‘Very Major Border Tax’ is a Big Headache for Tech Companies

U.S. President-elect Donald Trump speaks as PayPal co-founder and Facebook board member Peter Thiel (C) and Apple Inc CEO Tim Cook look on during a meeting with technology leaders at Trump Tower in New York U.S., December 14, 2016. (REUTERS/Shannon Stapleton)
U.S. President-elect Donald Trump speaks as PayPal co-founder and Facebook board member Peter Thiel (C) and Apple Inc CEO Tim Cook look on during a meeting with technology leaders at Trump Tower in New York U.S., December 14, 2016. (REUTERS/Shannon Stapleton)

That sighing sound you hear from Silicon Valley is from executives contemplating the implications for their business model if President Trump follows through with a “very major border tax” on goods made outside the U.S.

Restructuring a global supply chain after decades of advances in automation and off-shoring jobs would throw the operations of large companies, especially in the tech sector, into chaos, tech analysts and industry groups warn. To uproot their highly complex system of overseas plants, component suppliers and distribution partners would lead to pricier goods, deflated revenue and profits, and, yes, layoffs, they say.

“Labor intensive manufacturing will come back when buggy whips do,” says Roger McNamee, founding partner of venture-capital firm Elevation Partners. “The USA needs to create new industries and prepare employees to work in them.”

While an import tax that mandates these changes would gouge a company’s bottom line, several Trump ideas, including steep deregulation and a deep cut in corporate tax rates, could offset matters. Another factor: one-time tax relief to encourage companies to bring back cash held overseas.

President Trump — who campaigned tirelessly on creating jobs in the U.S. and vowed a punitive tariff of 45% for goods from China and 35% from Mexico — gave a group of large manufacturers, including some tech companies, 30 days to come up with ideas and report back.

“If you go to another country” and cut U.S. jobs “we are going to be imposing a very major border tax” on that product, Trump told Michael Dell, Elon Musk, CEO of Tesla Motors and SpaceX; Ford Motors CEO Mark Fields and nine other CEOs. (Trump also met with automaker execs and union leaders this week.)

It remains unclear if the tax would be applied to future manufacturing jobs and not existing facilities, but it is cause for serious concern among companies like Apple and chip makers that rely on complex, automated operations offshore to keep prices lower on iPhones and other products.

For Dell, which employs 140,000 people worldwide, the president’s call for American jobs reflects a quandary it and other companies face: How to mollify Trump with jobs in the U.S. while maintaining significant offshore facilities that pump out products at a lower cost than in the U.S.

Dell, for example, has nine manufacturing facilities — two in the U.S. (Massachusetts and North Carolina), two in China, and one each in Brazil, Ireland, Poland, India and Malaysia — that reflect user demand in those regions, according to Dell spokeswoman Lauren Lee.

The Round Rock, Texas-based company does not break out employee figures, or revenue, by region. As part of its mega-merger with EMC last year, it intends to add 2,000 salespeople to its global force of 40,000,

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SOURCE: USA Today, Jon Swartz