By Edward Hertzman. Source: Business of Fashion.
NEW YORK, United States — These days my phone has been ringing a lot. Every day brings news of big changes in Washington, and both brands and retailers are anxiously trying to make sense of what it all means for them.
It’s not a secret that the apparel industry has taken a beating lately, one that — in my opinion — may be irreversible. The last thing retailers need is an unfavourable tax code or sky-high tariffs, but that’s just what is coming out of the Republican party and the new Administration in the US.
For those not familiar with the proposed tax overhaul, here’s the part that has everyone so nervous. The Border Adjustment Tax would drop overall corporate taxes to 20 percent, down from the current 35 percent. And revenue associated with exports would be exempt from taxation. Sounds good, however, all costs of goods sold (COGS) associated with imports would no longer be deductible from a company’s income. This means that companies could end up paying an extra 20 percent tax on the cost of all their imports, including those originating from free trade areas or those that include US content.
Let’s do some simple math. Let say a company earned $10 million in revenue on $7 million of imported garments, and it had an additional $2 million in overhead costs. Based on today’s tax structure, this company would pay 35 percent on its $1 million profit or $350,000.
Based on the new tax, this company can only write off its overhead, making its tax liability 20 percent of $8 million, for a total of $1,600,000 in tax liability. In this case, this company would have a tax bill larger than its total profit, which leaves three alternatives: 1) the company goes out of business, 2) the company raises its prices and passes the increase onto its consumers, or 3) the company starts making its product back in America.
With retail in such a highly deflationary and promotional cycle, I can’t imagine any companies being able to raise their prices enough to absorb such high increases. But returning production to America would be even more of a challenge — it would be next to impossible to reshore apparel manufacturing. The costs are too high, and we lack the labour, the capacity and the raw materials… to begin enumerating a very long list.
That’s why apparel associations and individual corporations have been lobbying to stop the border tax. And it’s not just our industry — this Border Adjustment Tax would negatively impact a wide variety of consumer goods categories. If Congress were to take a serious look at the hard realities, they would quickly see that a law they’re trying to pass to help the US economy would actually end up tanking most companies based here.
While at one point Trump was against the Border Adjustment Tax, it’s unclear where the White House stands now. The president seems more focused on an increased tariff on products coming out of China. But as the largest exporter of apparel, this also puts unnecessary pressure on the industry’s supply chain.
The only way for brands and retailers to protect themselves and prepare for any substantial change in tax or trade policy is to stay on top of the news, work with their local politicians and join associations like the AAFA, USFIA and AAPN. These groups support organisations that are working in Washington to represent the best interests of our industry. Finally, retailers and brands must have a diversified supply chain or risk being overexposed in one market.
Other than these small forays into activism, we have to wake up and conduct business as usual. Our jobs may be getting harder, but one thing is certain — we will all be wearing clothes a year from now.
Edward Hertzman is an apparel supply chain expert and CEO/Founder of Sourcing Journal, a Hertzman Media Group property.