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Trade, coupled with the poor condition of the nation's crumbling transportation infrastructure, is top of mind among lawmakers and industry executives alike. In the case of the latter issue, there's a rough consensus among both political parties of the pressing need for repair, maintenance and new construction of highways, bridges, ports and rail facilities. But one huge obstacle stands in the way of progress on either front: the President's vow to make huge cuts in the federal budget across multiple agencies and programs.
His draconian budget proposal for 2018 is generally considered to be “dead on arrival” in Congress, even among supposedly supportive Republicans. But pieces of it could still be enacted, hampering efforts to improve the flow of people and freight throughout the nation’s transportation system.
Proposed cuts would affect a number of non-defense programs that are key to the efficient movement of cargo, including funds for cargo clearance. Then there’s the vaguely defined border adjustment tax, to be levied on imported goods in retaliation for manufacturers failing to produce domestically. The President has spoken of a tariff on imports as high as 45 percent. In addition, importers would not be permitted to deduct from their taxes the cost of goods sold, including labor and services — a perk that would be available to exporters.
“We are significantly concerned about the impact this will have on our members and consumers,” said Jonathan Gold, vice president of supply chain and customs policy with the National Retail Federation. He spoke on a panel at the recent Trans-Pacific Maritime (TPM) conference in Long Beach, Calif., presented by JOC and its parent, IHS Markit. Gold said the tax “could have an impact three to five times the profit margin of retailers.”
The President has also pledged to cut business tax rates by 20 percent, but Gold said that move would be more than offset by the border adjustment tax, resulting in a net tax increase of 80-100 percent for retailers.
In proposing the border tax, President Trump appears ignorant of the complexities of modern-day trade. A manufactured item today often will be sourced from multiple suppliers and locations, both domestic and offshore, and might cross the border more than once during the process of assembly. “Companies are going to have a nightmare trying to figure out what can and cannot be deducted,” said Susan Kohn Ross, partner and international trade counsel with the law firm of Mitchell Silberberg & Knupp LLP.
Centric Parts is a manufacturer and supplier of replacement brake components for domestic and foreign vehicles. Steve Hughes, vice president of supplier development, government affairs and logistics, said the company imports up to 6,000 twenty-foot equivalent units (TEUs) of product a year. “A huge portion of our industry is offshore,” he added, meaning that the cost of crucial aftermarket auto parts will rise “exponentially” in the event of a border tax.
Moving production to the U.S. is not as easy as it might sound. Hughes said Centric would have to spend more than $120m to retool its factories for onshore production, and the effort could take between five and 10 years to complete. What’s more, the resulting product would be significantly more expensive than today’s imported version.
Low- and medium-income consumers would be hit the hardest by the increase, claimed Hughes. In addition, many producers would be unable to bear the burden of the new tax and would be driven out of business. “This is just a really dangerous plan, in my opinion,” he said.
Regardless of what shape the President’s budget and taxation proposals ultimately take, they won’t be realized quickly. Congress’s attempt to rush through healthcare reform, under pressure from the Administration, crashed and burned in part for that very reason. Paul H. Bea, Jr., government relations and policy adviser with PHB Public Affairs, said the debate over tax policy will be prolonged and painful. “There’s a reason why we haven’t seen tax reform out of Congress for decades,” he noted. “This is something that’s not going to be done quickly or easily.”
Further clouding the issue is the uncertain fate of the North American Free Trade Agreement (Nafta), which President Trump has vowed to renegotiate on terms that would supposedly be more favorable to the U.S. Ross said it remains questionable as to whether treaties such as Nafta are the primary reason for lost American manufacturing jobs. “Study after study shows it’s attributable to globalization and automation,” she said. But that didn’t stop candidate Trump from demonizing Nafta and other big trade deals during the presidential campaign.
Meanwhile, traders and transportation interests remain in a state of limbo. Yet another law for addressing the nation’s surface transportation infrastructure is on the books — once again, without adequate means of funding. All industry can do at this point is hammer home transportation’s importance to consumers, freight carriers and the U.S. economy. Gold said the effort must include private-sector employees, legislators and trade associations.
Congress and the Administration will likely be trapped in gridlock for months to come. But education of the public and policymakers must go forward.
