Markets sage Aidan Donnelly considers the effect of Trump’s tax policies on trade and investment.
Let us set the scene – it is January 2016 and you are wondering what the year ahead has in store for global investors. If I had suggested that there would be a significant correction in the Chinese stock market in January, Britain would vote to leave the European Union, and Donald Trump would be elected as the next US president, you might question the nature of my crystal ball.
If I then told you that even given these events, world equity markets would end the year in positive territory, you would probably question my sanity. And yet the 2016 scorecard reads as such. But if 2016 was the year of ‘shock’, will 2017 bring us the ‘awe’ or the ‘ah hell!’?
While most of the media focus in Ireland has been around the impact of Brexit, the upcoming first year of the Trump presidency could be significant as well.
The week before the presidential inauguration, the incoming president, Donald Trump, gave his first press conference since winning the election. Viewed under the category of entertainment, there is no denying that it was unique, and most people watching it found it compelling viewing – akin to car crash television.
We certainly have never seen anything like it from an incoming or sitting ‘Leader of the Free World’ – not even Silvio Berlusconi in his heyday could match this.
But as the cheering and clapping subsided and the CNN reporter questioned the future of his career with a fake news network, anyone taking a detached view of the press conference would come to the conclusion that there was little in the way of details on the key policy initiatives that will shape his term in the Oval Office.
There was a very brief mention of a “major border tax on companies leaving the US” and that Obamacare will be repealed and replaced “almost simultaneously”. And from an Irish perspective, these are two areas that have the potential to impact us.
BREAK FOR THE BORDER
The US Republican Party has proposed a radical overhaul of the US corporate tax system. This could involve a lower corporate tax rate, higher capital expenditure offsets, cash repatriation incentives, changes in the treatment of interest payments and the introduction of a border tax.
A potential US border tax could have profound implications for economies and companies across the world, but Ireland could also be impacted by other changes in the tax code.
a potential US border tax could have profound implications for economies
The prospect of a US border tax has attracted particular interest from investors as it is obviously intended to encourage more US-based production. Of course, this radical policy might not even happen and even if it does become law, then it is likely to be watered down by industry exceptions.
Prior to his press conference, one industry that was definitely in Trump’s crosshairs for a border tax adjustment was the auto manufacturers. Following Ford’s decision not to build a new assembly plant in Mexico, opting instead to expand their facility in Michigan, Trump turned his attention to General Motors (GM) and Toyota, highlighting – in some cases incorrectly – their overseas manufacture of vehicles sold in the US. Other large industrial companies like Carrier have also scrapped plans to invest abroad, and instead expand domestic US operations.
From an Irish perspective auto manufacturing ceased to be a major industry a long time ago, but that’s not to say we are immune. One element of Trump’s press conference will certainly give those involved in attracting Foreign Direct Investment (FDI) cause for concern.
In his speech he said “I think a lot of industries are going to be coming back (to the US). We have to get our drug industry coming back. Our drug industry has been disastrous. They’re leaving left and right. They supply our drugs, but they don’t make them here, to a large extent…. they’re getting away with murder”.
In 2015 exports to the US accounted for 15% of total Irish exports, with the lion’s share of this coming from the pharmaceutical (pharma) and medical device (medtech) sectors. Although employment levels are not as significant, both these industries have been major sources of FDI over the last few decades.
THE PILL FOR THIS ILL?
The introduction of a border tax or other tax code changes such as the ability to expense US capital expenditure immediately could swing plant location decisions back to the US and away from these shores.
These coupled with a proposal to allow the repatriation of accumulated untaxed earnings – a traditional source of funding for overseas investment – at a reduced one time rate will give company managements much food for thought in the coming years.
Inclusion in any bidding process will be paramount for all companies
If that wasn’t bad enough news for the pharma industry, they also face challenges in the form of drug pricing and repeal of the Affordable Care Act (Obamacare).
Again during his press conference Trump said the “other thing we have to do is create new bidding procedures for the drug industry because they’re getting away with murder. Pharma has a lot of lobbies, a lot of lobbyists and a lot of power. And there’s very little bidding on drugs. We’re the largest buyer of drugs in the world, and yet we don’t bid properly. And we’re going to start bidding and were going to save billions of dollars over a period of time.”
Inclusion in any bidding process will be paramount for all companies and success may not be just about your price – other actions may also sway opinion.
TRADE WAR: WHAT IS IT GOOD FOR? ABSOLUTELY NOTHING
The wider question of how long would it be before other countries respond cannot be ignored either. While the US may have a head start, others are well practiced from World Trade Organisation (WTO) trade disputes to slap countervailing duties or use other methods rapidly to challenge unfair policies.
The upshot is that the US advantage from being a first mover could be relatively short, and the consequences of a global trade war would be significant for global growth.
Although a four year odyssey has just begun, the first 100 days are likely to be the most informative. The speed and direction the good ship Trump takes could create waves far beyond the US shores. Let’s hope it doesn’t result in rough seas for us!
About the author: Aidan Donnelly is head of Equities at Davy Private Clients. Views expressed in this article reflect the personal views of the author and not necessarily those of Davy. Follow him on Twitter @aidandonnelly1. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland.