President Donald Trump floated his endorsement of a 20% "border adjustment” tax on imported goods favored by U.S. House Republicans as a financing mechanism to pay for a wall on the U.S. border with Mexico, a construction project that could cost some $20 billion, White House press secretary Sean Spicer told reporters on Thursday.
Retailers would no longer be able to deduct the cost of merchandise they import under such a plan, hiking taxes three to five times higher for some merchants and driving up the price of imported goods, according to the National Retail Federation. Even many retailers that don’t import directly would also experience higher costs as wholesalers pass on their own inflated costs, and it would be difficult for retailers to substitute American-made goods because so much of their merchandise is made overseas, the NRF says.
The tax and its effects run “very counter to the way consumers are feeling at the moment,” David French, the NRF's senior vice president for government relations, told The New York Times.
Trump alluded to the border tax at a congressional Republicans’ retreat Thursday in Philadelphia, saying “We’re working on a tax reform bill that will reduce our trade deficits, increase American exports and will generate revenue from Mexico that will pay for the wall if we decide to go that route.” The remarks caused an uproar, and Spicer walked them back a bit later in the day, indicating the tax is just one option of many.
Beyond the direct hit to retailers, observers warn that the border adjustment tax could more broadly hurt the economy as consumers face higher prices, retailers’ profits shrink and trade wars erupt. While the conversation has focused on relations with Mexico, the tax would have to be instituted on imports from all countries, and businesses — rather than governments — would pay.
In fact, taxing imports and exempting exports — the nut of the plan — appears to target foreign businesses, but U.S. retailers would be hit hard as well because they depend so much on overseas manufacturing, including apparel, home goods, electronics and other products. That puts them between a rock and a hard place, forced to either raise their prices or — if that approach threatens sales — reduce their profits. Many economists also say such a tax would boost the value of the dollar, which is already hurting many retailers by dampening sales from tourists and raising the cost of production in Asia, which trades using the U.S. dollar.
The uncertainty around the proposal will likely continue to vex retailers, which already face pressure from consumers to keep prices low as well as increasingly tighter margins from the higher costs of rising e-commerce sales.