COMMENTARY: Getting real about retail

As Washington contemplates import penalties, retailers focus on innovations

By: Eric Johnson
Photo: Eric Johnson
   In just a few days, President-elect Donald Trump will assume office and a Republican-led Congress, emboldened by results Nov. 8 will begin to reshape U.S. policy on a number of fronts.
   Politicians could have benefitted from visiting the Javits Center in New York this week and mingling with some 35,000 people from around the world attending the National Retail Federation’s annual Big Show, but sadly none of them showed up.
   It would have been an instructive exercise for lawmaker and incoming administration folks to see the sheer number of companies providing services and technological solutions to a retail industry hungering for data. They would have seen virtual try-on mirrors, augmented reality devices, warehousing robotics, and so much more.
   The message would have been clear: retail is a driver of innovation, the kind that leads to jobs and economic prosperity.
   As Mike McNamara, chief information officer for Target, said Monday, “I've been coming to this show for 17 years, and whereas you used to see exhibitors showcasing new shelving, now the whole exhibition hall is about technology.”
   The message that could have been sent was not, because the receivers weren't there.
   They are busy lobbing ideas back and forth about how to completely reorient the U.S. economy away from imports and retail, and toward manufacturing. As we’ve written about in the Adam Smith Project, congressional leaders are pushing a far-reaching corporate tax overhaul that includes a provision that is driving retailers batty: the so-called border adjustment tax (BAT), which would prevent importers from deducting the costs of goods imported for tax purposes.
   Meanwhile, President-elect Trump is pushing for a targeted import tariff that would penalize makers of goods abroad seeking to sell those goods to U.S. consumers. Of note, Trump on Monday criticized the BAT as too complicated.
   On its face, and in a vacuum, driving increased manufacturing growth seems a noble pursuit. The only problem is that Trump and congressional leaders seem to view growing the U.S. manufacturing base as mutually exclusive to fostering a healthy import retail industry.
   And what's more, there's a sense that the rug is being pulled out from under a huge and important sector of the U.S. economy. According to the NRF, retail is responsible for 42 million U.S. jobs, and a huge swathe of the U.S. GDP. It seems hard to imagine Congress and the president would summarily imperil those businesses and jobs while also raising prices for goods just in the name of incrementally resurrecting manufacturing here.
   The problem isn’t the policies, it’s the philosophy.
   Trump and House Speaker Paul Ryan appear intent (though via different means) on restructuring things in a way that goes counter to the development of the U.S. economy the last 60 years.
   But two problems exist with the current dialogue around imports:

   1) No one told the retailers about this shift. They've spent years (if not decades) building efficient global supply chains that deliver incredible value at affordable prices to U.S. consumers, only to be told that it won't work like that anymore. It's like someone spent years building a house for themselves only for someone to come in and change the locks.
   2) The "imports are bad" ignores the role retail supply chains and stores play in the American economy. Aside from in-store retail jobs, there are the upstream (warehousing, trucking, etc.) and downstream (customer service, courier, etc.) jobs associated with retail. And don’t forget the entire ecosystems of consultants, hardware, and technology vendors that make retail more efficient and innovative.

   Again, one can make the case that a consumption-based approach to economic growth founded on imports of goods made in cheaper manufacturing locations is not a sound one. But let’s not ignore the realities of our society. People like to shop. It's not a U.S. phenomenon either. To stop the economy on a dime and change course will not change the fact that punitive taxes or tariffs will make goods more expensive.
   The BAT proposal is essentially a way for Congress to fund broader tax reforms, including a cut in the corporate tax rate (which, incidentally, NRF President and Chief Executive Officer Matthew Shay says retailers are in favor of since the retail sector faces some of the U.S.’s highest corporate tax rates).
   Trump's tariff idea is a transparent way to penalize companies not sourcing 100 percent of goods and finished products in the United States. Such a tariff not only ignores the reality that many U.S. manufactures rely partly or wholly on inputs from abroad, it also seems destined to ignite destructive trade wars with the United States' biggest trading partners.
   This gets back to a singular point: Congress and the president-elect should have checked in with retailers before redrawing the parameters of the economy. Retailers were already being buffeted by the oppressive demands of omni-channel fulfillment. Now they have to contend with trade barriers that could prove burdensome at best and destructive at worst.
   In a tweet, Kurt Cavano, president of the commerce solutions provider GT Nexus rightly said nervous retailers will look to technology to help them through this.
   There are “a lot of lost people wondering where did the status quo go…” he wrote.
   But technology can't solve every problem. Retailers can't innovate their way around a punitive border tax or a broad-brush import tariff.
   So it would serve Congress and President Trump well to examine first thing Monday morning the real impact retail has on U.S. economic prosperity, imports and all. If they’re looking for job creation, the retail industry and its supporting technology and services ecosystems have a pretty good track record. And trade totally underpins that universe.