Tariffs, taxes and Trump

Posted on Written by Reagan Haynes
Changes in trade policy would have profound ramifications for the marine industry, which not only exports a great deal of product, but also relies to a heavy extent on an international supply chain.

Changes in trade policy would have profound ramifications for the marine industry, which not only exports a great deal of product, but also relies to a heavy extent on an international supply chain.

Every action prompts an equal and opposite reaction — it’s a basic law of physics. Contemplating major tariff and tax overhauls is no different, and the complexities have experts thinking about the ripple effects — from a strengthening dollar to raw material shortages.

As the Trump administration rethinks trade policies and contemplates corporate tax reform with the goal of putting “America first,” marine businesses are trying to get a handle on how the changes might affect their companies — in ways good and bad.

Proposals to alter import and export tariffs, as well as potentially implement a border adjustment tax, have economists speculating about the potential effects on the supply chain, possible retaliatory tariffs, an already overburdened manufacturing workforce and U.S. manufacturing capacity limits. Policies aimed at drastically reducing regulations elicit praise, but also some caution from experts, who, while largely agreeing that onerous regulations should be eliminated, worry that making drastic cuts could increase companies’ risk and exposure.

Democrats and Republicans support a reduction in the corporate tax rate, but disagree about how to achieve that goal. On the table now is a Republican plan that would implement a border adjustment tax, which many retailers have opposed but some have embraced.

Economists seem almost universally pleased with the idea of cutting the corporate tax rate from the current 35 percent to either 15 or 20 percent. The current structure is “a very complex system that leads to a lot of unintended issues and consequences,” says Brian Murphy, national managing partner of state and local tax services for Grant Thornton. It also drives behaviors — in this case, negative behaviors — as more businesses operate offshore so they’re only taxed on U.S. income, he says.

“Tax reform and rate reduction has been a goal of business for quite a while, and it’s had some momentum in Congress,” Murphy said during a National Association of Manufacturers webinar, “Navigating Headwinds for Success: The State of the Manufacturing Industry.” He thinks legislation will be introduced by March.

“U.S. corporate tax rates are higher than most of the top 20 industrialized countries, which gives incentives for companies to open plants in other countries, where they can pay 20 percent instead of 35 percent,” says Bill Yeargin, CEO of Correct Craft. “We’ve got to get that figured out, but we have to do it in a way that doesn’t create big deficits. We can’t just cut taxes and assume it’s going to work itself out.”

Rethinking free trade

In late January, President Trump withdrew the United States from the Trans-Pacific Partnership, known as TPP, as he had vowed to do throughout his campaign. The move drew praise from many on both sides of the aisle who have blamed trade deals for the loss of American jobs. It drew ire from others, including some conservatives who have generally supported free trade agreements, as well as fear from some, who worry that withdrawing into protectionism would open opportunities that nations such as China could seize.

The National Marine Manufacturers Association came out quickly against the Trump administration’s TPP withdrawal, saying it will directly harm the industry and American boatbuilders.

NMMA government relations vice president Nicole Vasilaros says TPP was “an important agreement that strengthens global trade,” pinpointing the Asia Pacific region.

“Without the TPP, the recreational boating industry and, specifically, U.S. boat manufacturers, are at a disadvantage — limiting growth in the international marketplace,” Vasilaros says. “Specific benefits for boating included: lower tariffs, mechanisms for standards harmonization and development of best practices for countries without a regulatory regime, customs transparency and opportunity for adjudication, and reduced technical barriers to trade.”

The NMMA says the agreement provided regulatory transparency while reducing “burdensome and duplicative rules,” echoing a point that a trade expert made during the NAM webinar. “Moving to bilateral agreements versus multiple countries introduces multiple complexities where the rules will be different for different players because they will each be negotiated differently,” says Ward Melhuish, advisory principal and national advisory lead, consumer and industrial products industry practice at Grant Thornton.

The NAM had also strongly supported the TPP as a deal that would open markets in Asia, where its members are losing market share.

Another source of concern is Trump’s vow to renegotiate the North American Free Trade Agreement or withdraw completely from it. Canada is the No. 1 importer of U.S.-built boats; Mexico also is high on the list. Many in the boating industry who worry that renegotiating NAFTA would harm the industry did not want to be quoted because emotions have become so heated over international trade —a fairly dry topic in the recent past.

Economists say that if the U.S. imposes tariffs on incoming goods, other countries are likely to take retaliatory measures.

Economists say that if the U.S. imposes tariffs on incoming goods, other countries are likely to take retaliatory measures.

