So why should Target and Best Buy worry about border taxes?
Major U.S. retailers don’t want taxes on imports and are lobbying hard to keep them from being imposed, either as classic import tariffs or as a “border equalization” feature of the corporate income tax. But Donald Trump got strong affirmation from supporters whenever he advocated taxes on imports, so keeping such taxes out of the picture entirely may be a vain hope.
Best Buy and Target are based right here in the Twin Cities. They are as concerned as Walmart, Sears or any other retailer that sources much merchandise abroad. But why, exactly, are they so concerned? Are these concerns well-founded? And should anyone in the public who does not own stock in these companies or work for them really be concerned?
There are a number of different scenarios for how retailers might be hurt by higher border taxes. These are not necessarily mutually exclusive and the list isn’t exhaustive. But some are more plausible than others.
The simplest explanation would be that a tax on imports will raise the cost of retailers’ merchandise. This is a highly competitive, low-margin sector. If they have to pay a tax of, say, 20 percent to get things into this country from foreign suppliers, this higher cost will sharply reduce profits. This in turn will limit their ability to invest in new facilities, hire more workers, give raises and so on.
At its core, this is simplistic to the point of being silly. But it seems plausible to many and I hear it in cafe conversations and in emails from readers. So it deserves some examination.
The logical flaw is a fallacy of composition. Yes, an import tax in the ranges discussed would raise the cost of Target’s or Best Buy’s merchandise. And yes, retailing is competitive. No single retailer can raise prices much without seeing shoppers go elsewhere.
But if all retailers face identical merchandise cost increases, then the overall market price for clothing, housewares, electronics or whatever will rise. No individual store or corporation is particularly disadvantaged relative to others. Consumers will pay more, just as they do if a frost wipes out an orange crop, sending citrus prices higher. But, as in that case, the retailers who sell the merchandise are not inherently condemned to lower margins.
Yes, there may be details of one retailer sourcing a somewhat different proportion of some product line abroad than does a competitor. If Company A gets 85 percent of its clothing abroad and Company B gets 90 percent, then B will get smacked a little harder by import tariffs than will A. But adjustments can occur in a matter of months.
Advocates of import taxes argue that all firms could respond by sourcing more of their purchases from U.S. manufacturers. That is the very point of the tariff. And as the price advantages of foreign producers are erased by the tariffs, U.S. production will rise.
Retailers could make money 30 years ago when a higher fraction of their merchandise came from U.S. producers and they will be able to make money if we get back to this state.
Skeptics will disagree, noting that for many products, there no longer is a manufacturing base in our country and that it will take many years for factories to be built, workers trained and so forth. If we suddenly tax imports, there won’t instantaneously be alternative U.S.-produced goods waiting to be loaded for delivery to U.S. stores. I think this clearly is correct, but leave it aside for now.
A second scenario of why U.S. retailing firms should be concerned is that even if import taxes are largely passed on to consumers and retailers can maintain margins on what they sell, the implicit effect will be a cut in disposable incomes. After absorbing the tax on purchased items made abroad, households will have less money to spend on other things. Economics students will recognize this as the “income effect” they first encountered in freshman micro.
If higher costs due to import taxes means that households only can buy a smaller quantity of goods in total, then retailers’ sales volumes will fall. The fact that retailers may be able to keep the same margins on units they still sell is of little comfort if overall sales drop.
This scenario is more realistic than the naïve one that assumes retailers must eat the tax. If this is what managers at Target and Best Buy fret about, they are on the right track. But the implications of the scenario go beyond these directly affected firms.
If a family has to pay more for clothing, housewares, toys and electronics because of taxes on imports, they will, indeed, buy less of these products. But the income effect may also affect their purchases of things not even imported at all. If you know it is going to cost you more to get clothing and supplies for the kids to return to school, you may decide you cannot go out to eat quite as often or cannot spend a week at the resort on Lake Wobegon as you usually do. Maybe the household budget gets stretched so tight you need to give up your yoga class or not go pheasant hunting with cousins back in South Dakota.
The dampening effects thus can spread farther than the immediate imports taxed. Yes, import restrictions well may raise employment and profits in U.S. companies that compete with imports. And revenues from import taxes may allow other taxes to be cut, thus freeing up money to bolster household consumption. These arguments convince advocates of these taxes, but not most economists.
This brings us to the third scenario for concern in corporate suites in Richfield, Minneapolis, Bentonville and elsewhere. It is a more generalized one and the one that will resonate most with economists and historians.
Imposition of taxes on imports in the ranges discussed will be a major shock to the world economy. U.S. imports well may shrink, but so will U.S. exports and so will the broader national economy. The Chinese economy will suffer a blow and so will Europe. Slowing economic activity in the northern hemisphere means Brazil, Argentina, Peru, Chile, Zambia, Nigeria and other commodity exporters will slump as well. A global economy in recession means a U.S. economy in recession. Virtually all businesses will see lower sales and much lower profits. Retailers indeed will suffer, but they won’t be alone. Everybody will be in a slump everywhere.
To anyone who has studied a bit of economic history, the proposed tax levels currently bandied about seem surreal. At differing times, candidate Trump called for 20 percent, 35 percent or 45 percent import taxes on goods from sundry other nations. If you consider that prior to NAFTA the average U.S. tariff on imports from Mexico was only 2.9 percent, you can see why current rhetoric strikes most economists as crazy talk. But we live in an age when nothing is impossible.