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31 January 2017

Playing the Trump Import Tax Game

Written by

Description of Players

Complications for Import Tax

Other Issues

 

 

One of Donald Trump’s more salient campaign promises was a promise “to bring back jobs to fading steel towns and former manufacturing areas.” To promote the create of more jobs in the US, Trump has proposed

  Tax cuts for the middle class and businesses;

  Reduction in government regulations by at least 75%;

  Incentives for businesses that produce and hire in the U.S.; and

  An import tax, at a suggested rate of 35% – 45%

The import tax has been the most contentious measure, which opponents claim will harm

  US consumers, who will end up paying higher prices,

  US manufacturers who currently outsource production to Mexico, China, and other countries with low cost labor, who will suffer from higher costs/lower profits

  Foreign manufacturers who export their good to the US., who will suffer from higher costs/lower profits

This analysis examines the actions and issues other market players face vis-à-vis Trump’s proposed import tax as a means of creating new jobs and growth in the US.

Description of Players

trump imp tax game

I. Trump

A. Role

Establish the market environment; that is, set the rules of the game

B. Objective

Promote jobs and growth in the US

C. Conception of the Market

  The global job market is a zero-sum game, which means that to create jobs in the US, they have to be attracted from somewhere else, like China and Mexico.

Chris Bryant and Elaine He, “The Robot Threat Donald Trump Isn’t Talking About”

Donald Trump tends to present the labor market as a zero-sum game: companies have shifted production to China and other emerging markets. He’s going to bring those jobs home.

  The current global trading regime is not one of free trade, and the game is rigged against the US. That is, the US is at a disadvantage because it imports goods and foreign production from other countries much more freely than other countries import goods and US production from the US.

Carol E. Lee and Damian Paletta, “President Trump Focuses on Trade With Promise of ‘Very Major’ Border Tax”

We don’t have free trade because we’re the only one that makes it easy to come into the country,” Mr. Trump said.

D. Proposed/Actual Actions

  Decrease government regulations

  Decrease taxes on businesses and on the middle class

  Provide incentives for businesses that create jobs

Carol E. Lee and Damian Paletta:

At the start of the meeting, the president said he would cut taxes for the middle class and businesses, as well as reduce government regulations by at least 75%.



He promised incentives for businesses that produce and hire in the U.S. but warned the leaders, “if you go to another country...we are going to be imposing a very major border tax.”

  Impose an import tax

John Ydstie, “Trump Vows 'Big Border Tax' For U.S. Manufacturers That Move Jobs Abroad”

"We're bringing manufacturing back to the United States, big league," Trump said. "We're reducing taxes very substantially and we're reducing unnecessary regulations."

"A company that wants to fire all of its people in the United States, and build some factory someplace else, and then thinks that that product is going to just flow across the border into the United States — that's not going to happen," Trump said. "They're going to have a tax to pay, a border tax, substantial border tax."

Trump has suggested the tax could be 35 percent to 45 percent of the value of the product.

  Shame outsourcers

Mike Colias, Christina Rogers and Joann S. Lublin, “Auto Industry’s No. 1 Preoccupation: Trump”

Less than a decade after U.S. auto makers bounced back from near catastrophe thanks to a bailout from Washington, they have been rattled by a series of tweets by Mr. Trump accusing them of not being sufficiently committed to U.S. jobs and investment, given their heavy reliance on overseas production.

  Signal to the nation that Trump is creating a business-friendly environment. That is, set expectations to reduce uncertainty and induce new business investments in the US.

John Ydstie:

The president assured the executives that his administration will be among the most business-friendly in the world.

Theo Francis, “The Trump Factor in Companies’ Jobs Pledges: Analyzing the Numbers”

Mr. Trump said he wasn’t micromanaging business decisions. “I’m setting a tone for hundreds of companies,” he said.

Reader Comments “The Trump Factor in Companies’ Jobs Pledges: Analyzing the Numbers”

Phil Christopher: The reason to be optimistic about the job creation is NOT that Trump will pick off as series of job creation deals. That would be inefficient and clearly is not his plan. That was as much he could do until he took office, which happened to be more than recent Presidents have done even while in office.

