President-elect Trump has offered plenty of tough talk on his way to the White House. And while the businessman has turned his rhetorical fire to everything from the Iran nuclear deal to the Affordable Care Act, perhaps no issue has been as consistent a target for his ire than trade policy.
Trump has talked often of introducing soaring new tariffs, pulling out of trade agreements, and recently, punishing American companies who move jobs overseas. These moves, he says, would be aimed at encouraging companies to create jobs in the United States by making goods here at home.
If a Trump administration ends up pushing for these or other major policy changes on trade, few industries are likely to feel the jolt more acutely than retail, which sells you smartphones made in China, sneakers made in Vietnam and furniture made in Mexico. With that in mind, it’s worth examining what is at stake in this debate for retailers and consumer goods importers. A sweeping change could alter how they do business and, in turn, could affect the prices or merchandise selection available to you, the consumer.
Let’s start with a look at the status quo. Retail industry experts often point out that tariffs are unusually high on many of the items that fill store shelves. For certain types of apparel, tariffs can go up to 32 percent; on footwear, they can soar over 67 percent. That is significantly higher than the 1.5 percent average seen across all imports including goods such as automobiles and oil.
Retailers, along with apparel and shoe brands, feel choked by these taxes. The National Retail Federation, an industry trade group, says bringing these taxes down could allow stores to reduce the prices you see on their shelves. (And in theory, they could sell more.) This is why the NRF was an ardent supporter of the Trans Pacific Partnership, which would eliminate tariffs on thousands of products coming to the U.S. from the 11 other participating Pacific Rim countries. In particular, as Vietnam emerges as an important garment and footwear manufacturing center, the removal of tariffs under this deal could have allowed retailers of these goods to offer cheaper prices to consumers.
NRF says in a report that the TPP could boost annual spending power by more than $1,000 per household per year, in part because of lower prices.
Want a real-world example of how an industry executive thinks about this issue? Danielle DiFerdinando is the founder and creative director of Danielle Nicole, a handbag brand carried at retailers such as Macy’s and HSN. The purses are assembled in China, using fabrics, fasteners and zippers from Chinese suppliers; DiFerdinando says this means her import taxes can be up to 20 percent on some of her brand’s larger handbags. When asked what she’d do if those tariffs were slashed, DiFerdinando said she could lower her prices for shoppers and order more bags from her suppliers so as to reach more of them. And she even said it could lead to some added creative freedom.
“We could use more hardware, play around more with the design,” DiFerdinando said, because it would give her a cushion to put more detail or different fabrics into her bags while keeping the consumer-facing prices the same.
Given that context, you can imagine how the industry is looking at Trump’s posturing on this issue. For one, Trump has been a fierce critic of the TPP, so that deal – which already looked doomed – now truly seems like a pipe dream.
And then there’s his other pronouncements, including that he’d like to pull out from the North American Free Trade Agreement, or put 45 percent tariffs on goods coming from China.
Before diving into what those kinds of moves could mean for retailers, it’s worth noting that these are not easy changes to execute, and are not changes a President Trump could make on his own. Even if Trump were to withdraw from NAFTA, Congress would still have to repeal the related implementation act. And as part of the World Trade Organization with China and more than 160 other countries, we’re obligated to adhere to rules that mean we can’t set tariffs over a certain threshold.
But, let’s say Trump was able to orchestrate a move to withdraw the U.S. from NAFTA. Experts say retailers that import from Mexico and Canada would likely be forced to rethink their supply chains and perhaps raise their prices to offset higher tariffs.
“It’s hard to envision a scenario where we re-open NAFTA that’s a positive for the business,” said Edward Rosenfeld, the chief executive of footwear brand Steve Madden, at a conference in November.
And if Trump were to push for a surge in tariffs on goods from a single country, such as China, it’s likely that U.S. retailers and brands would simply move their manufacturing to overseas facilities in a different nation instead of bringing them stateside, because it would simply be too expensive.
“You can try to drive domestic production as much as possible,” said Hun Quach, vice president of international trade at the Retail Industry Leaders Association, a trade group representing large retailers. “But if you look at our members, the volume in which we would need to source some of these products, I think, is a challenge here in the United States.”
Plus, China would likely retaliate by adding tariffs of its own that would hit U.S. companies that export to that fast-growing economy.
Meanwhile, there’s at least one Trump trade idea that probably wouldn’t have much impact for the retail and consumer goods world: His latest statements that there would be “retribution” for corporations that moved jobs overseas, in the form of a 35 percent tax. While this particular decree may sound chilling for many corporations, it doesn’t matter much in retail. For one, store positions – cashiers, clerks, stockroom workers – are essentially impossible to outsource. And garments, shoes and other items have been manufactured in Asia, Central America and other regions for decades. So it’s not as if many businesses are currently contemplating moving these kinds of roles abroad. In this industry, that moment has long since passed.
In addition to Trump’s own ideas, retailers are closely watching what trade-related topics might bubble up in Congress during his administration. After all, with Republicans now controlling the House, Senate and White House, perhaps their ideas have a better chance of becoming law.
The House GOP’s blueprint for tax reform includes a provision for what’s known as border-adjusted corporate taxes, which would rebate taxes on exports and put new taxes on imported goods. While the retail industry is generally in favor of tax reform, and likes the proposal to cut the corporate tax rate to 20 percent, it is deeply concerned that the border-adjusted taxation could cancel out – or more than cancel out – the relief companies would get from cutting the overall tax rate.
“It would be really a huge tax increase for the industry,” said Dave Koenig, vice president for tax at RILA. “More importantly in the eyes of policymakers, we’re going to have to pass these costs on in one way, shape or form.”
Economists and experts don’t necessarily agree that this policy would be detrimental for retailers. Kyle Pomerleau, director of federal projects at the non-partisan Tax Foundation, said that in a scenario in which border-adjusted taxes were implemented, currencies would adjust and U.S. retailers would end up shouldering a lower cost of goods. In turn, Pomerleau said, “retailers are no worse off than they were before the border adjustments.”
But the retail industry will be closely watching to see if it remains a cornerstone of the GOP’s tax plan going forward.