What Would a Border Tax Mean for the Industry?

Proposals from the president and Congress to boost levies on imports could affect jewelers

It’s been largely lost amid all the talk about inauguration crowd sizes and voting fraud, but one proposal currently floated by the new administration could have a major effect on the industry: a border tax.

For now the border tax is just an idea—albeit one favored, in different permutations, by both President Trump and Republican leaders. In a meeting with CEO on Jan. 22, the president warned, “If you [move manufacturing] to another country…we are going to be imposing a very major border tax” on your products. He’s also tweeted, “Make in U.S.A. or pay big border tax.”

It wasn’t clear if the president’s proposal would apply to products already manufactured offshore or to companies that move their production overseas after the proposal is enacted. It’s also unclear if it would apply to mined or farmed products, but the idea has already caused anxiety in the oil and food industries.

In testimony before Congress, Steven Mnuchin, the president’s pick for secretary of the Treasury, suggested that any border tax would apply to “a small number of companies that have moved their jobs, or are moving their jobs, putting products back into the United States, and taxing them.” (At least one trade specialist has suggested this may not be possible legally.)

Still, the “border adjustability” proposal, floated by House Republicans as part of a larger tax overhaul, would likely apply across the board. Critic Steve Forbes explains it like this:

Importers will no longer be allowed to deduct an item as a business expense. To simplify things, let’s say a store imports a pair of sneakers for $40 and then sells them for $50, making a $10 profit on which it would owe taxes. Under the Republican plan, however, the retailer wouldn’t be able to deduct the $40 it paid for the sneakers. In fact, it would owe taxes on the entire $50!

The president has called the adjustability proposal “too complicated” and said he “doesn’t love it,” though he’s also said it will be discussed.

What worries retail groups like the National Retail Federation is that the costs from any border taxes will ultimately be passed on to the consumers:

[The tax] would give some retailers tax costs three to five times larger than previous profit margins and would dramatically drive up the price of imported merchandise. Even retailers that do not import directly would see higher costs since wholesalers would likely pass along the increase. The vast majority of the imported items affected are not manufactured in the United States, so there would be no opportunity to substitute American-made inventory.

Tax proponents, like House Ways and Means Committee chairman Kevin Brady (R-Texas), argue the proposal will “level the playing field” with overseas competitors and stimulate domestic manufacturing. But others worry it could spark a trade war.

Needless to say, this issue could be of particular importance to jewelers, who sell many items made overseas as well as a high-value product where a few extra percentage points can make a difference. One could see companies that do manufacture here, like Shinola or Alex and Ani, ending up ahead. (Though Shinola does use imported parts.) But any broad increase on levies on imported items could hurt demand for items like Swiss watches, Chinese- and Indian-made jewelry, and anything that comes out of the ground, like diamonds and gemstones.