The reason to be optimistic is that for the first time in a long time a President is actually going to take on the issue in a meaningful, constructive way.  These deals were a manifestation of Trump's resolve, not the tactic he's going to lean on to win.

Mike Roads: The longer view is this:  Everyone knew in the past knew that politicians (incl Pres) had little true influence on job creation because everyone wanted jobs and knew that business created them.  Along comes O who actually believes that govt creates jobs.  (remember "you didn't build that"?)  So O threw an unprecedented chill over business plans all over the US.  Businessmen believe the Dems are a source of RISK not help.

The announcements of expansion plans aren't caused by expectations of specific govt programs as much as business leaders having a renewed optimism saying, "Hey at least the govt won't try to block me."

Montague Brown: If Trump can make one deal a day, it would take him 20 years to create as many jobs as the U.S. economy does in one month. It makes great media but poor government.” one professor noted.  I wonder, does this professor think it is bad government to promote the idea of creating new jobs for Americans?  Is it wrong to tout more for the people you represent?  Would it be wrong for universities to tout more for research at universities which would employ faculty and give opportunity to students?  Of course not, nor should Trump be crucified for not changing water into wine but only being able to water the vines.

And of course companies are dodging flak.  they are also evaluating plans and looking to see what might be different and what to seek in order to get more jobs here.  that is the trump message and it is a positive one.  we are in competition with the world and need to grow up, accept it and move on.

Richard C Levin: If not even one job was created or saved so far as a result of Trump's efforts, he is still successful.  Unlike Obama and our legislators, both sides, who turned their backs while the middle class was being outsourced, Trump has recognized and is calling attention to the problem.  For that reason alone  things will improve.  Obama quote on globalization:  "Globalization makes our economy, our health, and our security all captive to events on the other side of the world. And no other nation on earth has a greater capacity to shape that global system, or to build consensus around a new set of international rules that expand the zones of freedom, personal safety, and economic well-being. Like it or not, if we want to make America more secure, we are going to have to help make the world more secure." It seems people who are losing jobs disagree and voted for Trump! 

E. Style

Threaten draconian punishment, but settle for reasonable terms; However, there is a real impact of his threats:

  Uncertainty/Costs lead businesses to delay action

  Spook financial markets

  Wreak havoc with dollar

Rick Newman, “Trump just proposed a $60 billion tax hike”

Trump’s goal is to make imports more expensive in order to spur more production in the United States, where costs are almost always higher than in other countries because workers get paid more.

Trump’s negotiating style, as many are learning, is to threaten draconian consequences then settle for some compromise that’s less disruptive. On the other hand, the mere threat of tariffs might put business plans on hold at dozens of big companies, spook financial markets and wreak havoc with the value of the dollar and commodities dependent on future expectations of inflation.

many of the Mexican exporters are American companies such as General Motors (GM) and Ford (F). So higher taxes on them would lower profitability and perhaps dent their hiring plans in the United States.

 

II. US Manufacturers

A. Manufacturers’ Expectations about Trump

  Trump wants what’s best for the company. The inference is that he won’t actually take actions that are harmful to the economic health of the country.

Mike Colias, Christina Rogers and Joann S. Lublin:

“Look, he’s a businessman,” Mr. Ford said of Mr. Trump. “We’re not going to make dumb decisions. We can’t. He wouldn’t expect us to, frankly. So it was the right business decision for us. And obviously it was something he was happy with, and, heck, I’m happy with.”

Carol E. Lee and Damian Paletta:

Ford CEO Mark Fields, who was also at the meeting, said he “came out with a lot of confidence that the president is very, very serious about making sure that the U.S. economy is going to be strong and have policies—tax, regulatory or trade—to help drive that, and I think that encourages a lot of us as CEOs as we make decisions moving forward.”

