Experts are urging U.S. manufacturers to start anticipating potential changes in import and export tariffs and also begin thinking about potential retaliatory taxes that are expected to follow any addition of U.S. tariffs.
Brian Murphy, national managing partner of State and Local Tax services for Grant Thornton, says some of the potential tax reform could benefit businesses.
“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.”
But if they happen as proposed, tariffs very likely will affect all manufacturers, even if they source within the United States, said Ward Melhuish, advisory principal and national advisory lead, Consumer and Industrial Products industry practice, at Grant Thornton.
“Looking at companies that are net exporters, there are fewer tax issues on exporting, but if there are tariffs on imports you can expect retaliatory reaction to those negotiated deals,” Melhuish said.
About a quarter of the manufacturers that attended the webinar said in response to a survey question that they source within the United States.
“On one hand, you might say there’s a degree of insulation from these import tariffs,” Melhuish said. “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.”
“One thing to point out is, and this is sort of a hypothetical — there’s a great emphasis on creating jobs. But one point is, does pro jobs always mean pro business?” Melhuish said. “What’s the impact on the business, and it is placing new types of constraints on the types of decisions you can make?”
Moving to bilateral agreements versus multi-country agreements “introduces multiple complexities where the rules will be different with like players because they will each be negotiated different,” Melhuish said. “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.”
He also addressed President Donald Trump’s vow to reduce regulations as being a double-edged sword.
“Reducing the regulatory compliance burden is a good thing,” Melhuish said. “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? So there are two sides of the coin. Where there could be … pro business relief, when you look at this from a supply-chain standpoint, especially if it’s around financial compliance, are there things that cause you to say ‘There’s another way I have to understand my exposure and risk when it comes to supply chain.’ ”
If the regulations around small business loans are altered, companies should be vigilant to make sure they’re equal and fair to small businesses.
“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 asked.
He 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,” Melhuish said.
National Association of Manufacturers chief economist Chad Moutray posed 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 said.
There are multiple variables at play at once, Melhuish said. “It’s not just a tax issue, or labor issue, or tariff issue. All of those issues are at play.”
Bill Yeargin, CEO of Correct Craft, a boatbuilder that sells its brands in 70 countries, is a proponent of free trade and free trade agreements. Although the benefits sometimes take longer to see than some of the negative effects, Yeargin thinks that eventually the benefits offset the detrimental effects of such agreements.
And in the case of the Trans-Pacific Partnership, or 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 said.
“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,” Yeargin said. “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 follow suit by imposing retaliatory tariffs, Yeargin said. That will reduce U.S. sales in the global marketplace, which reduces American shops, he said. “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 added. “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."