Teetering on the brink of collapse, U.S. trade policy as companies know it today may soon trigger a seismic shift in the way global trade management compliance is conducted, while U.S. companies that rely heavily on imports could feel some strong aftershocks.
These predictions follow strong showings that trade policy features prominently on the agenda of President Donald Trump. And U.S. companies of every size and sector—importers and exporters alike—are speaking out on all sides of the debate.
Kicking off his first week in office, President Trump on Jan. 23 signed an executive order withdrawing the United States from the controversial Trans-Pacific Partnership (TPP). Instead, the administration said it intends to deal directly with individual countries on a bilateral basis in negotiating future trade deals, which could make more complex the already intricate, global web of trade compliance.
In February 2016, twelve Pacific Rim countries, representing roughly 40 percent of the global economy, became TPP signatories, including the United States and Japan. The intent of the TPP was to strengthen economic ties between these countries, slash tariffs, and promote trade to boost economic development.
Many industries were also anticipating significant cost savings as a result of the TPP. The agricultural industry, for example, could have seen the reduction or elimination of certain excessive taxes, while both the automotive and footwear-retail industries could have seen the end of certain exorbitant export tariffs, most especially pertaining to Vietnam, a TPP partner-country.
Footwear Distributors and Retailers of America (FDRA) estimated that duty reductions could have generated more than $450 million in savings for the footwear industry just in the first year of TPP implementation alone, cost savings that FDRA said would have helped foster both U.S. job creation and innovation. Retail giant Nike, for example, previously stated that, “footwear tariff relief would allow Nike to accelerate development of new advanced manufacturing methods and a domestic supply chain to support U.S.-based manufacturing.”
For companies with global supply chains, such cost benefits have now been wiped clean. “Those are the costs that companies will feel immediately, that their bottom lines will not realize,” says Marianne Rowden, president and CEO of the American Association of Exporters and Importers (AAEI), a trade group representing U.S. companies engaged in global trade.
“The problem with the border adjustable tax is that it will split the trade community between importers and exporters, and we haven’t seen that in a long time.”
Marianne Rowden, CEO, American Association of Exporters and Importers
And that’s just the start.
Matt Priest, CEO of the FDRA, says, “If there is one word I can use to capture the concerns in the industry, it’s ‘uncertainty.’ ” Companies across every industry rely on a level of certainty to assess how a policy, including trade policy, could affect their business decisions. “Planning can’t happen with uncertainty,” he says.
NAFTA in limbo. In addition to the TPP, the North America Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico is also in limbo. During a White House meeting on Feb. 2, President Trump reiterated that he has “very serious concerns” about NAFTA, which he called “a catastrophe for our country.” Referring to the possibility of a renegotiated deal, President Trump stated, “I don’t care if it’s a renovation of NAFTA, or a brand-new NAFTA.”
In the first meeting on Feb. 13 with Canada’s Prime Minister Justin Trudeau, President Trump said he is looking at “tweaking” portions of NAFTA concerning trade between the United States and Canada. In a press conference following that meeting, President Trump said that U.S.-Canada trade is “much less severe situation” than with Mexico.
Beyond those vague details, uncertainty about NAFTA’s future has certain industries feeling particularly uneasy. More than 130 food and agricultural organizations, for example, in a joint letter to the President highlighted the importance of NAFTA to the industry.
Under NAFTA, U.S. food and agricultural exports to Mexico and Canada have more than quadrupled, from $8.9 billion in 1993 to $38.6 billion in 2015. “With a few key sector exceptions that still require attention, North America intraregional food and agricultural trade is now free of tariff and quota restrictions, helping U.S. farmers, ranchers, and food processors expand exports,” the letter stated.
The automotive industry also has a highly integrated cross-border supply chain. “This arguably makes it the most trade-sensitive sector with regard to shifting policies during 2017,” according to data from global trade research firm Panjiva.
Border adjustable tax. The TPP and NAFTA aren’t the only trade agreements causing turmoil across industries. Also in the works is a proposed “border adjustable tax” that would slash corporate income tax from 35 percent to 20 percent. The House Republican blueprint also proposes to exclude export revenue from taxable income and impose a 20 percent tax on imports.
“The problem with the border-adjustable tax is that it will split the trade community between importers and exporters, and we haven’t seen that in a long time,” Rowden of the AAEI says.
Industries that rely heavily on imports argue that a border tax would outweigh the benefits of a reduced corporate income tax. In response, the Retail Industry Leaders Association (RILA)—a coalition of more than 120 companies and trade organizations—is leading an effort to push against a border-adjustable tax.
LETTER TO CONGRESS
Below is text of a letter that 16 CEOs sent to Congressional leadership in support of comprehensive tax reform that would end the ‘Made in America’ tax on domestic production and make the U.S. tax code competitive in the global economy.
Dear Speaker Ryan, Leader McConnell, Leader Pelosi, and Leader Schumer:
Our companies collectively employ millions of Americans, either directly or through our suppliers, and we are proud of our roots here in the United States. We do business all over the world, so we witness every day how federal policies restrain the growth of the U.S. economy and reduce the number of jobs available to American workers.
We recommend enacting comprehensive pro-growth tax reform to remove a major impediment to economic growth—our outdated tax code. We have the highest business tax rate in the developed world and are one of the few countries that taxes business income on a worldwide basis. At a time when other countries have lowered their tax rates and enacted territorial taxation to attract investment and create jobs, the U.S. tax code continues to stand still. Our tax code also penalizes American workers who make products or provide services sold abroad, while favoring their international competitors.
