Border Adjustment Tax: Who Will the Biggest Winners Be?

by Taylor Milner and Erik Fogg

A Border Adjustment Tax (BAT) in any proposed new United States tax code has the potential to create significant winners and losers in a rapidly-changing domestic manufacturing market.  Its proponents claim that the border adjustment tax will help rebuild US manufacturing--and hopefully the jobs that go with it--by creating pricing incentives to build products in (and export from) the US rather than import them.  Its opponents suggest that it will raise the prices on many of the things that consumers purchase today and cause a huge required relocation of the US workforce. It’s different from a tariff because imported goods aren’t themselves taxed; instead, company profits are taxed more heavily if they use imported parts, and they get tax breaks for using domestic parts. If the border adjustment tax becomes a reality, there will be a national scramble to capture growing market share among many domestic competitors.

The biggest winners will be those who are able to find more capacity in their operations, allowing them to quickly capture market share before their competitors are able to bring new capital online. Some of this capacity is easy to see today. It exists when a process does not operate 24x7 and only requires more operating hours to capture.

A second category of capacity opportunity also exists, but it is harder to see. This additional capacity exists within a process, and capturing it requires running that process faster or more efficiently by solving the operational and physical problems that hold these processes back. The biggest winners in the case of a Border Adjustment Tax will be the ones that can find and realize this capacity opportunity within their processes.

For many manufacturers looking to capitalize on the reshoring of production caused by a border adjustment tax, the typical path will be to ramp up production by hiring and running 24x7 and then adding capital to increase production. Most manufacturers will be able to fill the positions they need to get to 24x7 even if it means raising wages or relocating workers.

The real challenge will lie in the time and cost of adding capital. This challenge will also create the largest opportunity for capturing market share. It is also why finding hidden capacity opportunity will be so valuable.

Building new facilities or adding production lines takes time. It takes about four to 24 months to add a production line and on the order of two to five years to add a new facility and bring it online (more for heavy equipment like aerospace). These numbers vary by industry, and in many cases timelines are significantly longer. These timelines will only get pushed out with the increased demand on equipment manufacturers and construction firms to meet the reshoring demand. Costs for production equipment and facilities will likely also go up with demand. We only have to look at the oil and gas industry during the recent boom to get a feel for the inflation that could be seen as manufacturers “bid” for production equipment. Finally, the cost of financial capital itself will go up as many businesses bid for loans to add new equipment.

If it is going to take 1 to 5 years and costly capital expenditure to bring new capacity on line, then the big winners will be the manufacturers who find hidden capacity in their existing operations and capture more market share sooner.  Furthermore, they will reduce or eliminate the risk of overbuilding during the demand boom, wait out price spikes in industrial equipment, and avoid significant associated capital costs of new lines or facilities.

 

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