By John Hintze
Many unknowns but the potential for dramatic change in trade, taxes and the US economy is “yuge.”
President-elect Trump’s phone call with the president of Taiwan: a blunder or a first gambit toward some new sort of deal? And what of Trump’s threat over the first weekend of December to impose a heavy tax on US companies moving production overseas, a move Republican congressional leaders quickly denounced?
These questions and others impacting corporate treasury are unlikely to find much clarification before Trump’s inauguration. However, the new president will have the tools and in many instances the political support to make dramatic changes to trade, taxes and the US economy.
In terms of trade, Trump has nominated private equity firm chief Wilbur Ross Jr. as Secretary of Commerce. Mr. Ross is a long-time proponent of a more protectionist US trade policy, if not necessarily instituting the double-digit tariffs targeting Chinese goods that Trumped threatened during his campaign. But Mr. Ross has been on record saying there would be no trade wars. “There are plenty of things that could be done that would not be the end of the earth but would help our trade balance,” he told Yahoo Finance in an interview after the election.
Nevertheless, a Trump Commerce Department could encourage companies to lodge anti-dumping duties against specific companies (as well as measures across specific categories of imports) more aggressively that could exceed 100%. In addition, the president has significant unilateral powers to impose tariffs, quotas and quantitative restrictions on imports, if such measures are deemed in the national interest. These could be seen as acts of a trade war.
“If the US misuses those policies, other countries could and probably would file a claim with the World Trade Organization’s dispute settlement body,” said Emily Blanchard, associate professor at the Tuck School of Business at Dartmouth College. “That’s a long remediation process.”
As a result, China could choose to retaliate with tariffs without the WTO’s green light, resulting in a broader trade war. “I worry about some of the unlikely-but-not-impossible scenarios. For example, suppose that the US violates its WTO commitments, the WTO DSB finds against the US, and the US just kind of shrugs its shoulders in such a way that it makes other countries start to question the value of the WTO’s dispute settlement panel,” Ms. Blanchard said.
Trump will get support from Republicans now controlling both branches of Congress to lower today’s 35% corporate tax rate, and the main question will be how far. Democrats may even support revamping the tax structure on companies’ overseas earnings if the proceeds are used to support initiatives they care about, such as rebuilding the US’s neglected infrastructure.
The Trump campaign proposed a 10% repatriation tax, while the Hoover Institution’s Blueprint for America, supported by House Speaker Paul Ryan, formerly chairman of the House Ways and Means Committee that writes tax legislation, proposed a repatriation tax of 8.7% for cash or cash-equivalent assets, and 3.5% for illiquid assets. “The point here is it’s a mandatory repatriation—the cost of transitioning into the territorial system,” said Kathleen Dale, principal, international tax at KPMG, who spoke at The NeuGroup’s fall Treasurers’ Group of Thirty (T30) meeting. She added that a territorial system would eliminate the problem of trapped offshore cash, and those offshore earnings could be brought back to the US without facing a tax hit.
Given the number of transitional rules that would have to be put in place to effect the change, she said, the reform could be enacted within a year but may take longer, creating a quandary for treasury executives whose firms need cash more urgently.
“Do I try to repatriate the cash, perhaps using a highly structured transaction, and risk the IRS coming in and saying, ‘We don’t think this works,’ ” Ms. Dale said. “So the company ends up paying the 35% rate, when in the meantime Congress passes the mandatory repatriation where it could have paid 10%.”
An obligatory repatriation tax raises other issues. Trump has stated he wants to reduce the US’s current-account trade deficit, which was $367 billion in 2015 and $258 billion as of September 2016. That deficit indicates foreign investors are clamoring to invest in US assets, especially Treasury bonds, even at today’s very low interest rates, and consequently the US is a global net investee—a net seller of assets. However, balance-of-payments accounting says that the US can’t have balanced trade and also be a net seller of assets, i.e., a net borrower from the rest of the world.
If the US were to force balanced trade, it would have to fund its borrowing from US savers instead of foreigners, Ms. Blanchard said, and that could get expensive.
To replace foreign saving with US saving would require higher interest rates across the board. In turn, higher rates would mean that the entire cost of the US debt goes up and along with it the cost of corporate debt, which according to the Securities Industry and Financial Markets Association reached more than $8.4 trillion as of June 30, a record.