The Americans for Affordable Products (AAP) coalition was set up earlier this year with the sole stated purpose of blocking the proposed tax

The Americans for Affordable Products (AAP) coalition was set up earlier this year with the sole stated purpose of blocking the proposed tax

As has been widely reported, some US politicians have endorsed a plan to alter domestic tax laws in such a way that imported products would be subject to a new tax, while exempting exported products from the tax. The plan is called the Border Adjustment Tax (or BAT). It is bad policy. Why? Let's take a look.

Congressional architects of the tax reform plan included the BAT, which would amount to an estimated across-the-board 20% tax on all products imported into the US – including the raw materials that are brought here by American companies, manufactured by American employees and then sold to American customers.  

Supporters of the BAT claim it will act as a value-added tax – something many countries around the world utilise – and will promote the creation of domestic jobs thanks to its export benefits. Although, in reality, it will do the opposite.

The idea behind the BAT is to raise revenue by taxing imports to help offset tax-cutting provisions proposed by some politicians as part of a broad tax reform legislation. For sure, the US tax code needs to modernisation, but the BAT shouldn't be part of any tax reform plan.

The US retail apparel market today is dominated by imports. It's a reality. A 20% hike in the price of imported goods makes little sense when the vast majority of clothing sold in the US today is made overseas.

Moreover, today's retail market is underperforming; raising prices at this delicate time ignores the reality of today's business. Indeed, retailing is tough enough without adding a 20% hike to the industry's cost structure.

US jobs are created directly by trade and imports, whether it's in product development, design, manufacturing or logistics. All throughout the supply chain, employment is perhaps the biggest value of imported goods. Supporters claim that the BAT will create lots of new jobs. That is true – only that the jobs created will be overseas, not in the United States.

US apparel sector braces for potential cost hikes

Reworked supply chains

If anything, the BAT will only eliminate US jobs, particularly in the fashion industry, which relies so heavily on imported products and materials. Faced with higher costs, the textile supply chain – from manufacturers, to importers, and to retailers – will just adjust their sources of supply to cheaper countries to manufacture their goods.

The materials US apparel companies import from abroad, including many basic fabrics, are no longer produced domestically

Further, the products and materials US companies import from abroad are either scarce or not available at all here in the US. In particular, many basic fabrics are no longer produced domestically.

Higher costs from the proposed BAT will strip away any gains from any other corporate tax cuts proposed in any pending tax legislation. Increased prices to customers are a certainty, which will put a chilling effect on sales and revenue.

Many fashion businesses, clothing, and apparel retailers will face hard decisions – including laying off employees or closing their businesses. So many US retailers have already been forced to shut down over the past couple of years. The BAT will only add to an already depressed market.

A 20% increase in the cost of an imported pair of jeans, for example, won't curtail imports; even with that increase, imported jeans will continue to be much cheaper than those produced domestically. Some retailers and brands may choose to pass the added costs on to consumers, though that could prove difficult for many companies.

What's more likely, though, is fashion companies will rework their overseas supply chains to offset the BAT by moving to lower cost countries to have their products made. That will result in new jobs being created in the farthest corners of the world – not in the US.

Cheaper alternatives

As US consumers witness on a daily basis, clothing is always discounted and on sale. And there's a good reason for that: it's hard to sell products in today's economy. It requires lower prices to stay viable.

There's a recent example that helps to illustrate the point. A few years ago, the price of cotton soared to uneconomical levels. Retailers and apparel brands couldn't pass on those added costs to consumers, so they frantically searched for cheaper alternatives. Their solution was to use more fabrics made with cheaper synthetic fibres, like polyester. Please check the clothing you are wearing now: it's likely it contains synthetics – certainly more likely, at least, than would have been the case just a few years ago.

Here's the point: when costs go up, the supply chain adjusts by seeking out cheaper alternatives. As with the fibre example, so will be the case with the BAT.

Meanwhile, US trading partners will also not like paying a BAT and could seek to ship their exports to a more economically friendly destination. Furthermore, many countries will also seek retaliatory tariffs on US exports, in turn adversely impacting export-oriented US manufacturers.

US tax reform is desperately needed to boost commerce and grow jobs, but unfortunately, the BAT has stalled progress on passing meaningful tax reforms.

Media reports suggest the BAT legislation is dead for now, although that's not the case. Life support is a more accurate description of the BAT's current health as some politicians continue to keep the initiative alive.

In fact, some have proposed phasing in the BAT provisions over five years. Only that bad policy is still bad policy.

How US border adjustment tax could affect apparel

About the author: Robert P Antoshak is managing director at Olah Inc, a New York-based global textile and apparel development and marketing firm that supplies US companies with denim, corduroy and piece-dyed fabrics. It is also producer of the Kingpins denim shows.