The implications of the proposed border adjustment tax and the threat to renegotiate or scrap the North American Free Trade Agreement has executives agitated, as evidenced by formal discussions and cocktail party talk at the American Apparel & Footwear Association’s annual executive summit here.
Many of these industry leaders are still reeling from Trump killing the Trans-Pacific Partnership trade pact. While most of the companies represented at the AAFA meeting are importers, there was some positive talk about the continued growth of Made in America manufacturing and that it could be the only plus of what the vast majority of these executives feel would be a harshly negative impact from these trade proposals.
The irony of the confab being held at the Watergate Hotel — the complex where a robbery at Democratic National Committee headquarters eventually led to the resignation of President Richard Nixon — wasn’t lost on most attendees.
Rick Helfenbein, president and chief executive officer of the AAFA, in his opening remarks, said, “The uncertainty has own phones ringing off the hook. The BAT is a serious institutional threat to our industry. We’re concerned with the House tax plan — A Better Way — that will tax imports, that will work against us, cause disruptions and lead to higher consumer prices.”
Helfenbein said if the Republicans want to pass this legislation, it will pass. He said he told House Speaker Paul Ryan, (R., Wisc.) that “we are being targeted,” but that he wasn’t very receptive.
In a panel on “Trade Transformers in the Trump Era,” Helfenbein said, “Our industry is under attack. There’s a lot that’s going on that’s changing.” He said “nobody in this room should underestimate what you’re up against. If the House wants to pass this bill, they can do it. They have the power.”
He said the Senate will most likely vote it down, which means it will then go to reconciliation and the concern then is that apparel importers will be the “sacrificial lamb.”
“The good news is that they want to bring the corporate income tax from 35 percent down to 20 percent, but by the way you can no longer deduct your cost of goods sold. So if you can no longer deduct your cost of goods sold…your taxes will more than likely exceed your profits.”
Tom Glaser, vice president of VF Corp. and president of global supply chain at the company, said, “It’s important that we continue to send the message as an industry that the border adjustment tax will more than likely annihilate the P&L for many companies in the industry.”
Glaser said at VF Corp., executives are analyzing what the exact policy is, what will come out of the House of Representatives and what the implications will be because the details “really matter.”
Juan C. Zighelboim, cofounder and president of El Salvador-based TexOps, a producer of stretch performance activewear, said, “With chaos comes uncertainty and uncertainty is related to proximity and perhaps as a company in the CAFTA [Central American Free Trade Agreement] region, that tilts in our favor.”
Zighelboim said the company is trying to take a pragmatic approach to what may be coming.
“The world of trade is not going to end if the BAT happens to become a reality,” he said. “It affects us all equally, negatively, but equally.”
Steve Lamar, executive vice president of the AAFA, said, “We as an industry paid $14.5 billion in tariffs last year, so we’re already very heavily taxed at the border.”
He said beside the overall negative impact if BAT becomes law are the unknowns, such as whether imported merchandise that is part of trade agreements like CAFTA would be included, or if U.S. content is used.
Lamar noted that some people have equated BAT to a value-added tax, which is a consumer goods tax.
“But nobody has ever taxed the income related to goods crossing the border,” he added. “It would be the first time, which is going to raise a lot of questions and challenges with the World Trade Organization and our obligations.”
As for NAFTA, Lamar said, “There are a couple of hundred textile and apparel jobs in this country that depend on NAFTA, while also employing many thousands more in communities across the country. If that is disrupted, the economic disruption that would spread across the country would be terrible. There should be basis in any renegotiation that this agreement is working, that this agreement is keeping a lot of people employed in the United States.”
He also noted that Made in USA is a trend “that we are very much promoting,” that could also be hurt by NAFTA being substantially changed due to cross-border benefits and that over the last several years, Made in the USA for apparel and footwear has increased about 50 percent.
Robert W. D’Loren, chairman and ceo of Xcel Brands, in a separate talk on supply chain efficiency and optimization, said “accelerating the speed of production” is more important than ever and that Made in America can pay a role in that, particularly in the move toward more fully automated factories.
Glaser agreed that NAFTA has been “a very successful arrangement and has many cross-border benefits, where we buy yarn and fabric in the U.S. and ship it to Mexico and ship finished goods all around the world. From everyone that I have conversations with in our industry, it generally works. As with the BAT, we should be having a serious conversation about what the positives and negatives are and put all the facts in evidence and have a serious conversation and about should be done moving forward.”
He added, “I think the core principles of NAFTA have worked, there’s a surplus for our industry, there’s a lot of benefit that’s been created. I have a concern that if there were to be substantial changes in NAFTA, it would absolutely have a negative impact on jobs in the United States.”