American-made companies worried about border tax

Lauren Zumbach
Chicago Tribune

Some of the loudest opposition to a proposed tax on imports has come from the retail industry, which sent a handful of top CEOs to meet with President Donald Trump earlier this month and has warned that bigger tax bills could mean price hikes for customers.

But the proposed border adjustment tax, part of the House Republicans’ tax reform plan that would also lower the corporate tax rate, is making some smaller businesses that proudly tout their American-made status nervous too.

Although the 225,000 suits and sport coats Hart Schaffner Marx stitches each year are made at factories in suburban Chicago and Cleveland, the wool fabric they’re made from isn’t.

If Hart Schaffner Marx had to pay a 20 percent duty on the fabric it imports, “my taxes would be through the roof,” and at least some of it would be passed on to customers, said Doug Williams, CEO of the W Diamond Group, which holds the manufacturing, sales and marketing license for the brand.

Hart Schaffner Marx isn’t unique, said J. Bradford Jensen, a professor at Georgetown University’s McDonough School of Business. Most people think of companies as either importers who sell foreign-made goods to Americans or exporters who sell domestic products abroad, he said.

But in the U.S., more than 90 percent of top exporters are also importers, and vice versa, Jensen said. And it’s not just big corporations — even smaller manufacturers buy some raw materials overseas, either because it’s cheaper or because certain key components simply aren’t made at home.

That reality complicates one goal of tax reform — to boost U.S. manufacturing.

Some of the manufacturing executives who met with Trump last week backed the tax plan in a letter to congressional leaders, saying it would “effectively end the ‘Made in America’ tax” that gives foreign competitors an advantage. But opponents warn taxing imports could raise prices for U.S. consumers.

Supporters of the proposed tax plan say companies shouldn’t fear the border adjustment tax because the value of the dollar would rise, reducing the cost of imported goods and mitigating the effect on importers’ tax bills. But it’s unclear how quickly that adjustment would happen or whether it would fully offset the tax, forcing companies to absorb the extra costs or convince customers to pay more, at least in the short term.

The unknowns make some manufacturers nervous.

“It could put us out of business,” said Brandi Archer, who launched Chicago-based women’s apparel brand Suki + Solaine in 2014.

Most garments are made by the company’s six employees, with some sewn at outside factories in Chicago and New York when demand is especially high. Being U.S.-made is important to Archer, even though it’s more expensive and experienced employees are tough to find. She wanted to use strictly U.S.-made fabrics too, but couldn’t find the high-quality printed woven and knit materials her designs required.

“I would love it if there were more options for American-made textiles to choose from. But from a business standpoint, with what’s available right now, it wouldn’t work,” she said.

State Optical Co. has about 50 employees making eyewear at a factory in suburban Chicago. But two key components — hinges and acetate for the frames — must be imported from companies in Italy and Germany, said Scott Shapiro, CEO of State Optical.

The imports make up a small slice of the value of each pair of luxury frames, so Shapiro isn’t too concerned about a tax’s impact on his margins. But he feels like it’s a penalty on top of the hurdles he’s already jumped to manufacture State Optical’s frames locally when most eyewear is made overseas — including frames sold by his family’s eyewear company, Europa International. The companies share offices.

The team behind State Optical was convinced there was a market for luxury, American-made glasses, and that they could find a way to make it work, Shapiro said. But even with his experience in the industry, it was much harder than expected. Even buying machinery was a challenge — equipment didn’t come with English instruction manuals, wasn’t compatible with the U.S. electric grid and there was no local repair service.

“It just seems unfair that we’re doing exactly what the government wants us to do, which is bring manufacturing back to the U.S., and we would pay the same penalty as companies importing everything,” he said.