Border Tax Polarizes U.S Companies As Exporters Take Side With Trump Team

There are two sides to every coin. Even as import-dependent corporations are vociferously opposing President Donald Trump's proposal to impose a border tax, a few others have quietly formed an alliance, seconding the president's proposals.

United By Trump's Border Tax

A Reuters report published on February 3 suggested that General Electric Company GE, Boeing Co BA, Oracle Corporation ORCL, Dow Chemical Co DOW, Eli Lilly and Co LLY and Pfizer Inc. PFE are among over 25 companies that have formed an alliance called "American Made Coalition," which supported the House Republican move to tax all imports. The logic? The Border Adjustment Tax would support American jobs and American-made products.

Retail Association Sees Profits Of Retailers Wiped Out

In a note released Wednesday, Deutsche Bank discussed a call it hosted with the Retail Industry Leaders Association, or RILA, and government experts Brian Dodge, who leads its media and public relations program, and David Koenig, VP for Tax.

Analyst Paul Trussell noted that the experts believe a border tax would impact net profits by about 90 percent, effectively wiping out earnings on average. The analyst also pointed to the National Retail Federation's estimate that the border tax would cost American households up to $1,700, on average, in its first year. This explains why retailers are leaving no stone unturned in getting across to Congress its viewpoint on how the retail sector and consumers would be impacted by the border tax.

Deutsche Bank noted that CEOs of eight retail firms, including Target CorporationTGT, Gap Inc GPS, Best Buy Co Inc BBY and Walgreens Boots Alliance Inc WBA, are scheduled to meet with Kevin Brady, chairman of the Ways and Means Committee, Congress members as well as Trump this week. The call also revealed that the RILA counts at least seven or eight Republicans, who have publicly expressed concerns on border tax.

Related Link: Why The Case For A Border Adjustment Tax Relies On A Questionable Assumption

Anti-Border Tax Move Gains Positive Momentum

The experts on the call felt a border tax bill can go through the House by August, although terming the timeframe as a little ambitious. However, the experts are not sure when the Senate will begin work on that.

Deutsche Bank thinks the headline would be ongoing, given the Speaker of the House, Paul Ryan's efforts to push a bill through. However, the firm believes the industry, including retail and autos, have earned a slight advantage, going by the positive momentum built up in convincing the lawmakers that border tax isn't a great idea.

What Is A Border Adjustment Tax?

A border adjustment tax, which the Trump administration is contemplating, taxes imports and excludes export revenues from taxation. It is a key feature of House Speaker Ryan's corporate tax reform plan.

Key Features

• Imports would be taxed at a tax rate equal to the corporate tax rate, which is to be slashed to 20 percent under Ryan's plan. This would be achieved by disallowing the deduction of the cost of imported goods from revenues when calculating tax burdens. Deutsche Bank expects the after-tax cost of imports to increase by a factor of 25 percent.
• Export revenues would be exempt from taxation, which would resemble an export subsidy.

Implications Of Border Tax

• Deutsche Bank expects the dollar appreciation on account of the border tax to roughly offset the trade impact of the tax. A stronger dollar relative to the currencies of the trading partners, makes imports cheaper but exports less competitive.
• However, given that currency adjustments can't happen overnight, the firm believes global trade would initially take a substantial hit. Based on its analysis, Deutsche Bank said Mexico, Canada and Asian manufacturing economies, mainly Taiwan, Thailand and Malaysia, would be the worst hit relative to GDP. In absolute terms, the firms believe the U.S.–U.K. merchandise trade would take the worst hit.
• The firm expects core PCE inflation to rise temporarily between 1.4 and 2.1 percent and sees the impact on headline inflation to be slightly larger. However, over time, the impact on inflation would be tempered.
• Monetary policy, according to Deutsche Bank, will remain accommodative initially, as the Fed sees past the initial spike in inflation and harp over downside risks to the economy from tighter financial conditions and weaker real income growth.
• If the initial rise in inflation leads to a rise in longer-term inflation expectations, Deutsche Bank believes the border tax could be hawkish for the Fed at the margin.
• As far as interest rates are concerned, Deutsche Bank sees the dollar strength reduce the demand for Treasuries. However, the firm feels the response of the slope of the curve is more ambiguous, as the dollar and Fed response steepens the curve, while inflation expectations would flatten it. The curve would be steeper if the dollar adjusts to the border tax faster.

Exporters such as Boeing and those companies relying purely on the domestic market are likely to benefit from the border tax. On the other hand, import-heavy companies such as Best Buy and Target could come under the pump.

The Reuters report also pointed to the 2015 alliance formed by many of the companies in the "American Made Coalition" to support the Export-Import bank, which extends loans overseas to buyers to purchase U.S. goods. Thus, these companies are seeking export competitiveness and a level playing field for them, given their argument that the high corporate tax in the United States has been punitive on them.