More charged than ever

Though once a mainstay of conservative ideology, free trade now fractures party lines on both sides of the aisle. Trump backers and Bernie Sanders supporters favored the U.S. entering fewer such agreements.

A month before Trump launched his presidential campaign, Pew Research asked Republican voters whether free-trade agreements had been good or bad for the United States: 51 percent thought they had benefited America and 39 percent said the opposite, according to New York Magazine.

By August of last year, only about a year later, those numbers had flipped, with 61 percent of Republicans saying free-trade agreements have hurt the country and 32 percent claiming they’d helped.

Economists and experts, regardless of party affiliation, seem more nuanced in discussing the possibilities around free trade agreements, pointing to potential benefits as well as drawbacks.

“The global economy is here to stay,” says Yeargin. “I know that can be scary to some people. I totally get that, but it’s not going away. If the United States is only 5 percent of the world’s population, the world can retrench and do all this without us. We need to find out how the U.S. can best benefit from the global economy. Do we benefit by competing strongly? Or by being more protectionist? We all want the United States to benefit. We’re all on the same side here. But the question is, do we do it by being more fully engaged or by being more protectionist?”

Tariffs very likely will affect all manufacturers, even if they source within the United States, Melhuish says. “There are multiple variables at play at once,” he says. “It’s not just a tax issue, or a labor issue, or a tariff issue. All of those issues are at play.”

Possible ripple effects

If the United States imposes tariffs on imports, American companies should expect “retaliatory reaction,” which could affect manufacturers who want to sell boats and accessories abroad, Melhuish says.

Even builders who largely sell and source within the U.S. could find unexpected effects, he says. “On one hand, you might say there’s a degree of insulation from these import tariffs. But there’s a twofold issue. One, are your suppliers facing these same import tariff issues? And what are the collateral effects?”

A focus on hiring American and elevating American workers can be positive, but it also is placing the United States in “a situation where there are a lot of things in motion. Whatever steady state a company has within its supply chain strategy is probably going to be disrupted, at a minimum,” Melhuish says.

“One thing to point out is — and this is sort of a hypothetical — there’s a great emphasis on creating jobs,” says Melhuish. “But … does pro-jobs always mean pro-business? What’s the impact on the business, and is it placing new types of constraints on the types of decisions you can make?

“On top of the tax issues, just looking at import/export issues, companies that are net importers or have a high degree of outsourcing, there’s going to be a cost effect.

“Certainly reducing the corporate tax rate across the board is a good thing. But even then, does that hit all companies the same way?”

Melhuish also believes Trump’s vow to reduce regulations is a double-edged sword. “Reducing the regulatory compliance burden is a good thing,” he says. “But there’s a flip side: What’s the impact to your suppliers and partners if they’re not held to an expected standard or level of scrutiny?”

Staying vocal

Melhuish urged manufacturers to keep close ties to suppliers to make sure they understand how tariffs are affecting them. “Understanding your suppliers, what challenges they’re facing and what they’re needing to deal with can be a barometer for risk going forward,” he says.

NAM chief economist Chad Moutray poses this question: If there is reshoring because of changing tariffs, what will the effect be on already strained manufacturing labor pools? “Every manufacturer I talk to talks about having a workforce-development challenge,” Moutray says.

Moutray, Murphy and Melhuish encourage manufacturers to stay vocal with their local lawmakers about how the potential changes could affect their businesses.

“First and foremost, we recommend you have ongoing discussion and cover these proposals as they move through Congress, and develop your talking points,” Murphy urged manufacturers during the webinar. “If you have members of your organization that are active in various governmental affairs units, such as working  with NAM, I think they would need talking points associated with the proposals and an understanding of how it will impact your organization. If there are things you don’t like about it, our experience in working with Washington is that the members of Congress are very interested in learning how their proposals are impacting their constituents.”

Industry reactions

A border adjustment tax means that companies can’t deduct import taxes as a cost of doing business, such as importing goods from overseas. That means exports and other foreign sales wouldn’t count as income. As The Wall Street Journal put it, the U.S. would only tax goods and services used in the country, which could benefit the economy since American consumption can’t be moved offshore in the same way that corporate profits can be.

During the NAM webinar, Murphy emphasized that Republicans are proposing a shift from a global system, such as the one the U.S. currently uses, to a territorial system, which is the one that most U.S. trading partners use.

The border adjustment tax has been touted in the Republican Ryan-Brady plan, which is something of a hybrid between global and territorial systems, although it is unclear whether Trump supports such an adjustment — in the past calling the suggestion “too complicated,” according to the Wall Street Journal.

