With a $500 million manufacturing campus opening next year in Berkeley County, Volvo Cars executives say they have a lot to lose if Congress imposes a border adjustment tariff on imports as part of a corporate tax reform plan.
"The customer is the loser, or we are the loser," Lex Kerssemakers, president and CEO of Volvo's North American division, said of the proposed tax during a media briefing in Charleston this month.
"Everybody's the loser," he said.
Volvo isn't alone in its opposition, but South Carolina manufacturers are hardly unanimous in their criticism — or praise — of the proposal to charge a 20 percent tax on imported goods in exchange for a reduction in the corporate tax rate.
Boeing Co., one of the Charleston region's largest employers, likes the plan. Dennis Muilenburg, the aerospace giant's president and CEO, said in a letter to Congress that an import tax "allows America's businesses to better compete in the global marketplace."
An aerospace industry trade group representing 330 manufacturers and suppliers nationwide, including GKN Aerospace in Orangeburg and Safran USA in North Charleston, also has endorsed the measure.
The benefits or disadvantages of a border adjustment tax depend on which industry is being targeted. That's one reason Bobby Hitt, the state's Commerce Secretary, is standing on the sidelines.
"As one of the numerous factors impacting the global business environment, South Carolina's international companies successfully operate with tariffs all over the world," Hitt said. "Recognizing that, our state remains committed to ensuring that we maintain a business-friendly climate — one that provides industries, from every corner of the globe, with the resources they need to succeed."
Volvo officials say it's certain the tax would hit South Carolina's automotive cluster particularly hard. It's a $27.1 billion-per-year industry that includes manufacturers like the Swedish automaker, BMW and Mercedes-Benz Vans as well as more than 200 suppliers. All told, the automotive sector employs nearly 50,000 people throughout the Palmetto State.
"Under the current border-adjusted tax plan, auto manufacturers would be among the hardest hit," said Daniel Brennan, state director for Americans For Prosperity, a conservative political advocacy group. "Simply stated, South Carolina's residents and businesses will be placed under significant strain if a border-adjusted tax is included in a tax-reform package."
In a study released this month, Americans For Prosperity said South Carolina would feel the drawbacks of the tax more than almost any other state. Only Michigan, Louisiana, Tennessee, New Jersey and Kentucky would fare worse.
That's because nearly one-fifth of South Carolina's gross domestic product is generated, at least in part, from imports subject to the proposed 20 percent tax on goods crossing the border into the United States. Everything from the Mexican-made cable harnesses helping to power Volvo's vehicles to the Japanese-built mid-body sections for Boeing's 787 Dreamliner jets would be hit with the tax.
South Carolina businesses would pay $7.5 billion more each year for those and other goods, according to the study.
Those extra costs will be passed along, as manufacturers squeeze margins from suppliers and raise prices for consumers.
Wolfgang Schafer, Continental Tire's chief financial officer, told The Wall Street Journal that a 20 percent border tax would result in a similar increase in the cost of tires made at the company's plant in Sumter.
South Carolina's tire manufacturers — which also include Goodyear, Michelin and Giti — buy the bulk of roughly $215 million worth of natural rubber imported through the Port of Charleston each year. A double-digit increase in the cost of that raw material will ultimately show up at the local auto service center.
Germany-based Daimler AG, which is building a $500 million manufacturing plant in North Charleston for its Mercedes-Benz Vans unit, is watching the tax proposal closely, but "we will not participate in any speculations," said spokeswoman Andrea Berg.
Still, Berg points out that "prosperity in the United States and Europe is to a great extent the result of free trade."
The carrot to the border tax stick is a reduction in the corporate tax code, to 20 percent from its current 35 percent. The idea is to make up the difference with the $1.7 trillion that import tariffs are expected to generate.
Exports, on the other hand, would be exempt from taxes.
That's why Boeing favors of the proposal. It certainly buys many of its aircraft parts from foreign suppliers. But the company also is the nation's top exporter, with foreign customers accounting for about two-thirds of commercial plane deliveries totaling roughly $56 billion each year.