B. Responses to Trump’s Actions

  Rethink plans to outsource

°  Expectation of pro-business environment might make on-shoring more profitable

°  Lower taxes might offset import tax

Lauren Weber, “Trump’s Attacks on Outsourcing Put Companies on Guard”

Sarah Koshiol, a director with Brightfield Strategies, which advises companies on workforce strategy, said some firms are rethinking plans to increase their offshore contracts, worried about potential penalties from a Trump administration. So far no one has formally changed tack, but the fear of reprisal is “on their radar,” she said.

  Announce previously planned job expansions to garner favor from and/or prevent shaming by Trump

Mike Colias, Christina Rogers and Joann S. Lublin:

Mr. Marchionne was one of the few auto captains to get out in front of Mr. Trump’s salvos, announcing on the eve of the Detroit auto show that Fiat Chrysler would invest $1 billion in two Midwest factories and create 2,000 new jobs. Manufacturing investments aren’t typical fodder for press releases issued during a major auto show. Mr. Marchionne denied any Trump influence on the timing of the news. The investments have been in the works for many months.

  Shame Trump for outsourcing his own businesses

Lauren Weber:

“There is a fear of being called out and shamed for outsourcing,” said Eric Dezenhall, a crisis- management consultant and former press aide to President Ronald Reagan. He noted that Mr. Trump has some vulnerability on this issue; he has used foreign steel in his buildings and some Trump- branded items are made in China.

Mr. Dezenhall said he has discouraged leaders from calling out Mr. Trump’s outsourcing record, though. “What he can do to you now is a heck of a lot worse than what you can do to him,” he said.

  Re-shore production but use automation and skilled labor

Lauren Weber:

Leaders of U.S. companies with offshore operations are privately worrying that they will come under the scrutiny of a president who has blasted firms for moving production outside American borders.

The attacks are reverberating at companies with production and IT operations in countries like India, China and the Philippines, outsourcing executives say. Some companies are looking for U.S.-based alternatives, while vendors that provide outsourced services are pushing automation as a cost-effective way to re-shore work— but not necessarily jobs.

  Mollify Trump with job creation in the US while maintaining offshore operations

Jon Swartz, “'Very major border tax' is big migraine for tech”

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.



He [Dan Panzica, a senior principal analyst at market researcher IHS Markit] conceded Apple could do final assembly of a limited edition iPhone in Texas, for instance, to satisfy Trump. Higher labor costs would be offset by savings in transportation expenses, he says.



A common path could be the establishment of automated manufacturing hubs in the U.S., where workers would be trained to work with automated tools such as robotics and data analysis, according to Tom Bianculli, chief technology officer of Zebra Technologies, an information-technology adviser thatworks with retailers Target and Macy's.

  Use outsourced labor to cater to foreign markets

Jon Swartz:

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.

 

III. Foreign Manufacturers

A. Responses to Trump’s Actions

  Object to import taxes (lack of political support)

  Build factories in US, but much would involve automation and skilled labor

Eva Dou, “Foxconn Considers $7 Billion Investment to Build U.S. Factory”

Electronics manufacturer Foxconn Technology Group is considering investing $7 billion to build a flat-panel screen factory in the U.S., but the company founder says incentives will be needed to make the deal happen.

  Cut exports to US and/or focus on domestic markets

 

IV. US Consumers

A. Responses to Trump’s Actions

  Object to import taxes (lack of political support)

  Pay higher prices associated with export taxes

  Pay same or similar prices

°  From re-shored businesses using automation

°  From re-shored businesses operating in friendlier business environment

 

V. US Workers

A. Responses to Trump’s Actions

  Laud Trump’s actions (political support)

  Job situation

°  No better off with re-shored companies and automation

°  Get new jobs with re-shored companies and friendlier business environment

 

Complications for Import Tax

I. Multinational Supply Chains

  Trump tax could hurt imports of raw materials and intermediate goods used to make final products in the US.

J. W. Mason, “What Exactly Does Mexico Export to the US?”

Most US imports from Mexico are intermediate and investment goods, not consumer goods. A tariff on Mexican goods is more likely to raise costs for US businesses — including for US exporters — than to lead people to substitute American-made goods for Mexican ones.