Several major retailers are opposed to any plan that imposes a border adjustment tax, saying it will result in pricier goods and fewer options for American consumers. Some chains say that being unable to deduct the cost of imported goods from taxes would seriously hurt them, according to an article in the New York Times. A coalition calling itself Americans for Affordable Products includes retailers such as Rite Aid, Nike, Neiman Marcus and Kohl’s.

Economists say there is little reason for retailers to fear this policy, The Times said. They say the value of the dollar will increase significantly if a border adjustment tax is implemented, thereby reducing importers’ cost of goods.

Direct effects on marine?

The border tax might hit MarineMax when it comes to the boats it sells from overseas — for example, Italian-built Azimut and Poland-built Galeon. “Any time you talk about things like that, we’re concerned,” says MarineMax chief revenue officer Chuck Cashman. “I believe the country’s headed in the right direction. I think some of the economic steps to protect America could be good. But we’re cautious.”

A border tax could benefit the many dealers that carry U.S. brands — because the powerboat industry is by and large an American industry — but “I don’t want to go backward on European brands,” Cashman says. “Personally I think anything that makes our country stronger is good for us. That’d be the underlying sentiment for us. But if it becomes punitive to European partners, that’s not good.”

“Look at the supply trail to the composite industry,” says Ken Whitehouse, who has worked for decades in that industry. “Most comes from China or other Pacific Rim countries. We exclude ourselves with our own arrogance. I have been building boats for most of the major players since 1980. When you cannot get certain key materials, production either slows or stops. This trade treaty could be a boon for the composite industry if approached in an equitable equation for everyone involved. This will not happen with this administration. We have left the table of opportunity.”

At Imtra Corp, CEO Eric Braitmeyer advises caution. “In general, a move to increased tariffs and duties on imported products will not be good for Imtra,” he says. “Most of the Trump plans seem to want to ‘balance trade’ between low-cost manufacturing countries. Since most of our products come from Western Europe, the Nordic regions and Australia and New Zealand, we may not get as hammered as importers from low-cost regions.”

Correct Craft sells its products in 70 countries, leading Yeargin — who also has served on the manufacturing council of the U.S. Department of Commerce’s International Trade Administration — to be a proponent of free trade and free trade agreements.

In the case of the TPP “they were all lowering tariffs to zero for boats, and that was going to be great for our industry — help growth, help us hire more people and help us generate more jobs,” Yeargin says. “People talk often about a level playing field, but the TPP, as an example, would’ve required countries, as part of the free trade agreement, to come closer to U.S. labor and environmental regulations. It’s not only good for the environment, but also for the people who work in those countries.”

If the United States increases tariffs, other countries will likely follow suit by imposing retaliatory tariffs, Yeargin says. That will reduce U.S. sales in the global marketplace, he says. “If we or any boat manufacturer starts losing global sales because of retaliation tariffs on the United States, it’s going to impact our ability to sell overseas, which impacts our ability to create new jobs.

“Keep in mind that [imposing] tariffs or border taxes always have unintended consequences,” Yeargin cautions. “Tariffs generally hurt boat sales. If we did [impose] a 20 percent tax on Mexico, all that means is people paying 20 percent more for Corona beer or other products.”

Cautious optimism

Some exhibitors at the New York Boat Show expressed trepidation about the new administration’s intent to impose border taxes. Despite that concern, dealers and builders were upbeat, many expressing enthusiasm for Trump and his focus on business.

“All of our dealers are worried about [the proposal to impose tariffs of] 20 percent,” says Ben Dorton, founder of Heyday Boats, a company that Brunswick-owned Bayliner recently bought. Raw materials such as stainless steel, fabric and foam come from Asia.

Dorton says some fear that tariffs on those materials would drive up the price of boats — which many contend already is outpacing inflation in a way that prices out the middle class — even faster.

Although some raw materials are imported, a lot of them are sourced in the United States, Brunswick Corp. CEO Mark Schwabero said at the show. “A lot of raw materials are domestic,” he said, adding that the company has figured in potential import taxes. “It’s going to have some impact,” but not a significant one, he believes.

“If you look at engines, a significant portion is done in the United States,” Schwabero said. “Every action has an equal opposite reaction, right? It’s the laws of physics. I don’t know what that will be — maybe the dollar strengthens. Whatever it is, we feel like we’re positioned well. We build Bayliners and Sea Rays for Europe in Europe. Rayglass is made in New Zealand for that market.”

The company did move the production of Sea Ray’s SPX line to Mexico last year, but Schwabero says that could easily be relocated back to the Tellico plant in Vonore, Tenn.

“We were there for years. It’s a couple of molds,” Schwabero said. “So we’re well positioned to handle any little bumps.”

This article originally appeared in the March 2017 issue.

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