Even with the corporate tax reduction, Americans For Prosperity estimates South Carolina businesses as a whole would owe 241 percent more in combined taxes and import tariffs under the proposal than they currently pay.
Volvo will have about the same mix of domestic to international sales as Boeing, with about 60 percent of the vehicles made in Berkeley County leaving through the Port of Charleston for overseas markets.
That global demand, and the resulting jobs it creates here at home, is one reason Volvo executives think they shouldn't have to pay extra for the parts they use. Volvo expects to hire 2,000 people from the Charleston region when its cranks up production next year near Ridgeville. A total of 4,000 workers eventually could be hired depending on sales.
Volvo will get three-fourths of the parts for its S60 sedans built in Berkeley County from foreign countries. A border tax on those parts could add an average of $7,643 to Volvo's sticker prices, according to automotive researcher Baum & Associates.
Other price hikes are likely. Baum & Associates says the average price of a BMW, for example, would jump by $3,725. Americans for Affordable Products, a coalition of 400 companies opposed to the border tax, estimates the proposal will cost families $1,700 more each year for food, clothing and other everyday goods — affecting the poor and middle class the most.
"We're not the only ones. There are other car manufacturers here (in South Carolina) that have very large volumes and they are providing job opportunities," said Katina Fjording, the Volvo vice president in charge of building the automaker's plant off Interstate 26.
"When they export," Fjording said, "it's income that can be further invested. If that is going to be neutralized by the fact that the parts and components we take in cannot be tax reliefed, then of course our business case is going to shrink and make it less interesting doing business here. So it's a two-way street. If we want to be exporters, which is good money in the hand, we cannot say that it's going to cost you a fortune to take in materials."
Fjording adds a border tax probably won't achieve one of its biggest objectives — forcing manufacturers to bring most of their suppliers back within U.S. borders. Volvo has about 1,200 suppliers worldwide.
"A global company means you have global sourcing," she said. "That means you're going to source where it makes sense from a global perspective."
BMW's manufacturing plant in Greer, which employs nearly 9,000 workers, exports more vehicles by dollar value than any other U.S. automaker — more than $9.5 billion worth in 2016, most of them through the Columbus Street Terminal in Charleston.
Harald Krueger, the German automaker's chief executive, told the cable network CNBC last month that BMW isn't ready to take a stance on the border tax proposal.
"There is no decision so far, so we need to wait and see what the future will bring," Krueger said.
It's a more conciliatory tone than Manfred Erlacher, the former head of BMW's Greer plant, took last year when foreign trade was under attack by then-candidate Trump, considered at the time a long-shot for the White House. Erlacher, now managing director of the automaker's plant in Regensburg, Germany, said free trade "could offer significant benefits" as he watched the 2 millionth BMW ship out of Charleston.
The prospects of an import tax ultimately gaining congressional approval are uncertain, with some Republicans wavering in their support of House Speaker Paul Ryan's signature plan.
South Carolina Sen. Tim Scott, a Republican, has said it's "going to be very difficult to get it through the Senate."
And voters apparently don't like the idea of paying more for the products they use. A national survey released last week by The Tarrance Group, a Republican polling firm, showed 63 percent of Americans are opposed to a border adjustment tax.
Alan Auerbach, a professor of economics at the University of California and one of the proposal's biggest advocates, says price inflation is overstated. In an interview with The Seattle Times, Auerbach said more foreigners will want to buy America's tax-free exports while U.S. consumers will cut back on taxed import purchases, creating a rise in the dollar's value that will offset higher prices.
Lindsey Graham, South Carolina's other senator, has said he doesn't think the proposal will garner even 10 votes in the Senate — if it ever makes it to a vote.
Graham summed up his feelings about a border tax in a Twitter post that gained national attention a few weeks ago.
"Simply put," the Republican lawmaker said, "any policy proposal which drives up costs of Corona, tequila, or margaritas is a big-time bad idea. Mucho Sad."