The status quo hurts American companies and their employees. Tax reform needs to address this challenge head on, which is why we are so encouraged by your commitment to fundamentally revamping the tax code. For the first time in 30 years, the U.S. has a real opportunity to adopt major reforms, and the change cannot come soon enough. If you are successful, the U.S. will level the international playing field by replacing the most antiquated tax code in the developed world with the most modern. The nonpartisan Tax Foundation estimates that increased investment under the House plan will result in higher wages and roughly 1.7 million new jobs here at home.
The plan championed by House Speaker Paul Ryan (R.-Wis.) and Ways & Means Committee Chairman Kevin Brady (R.-Texas) would dramatically lower rates for businesses of all sizes, allow immediate expensing of all capital expenditures, and incorporate a more competitive “territorial” approach to taxing businesses. These changes will free up much-needed capital for companies to invest here in the U.S., help stop corporate inversions and acquisitions of U.S. companies, and protect American jobs from unfair foreign competition.
A critical element of the House blueprint is the provision that ensures goods and services produced abroad face the same tax burden as those produced in the United States. This reform is consistent with the tax policies of nearly every other country in the world, and it would effectively end the “Made in America” tax that creates an unfair advantage for foreign-based companies at the expense of U.S. jobs and economic growth.
We applaud your efforts to pursue tax reform that is both big and bold. Incremental tweaks will not level the playing field for American workers or dramatically reinvigorate economic growth. If we miss this chance to fundamentally reshape the tax code, it might take another 30 years before we have another chance to try.
That is why we are committed to helping you advance transformative changes that will accelerate a new wave of job creation and investment here in the United States.
Source: American Made Coalition
On Feb. 15, RILA and member-company CEOs met with President Trump to discuss their concerns. Among those at the meeting were JoAnn Stores CEO Jill Soltau; The Gap CEO Art Peck; Best Buy CEO Hubert Joly; AutoZone CEO William Rhodes; Target CEO Brian Cornell; Walgreens Boots Alliance CEO Stefano Pessina; Tractor Supply Co. CEO Greg Sandfort; and J.C. Penney CEO Marvin Ellison.
Industries that rely heavily on exports and those that are wholly U.S. domestic companies, however, are rallying in favor of the import tax. Earlier this month, a coalition of over 25 U.S. companies launched the American Made Coalition in support of pro-growth tax reform. Members of the coalition include Boeing, General Electric, Pfizer, and more.
Eliminating the “Made in America tax,” which the coalition referred to as “an unfair tax hitting goods produced domestically while favoring foreign-made goods,” will “create a more favorable business environment for American manufacturing and level the playing field so American workers can compete with foreign competitors,” the coalition stated.
Even if President Trump doesn’t ultimately approve that particular legislation, the Trump Administration has mentioned the possibility of slapping a 35 percent tariff on imports from Mexico. Moreover, President Trump has not been shy about using Twitter to publicly shame U.S. companies—including Carrier, Ford, and General Motors—for planning to move production facilities to Mexico. All three companies have since decided not to proceed with moving plants to Mexico.
“Most companies are trying to avoid being the subject of a presidential tweet,” Rowden of the AAEI says. The industries that have the strongest incentive to maintain good relations with President Trump are those that supply goods and services to the government, she says. United Technologies, the parent company of Carrier, for example, will receive a portion of its revenue this year from through U.S. military contracts at its Pratt & Whitney and UTC Aerospace Systems units.
Keep calm and trade on. No matter what direction trade policy takes, companies must continue with their day-to-day business strategies of deciding where and with whom to work for sourcing their products. “When it comes to interacting with your partners overseas and continuing to foster those relations, you still have to stay the course,” Priest of the FDRA says.
If it makes sense to partner with a supplier in Mexico, do it. If it makes sense to diversify your sourcing out of China and put more in Vietnam or Indonesia, do it. Keep in mind, however, that you may have to adjust your strategy if some of these trade policy deals come to fruition, Priest says.
Priest also encourages companies—as many have already been doing—to be a part of the process by sending letters to Capitol Hill and engaging with industry trade associations. “Companies should be vigilant about gathering intelligence and staying up to speed on what’s happening,” he says.
Due to the complexity of global trade policy today and the unpredictable pace at which U.S. trade policy is evolving, companies may want to consider implementing a global trade management (GTM) software solution to stay up-to-speed on the latest developments.
GTM software provider Amber Road, for example, provides companies with streamlined access to the latest import and export compliance rules, custom duties and taxes, and other trade barriers, explains Ty Bordner, vice president of solutions consulting at Amber Road. Rather than release new versions of software, the data itself is continuously updated in near real-time, Bordner says. Amber Road also helps companies properly classify products based on the relevant country of import and country of export, while also documenting all decision criteria to support future audits.
Since it appears likely the Trump Administration will favor more bilateral trade deals over multilateral trade deals in 2017, trade compliance professionals will have an increasingly challenging road ahead of them.
The most arduous task will be understanding and navigating the various “rules of origin,” which are highly complex, and technical rules that describe how exported goods shipped to a country, or a region, may qualify for duty-free or reduced-duty benefits under the applicable trade agreement. Thus, the more bilateral agreements that are in place, the more costly and complicated it will be for any company that manufactures potentially thousands of goods across multiple markets.
The key message is that companies—importers and exporters alike—cannot afford to ignore the dramatic shifts occurring within the U.S. trade policy landscape. Now is an opportune time to reassess how these changes may affect your global supply chain.