  Complex international supply chains make reshoring difficult

Jon Swartz:

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.

 

II. Automation

It’s often cheaper to substitute automation for US labor, so even if companies re-shore operations, they won’t necessarily create many jobs for unskilled labor

 

III. Peak US Auto Demand

  Most cars sold in the US are already made in the US

Matthew Debord, “It would be a disaster if automakers do what Trump wants”

most cars and trucks sold in the US are already built in the US. The "big three" carmakers are major employers in the upper Midwest, a key reason GM and Chrysler were bailed out by the federal government in 2009.

Beyond the Detroit carmakers, the Japanese and German auto companies have been building vehicles at US factories in the South for decades in nonunion "right to work" states.

  US auto market is reaching saturation, so any new capacity built now will soon become idle

Matthew Debord:

A record 17.55 million new vehicles were sold in the US in 2016. We've now had two consecutive years in which the sales record of 2000 was topped.

automakers are under pressure to invest not in unnecessary capacity but in research and development that will enable them to attack the growing autonomous-driving, car-sharing/ride-hailing, and electric-vehicle opportunities. None of those really involve hiring additional factory workers.

us car sales

  Auto Manufacturers want to make concessions (marginal hiring) to appease Trump and get other benefits

°  Corporate tax cut

°  Rollback on fuel economy standards

°  Address problems with other countries’ currency manipulations

Mike Colias, Christina Rogers and Joann S. Lublin:

Auto executives, standing on firmer financial footing these days, hope there might be an upside to Mr. Trump’s close attention—if they can use the wrangling over trade as an opportunity to push their own agendas. Auto makers remain unprepared to meet the Obama administration’s stringent fuel-economy targets, standards Mr. Trump’s nominee to head the Environmental Protection Agency has said he would review. Auto executives also have said they share Mr. Trump’s concerns about other countries suppressing the value of their currencies.



GM has committed to doubling its Mexico production capacity through 2018. GM directors, who next meet in February, may discuss future Mexico expansion and weigh Mr. Trump’s views as “one more variable” before acting, said a person familiar with the matter. Board members also will ask executives to describe other possible Trump actions “where there will be negative publicity” for GM, this person said.

Theo Francis:

A dozen major companies have touted the creation of about 130,000 U.S. jobs since Donald Trump was elected president, vowing to keep jobs in America. How many of those come from Mr. Trump’s pressure and how many were already planned is hard to determine.



“Some of these jobs were going to be announced anyway, but are being announced in a way that is much more public, perhaps to garner a little bit of political favor—or perhaps more importantly, to stay out of trouble,” said Jim Russell, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati, which has about $17 billion under management.

  If Trump drives out foreign manufacturers to give market share to domestic manufacturers, he will cause unemployment in the southern US, where foreign manufacturers are located.

  Trump could accommodate Chinese auto makers in the US and have them create jobs in the US, but sales to them would come at the expense of sales to US manufacturers

 

Other Issues

I. Could Friendlier Business Environment Offset Impact of Import Tax?

Could decreased taxes and incentives could offset border tax?

Jon Swartz:

It isn't entirely a my-way-or-the-highway proposal from Trump. The billionaire has promised to shower companies with benefits: a lower corporate tax rate — Trump vowed to slash it to 15% from 35%, though he backtracked Monday and said 15% to 20% — the elimination of at least 75% of government regulations that hinder their businesses, and fast-tracking their plans to open factories in the U.S.

 

II. Trade War

A border tax might induce a trade war, in which other countries impose taxes on imports of US goods

 

III. Unintended Consequences

Jon Swartz:

"The administration wants to bring insourcing back into style, but there would be a whole host of unintended consequences based on their good intentions," says Ashley Craig, co-chair of law firm Venable's International Trade Group. "Literally, the administration would be asking companies to go back in time to help American workers."

Read 204 times Last modified on 30 January 2017

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