Why Did Industry Forecasters Miss 2016’s Biggest Story?

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American flag in a pocket of blue jeans.

Most people currently believe the biggest events of 2016 for our industry were Donald Trump’s surprising victory in the presidential elections and the challenge it offered to our import-dominated retailing.

I think a far bigger event was the platform of outright opposition to international trade on which America’s Republican Party campaigned successfully in the Congressional elections. The Republicans’ current trade policy is revolutionary, threatens serious damage to our industry, was published before Trump was even nominated—and was ignored by almost every industry observer in the six months before the election.

What the Republicans promised

In June 2016, Paul Ryan, Republican Speaker of the House of Representatives, published his “Better Way” manifesto, outlining most of the policy proposals adopted as the party’s platform at its mid-July convention.

These proposals included a number of references to “distance-based” corporate taxes: plans to disallow the cost of imports in calculating the profit on which a company’s taxes will be assessed. The June tax proposals were vaguely drafted and publicity for the “Better Way” manifesto, and the July platform at the time concentrated on headline issues like the Mexican border wall. Understanding the specifics of those proposals needed familiarity with ideas being tossed around parts of the Republican fringe at the time.

Those specifics—now being debated in both parties as they prepare for the next Congressional session—are now chillingly clear.

Take a retailer with $1 billion turnover today, returning 10 percent pre-tax profit ($100 million): it would currently be liable for 35 percent federal profit tax, or $35 million.

But if half its $900 million costs are imports and it has no exports, under distance-based profit tax, all its $450 million buying costs would be disallowed in calculating tax liability. So the retailer would be taxed as if it had made $550 million.

The Republicans want to slash profit tax. So if the rate came down to 15 percent, that retailer would face a tax bill of $82.5 million (15 percent of $550 million), or virtually all of its $100 million profit.

After decades of being friendly to business, the Republican party appears to have declared war on the way almost all U.S. apparel brands and retailers currently operate.

Though the operational details will no doubt be modified as Congress debates, the principle is simple: Republicans now believe net imports are bad for the U.S. and want to use the tax system to discourage them.

Both that principle and the details of their plan will be controversial, and I’ll leave the controversy to others. My question’s different: how did proposals so radical get to be the official policy of America’s governing party without arousing a puff of concern from lobbyists in our industry—which Goldman Sachs believes likely to be the hardest hit by them?

Are lobbyists uninterested in trade?

It’s not as if industry lobbyists were as uninterested in trade as the general public.

The proposed Trans-Pacific Partnership (TPP) practically dominated the apparel media for most of 2016. The TPP was a preposterously over-hyped trade deal, almost universally opposed by voters in all the democracies negotiating it. Few of its supporters ever offered concrete examples of its likely effects.

Our industry, though, was consistently and publicly entranced at the prospect it offered of duty-free trade between the U.S. and Vietnam.

I say “prospect” because, for all the huffing and puffing about the TPP’s profound importance, there was never any likelihood the deal would start getting implemented before 2018. Even then, it would take at least another 10 years before all eligible Vietnamese apparel would qualify for duty-free entry. And only if Vietnam reduced its government’s interference in the country’s industries.

Our industry is often criticized for its short-term thinking. The energy its spokespeople put into advocating a trade deal unlikely to be truly effective much before 2030 certainly gave the lie to that slander.

But why so much obsession with a deal offering nothing for years, amid silence about the Republicans – who in June were already likely to retain control of both House of Congress, planning war on our industry as we know it?

Why indeed?

In fairness, the Republicans’ proposals weren’t that clear at first. They were crystal-clear about wanting to cut taxes on business overall, but their plans to make a savage exception for businesses relying on imported goods were mostly wrapped in tough-to-decipher jargon about “border adjustments.”

Meanwhile, the conventional wisdom in the industry was that Obama was relying on Republican votes to get TPP ratified before he left the White House. So, many industry lobbyists may have let their enthusiasm for TPP (and for lower profit taxes) color how they saw the Republican plans.

Alternatively, they might have been ordinary Republicans convinced the party would always err on the side of business. That conviction may simply have blinded them to the anti-retail revolution that was taking their party over.

Or they may simply have bought into the cheap cynicism people often affect at election time. “Who cares about party platforms?” goes the common argument. “Politicians never keep their promises.”

Does it matter why?

The industry certainly does need to ask itself some tough questions. I’ve never seen a major party turn so completely, so quickly, from business-friendliness to undermining a major industry. I’ve never seen an industry show so little awareness of how the political tide has turned against it, either.

We don’t of course know how much of the Republicans’ platform will ultimately get enacted. Industry will now start lobbying against the distance-based tax threat—which threatens far greater damage than losing the TPP. How committed the party remains to the idea depends on the strength of opposition, from voters, from lobbyists and from Republican legislators.

Interestingly, in the U.K., the ruling Conservative party has seen its vote crumble in what were once safe seats since the Brexit referendum as business has savaged the party’s initial flirtation with anti-business policies. It’s now reining back its most radical ideologues, and sending out conciliatory signals to business.

The rush to populism by parties business could once rely on may turn out to be a short-lived panic. On both sides of the Atlantic, business needs to encourage them to abandon a truly destructive political fad.

 

Mike Flanagan, CEO Clothesource. Clothesource offers consultancy on the world garment industry using the wide resources of The Clothesource Knowledge Base – the most comprehensive collection of information anywhere about sourcing for the apparel industry. He can be contacted at Flanagan@clothesource.net.


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