Suppliers still wary of border tax

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WASHINGTON — The border adjustment tax advocated by some Republican lawmakers has lost a lot of steam since it was floated last summer, with major industries such as automotive and retailing that heavily rely on imports pressing lawmakers to scuttle the idea.

But auto suppliers aren’t letting up in their opposition, touting a new study that suggests the border tax and other trade policies, such as import tariffs aimed at pressuring U.S. manufacturers to relocate overseas factories to the U.S., will harm the auto industry and consumers while undermining job creation and economic growth.

Many Republicans on Capitol Hill have expressed skepticism or opposition toward the border tax, but House leaders still are expected to pursue the tax because it is a key revenue raiser that would allow them to offset cuts to corporate and individual tax rates.

Under the border adjustment tax, importers would be taxed at a lower corporate tax rate of 15 to 20 percent, but they would pay tax on the entire value of the sale, without the ability to deduct input costs associated with any part of the import process, as they can today. Exporters, meanwhile, would be exempt from paying tax on their profit.

The economics of bringing production work back to the U.S. aren’t favorable for most automotive products under current market conditions, according to the study by Boston Consulting Group and commissioned by the Motor & Equipment Manufacturers Association.

For the North American auto supply chain, a border adjustment tax would add cost to a vehicle but not change the decision on where to manufacture because it still would be cheaper to produce in Mexico, depending on the components or vehicle involved, Xavier Mosquet, managing director of Boston Consulting’s Detroit office, said in a briefing for journalists.

On average, a 15 percent border adjustment tax would increase the cost of vehicles by $ 1,000, while a 35 percent tariff would raise the price by $ 1,145, the study said. A 20 percent tariff would raise average vehicle cost by $ 650.

The cost increases would force automakers to pressure suppliers to lower prices, resulting in the removal of 3 percent of nonessential parts from vehicles. “Decontenting” would lower supplier revenues and place up to 50,000 jobs at risk, Boston Consulting said.

The decision to take out optional features will begin with customers deciding how much they can afford and streamlining option package choices, said Ann Wilson, the manufacturers association’s senior vice president of government affairs.

NAFTA objectives

On Monday, the Trump administration outlined its objectives for renegotiating the North American Free Trade Agreement with Mexico and Canada. President Donald Trump has suggested the U.S. could pull out of NAFTA if the talks don’t provide greater benefits to American companies and workers, at which time higher tariffs might be implemented.

The 35 percent tariff cited in the study is an extreme scenario and not considered likely by most trade analysts because it could do severe damage to supply chains that depend on cross-border trade. In January, the Center for Automotive Research estimated that a 35 percent tariff would result in a sales reduction of 450,000 vehicles in the U.S. and increase average prices by about $ 6,000.

Trump has shown a tendency to back down from tough rhetoric when it comes to actual policy decisions, so even if he follows through on a threat to withdraw from NAFTA, the administration is expected to impose much lower tariffs.

Expansion risk

Boston Consulting also said there isn’t enough domestic manufacturing capacity, or available skilled labor, to take on the extra load of overseas production, yet not enough demand for companies to justify investment in plant expansion. Automaker plants are running above 110 percent capacity and have limited ability to increase domestic employment without significant capital expenditures. Suppliers face similar capacity restraints.

Investment in new capacity would be risky because the automobile market is softening, the study says. Car and light-truck sales hit a new high of 17.6 million last year and are trending below 17 million vehicles in 2017.

Rather than try to stymie imports, the manufacturers association said, policymakers and local officials could better increase manufacturing competitiveness by:

Investing in freight transportation infrastructure such as highways, bridges and ports.

Enforcing trade laws and doing more to protect U.S. intellectual property abroad.

Adopting a territorial-based corporate tax system so companies have incentive to repatriate foreign earnings.

Supporting apprenticeship programs and increasing focus on career technical education to make sure schools have programs to train individuals not interested in college.

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