February 16, 2017, 12:03 PM

There’s good reason for retailers to hate a border adjustment tax

Retailers’ profits would be hurt, and U.S. consumers don’t want to pay for higher-priced goods like apparel and shoes.

Lead Photo

(Bloomberg Gadfly)—Chief executives from retailers including J.C. Penney Co., Target Corp. and Best Buy Co. went to Washington on Wednesday to implore President Trump not to follow through with pledges to tax stuff sold in the U.S. but made abroad.

Lobbying from companies against the so-called border adjustment tax (BAT) might not be enough to sway Trump, who based much of his campaign on bringing manufacturing back to the U.S. But the American consumer might be.

Let's put aside the fact that, for certain items such as zippers or sneakers, virtually all are imported, and the U.S. doesn't actually have the manufacturing capability or know-how to make many of them. A BAT might completely wipe away profits for certain American retailers, while others might benefit more from other changes in tax and trade policy. J.C. Penney is No. 33 in the Internet Retailer 2016 Top 500 Guide, Target No. 22 and Best Buy No. 12.

The argument against a BAT comes down to something more basic: Practically, Americans won't pay higher prices to buy stuff for their own families, even if they ideologically agree with creating manufacturing jobs and supporting American-made goods. And there's little doubt a BAT will result in American companies raising prices for consumers if they are going to stay in business.

Theoretically, a BAT could increase the value of the dollar, which might cancel out those price increases. But there's no telling how currency and other markets will really react to a BAT, Federal Reserve chairwoman Janet Yellen warned on Wednesday.

Any price increases that stick could have a profound impact on consumer spending, which accounts for more than two-thirds of U.S. GDP.

Consider this: Americans pay roughly the same clothing prices today as they paid in the early 1990s, when retailers such as Nike Inc. (No. 47 in the Top 500) and Wal-Mart Stores Inc. (No. 4) started making everything from shoes to soccer balls en masse overseas, according to Bureau of Labor Statistics data.

During that time, overall prices on all the goods and services American consumers buy—from healthcare to haircuts—increased by 80%:

America is the world's largest economy by GDP, but it ranks just 25th in the world in cost of living, according to a currency-adjusted index from the World Bank that tracks the prices of a basket of goods and services among different economies.

In terms of clothing prices specifically, the U.S. ranked 50th among 179 countries in 2011, the latest data available from the World Bank. Not only is it cheaper to buy clothes in the U.S. than in most developed Western countries (Canada, Norway, Australia, Japan, Germany, etc.), it's also cheaper to pick up a pair of pants or a sweater in America than in countries such as Haiti or Slovenia, according to the World Bank. 

These numbers are a bit dated, but retailers and economists say the trend persists.

By outsourcing 99% of footwear production and the large majority of its clothing manufacturing to countries such as Bangladesh and Vietnam, where labor and other costs are cheap, the U.S. has been able to artificially depress clothing prices.

And American consumers, as well as tourists who come in droves to shop here, have gotten addicted to the low prices. The 2008 financial crisis, the onslaught of low-priced fast fashion, the proliferation of outlet centers and off-price retailers such as T.J. Maxx (parent TJX Cos. is No. 117), and the price transparency fostered by e-commerce retailers such as Amazon.com Inc. (No. 1) only deepened that addiction.

We all saw what happened to J.C. Penney when it tried to wean shoppers off of those discounts: Customers walked away, and the company lost 24% of its revenue in one year. Meanwhile, Coach Inc. and Michael Kors Holdings Ltd. have been fighting a losing battle trying to get customers to pay more for wallets and satchel bags after years of heavy discounting.

Any tax on imported goods would have the same effect.

Already retailers are struggling to attract shoppers, leading to hundreds of store closures and multiple bankruptcies in recent years. A border adjustment tax will only speed that process. Americans will vote against such a tax with their wallets.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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