips told Business Insider.
"We import parts from around the world, and we ship parts out every day around the world," he said. "We buy from the EU. We buy from Turkey. We buy from South America. We buy from China. We buy from a couple of other Asian nations. We buy from around the world."
Phillips' company, which employs only five people, is one of many American small businesses — that is, wholesale or retail trade firms with 250 or fewer employees — that relies heavily on imports. More than 95% of US importers are firms of that size, according to Census data cited by The Wall Street Journal.
The Trump administration has floated a 20% tax on imports as one possible way to pay for the wall the president wants to build on the US-Mexico border, estimated to cost $12 billion to $15 billion. (Trump's embrace of the border adjustment tax would appear to be a reversal of his stance on it from earlier in January.)
While Trump's team first mentioned the 20% tax in relation to Mexican imports, Republican leadership has said it aligned with their boarder tax-reform plans, specifically the implementation of a border adjustment tax that would apply to all countries.
Such a tax would only apply to goods imported to and sold in the US, and companies would only be able to deduct their local costs. Revenue generated by the new tax scheme would supposedly fund a reduction in the corporate tax rate, from 35% to 20%.
Such a tax would have pronounced effects on Texas, which has a trade surplus with Mexico and through which flows 33% of Mexico's imports to the US.
"Texas' number one trading partner by far is Mexico, and imposing a 20% tax on Mexican imports to fund a border wall would hurt the Texas economy," Texas Association of Business President Chris Wallace said at the end of January. "This proposal could mean a loss of jobs and a hit to state tax revenues."
"Mexico doesn't pay for the wall," Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, told Bloomberg in late January. "American consumers who shop at places that import, like Wal-mart and Target, pay for the wall ..."
"I can easily see that businesses like ours would need to raise prices anywhere from 20% to 30% to cover these changes in the rules," Phillips told Business Insider, saying his company had a major presence in what he admitted was a "teeny, tiny market."
"And my customers are very price conscious," he added. "It would be very difficult for us to continue to sell at the volume we are with a 20% to 30% price increase." With customers less willing to buy his goods, Phillips said, businesses down the line, like repair shops, would in turn see less business and employ fewer people.
Concerns about barriers to imports are not limited to Texas businesses or to imports from Mexico.
While large retailers like Walmart have more leverage to negotiate deals or to shop around for suppliers, smaller US companies would be hamstrung, unable to maintain current prices while selling higher-priced imports and unable to afford domestically manufactured goods.
Richard Woldenberg, chief executive of Learning Resources, a Illinois-based company with about 150 workers selling plastic educational toys sourced mostly from China, told The Journal that even with a lower corporate tax rate, the border adjustment tax would drive his tax bill up by four or five times, which would require him to hike prices and then see sales shrink.
Jennifer Arenson, whose business, Global Sourcing Connection, employs 26 people and supplies uniforms and promotional items to Fortune 1000 companies, told The Journal that for a company the size of hers, running its own manufacturing operation "absolutely is not a realistic option."
Arguments in favor of the tax are that it would benefit firms that are exporters or those that don't import goods. Some small businesses may in fact become more competitive in this scenario. The conservative Tax Foundation estimates that it would generate $1.1 trillion in revenue over 10 years, and, among other things, it would disincentivize offshoring of profits and jobs.
Other advocates have said the dollar would rise in value, offsetting the impact of the tax on US businesses. If that adjustment doesn't come to fruition, companies big and small would be hit with higher prices for imports.
"We keep our pricing stable, even when we, say, have to pay a little more for a product because of a fluctuation in the exchange rate that's not in our favor," Phillips said. "But, if we go to an import tax, that's going to be seen as a permanent change, not a fluctuation."
"If it's permanent, we're going to move prices upward," he added. "There's just no question."
More broadly, the negative impact of a tax on imports may outstrip the benefits reaped.
"From a macro perspective, from a broad tax perspective, the amount of revenue you're going to get is very low, the amount of distortions you're going to create is very high, the amount of trouble you're going to create for the US and the world economy is very large, and the distributional effects are not trivial," Adam Posen, a former policymaker at the Bank of England and the president of Peterson Institute for International Economics, said at a conference this month.
The cost would be "actually very harmful," Posen added.
The possible broader international blowback from such an import policy — disturbed relations with major trading partners like China and Mexico, potential action against US exporters by the World Trade Organization, and retaliatory tariffs — would redound on the US economy as well.
Moreover, Phillips told Business Insider, with a global supply chain, good business relations are about more than just economics.
"There are some parts I'll be buying from Turkey in the next couple of weeks, and it's a pretty big purchase for my small company," he said.
"Turkey is a Muslim country, and we've instituted these travel restrictions ... on a number of Muslim countries, and the folks in Turkey may not be too happy about that."
"I need to have a good rapport with my Turkish supplier. They need to trust me, and I need to trust them," Phillips added, chuckling. "What the president says I have money riding on."
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February 7, 2017 at 07:12AM