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Trade, taxes and Trump: Operating in a changing landscape

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Trade, taxes and TrumpPledging to create 25 million jobs over the next ten years, Donald Trump promised to be the greatest job-producing president in U.S. history. To create those jobs, Trump’s plan calls for an “America-First” trade policy, backed by tax cuts and rebuilding infrastructure.

On November 2, the House revealed its Tax Cuts and Jobs Act, a proposed bill that details how it will address both business and individual tax rate cuts. But what about the U.S. trade agenda and the president’s recent threat to withdraw from the 23-year-old North American Free Trade Agreement (NAFTA)? Should tax reform legislation be ultimately enacted, withdrawing from the pact would bring big changes to businesses and the economy.

Since the pact took effect in 1994, U.S. trade with Mexico and Canada has more than tripled, growing more rapidly than American trade with the rest of the world. Mexico and Canada are now the second and third largest exporters to the United States, after China. And the two countries are the leading importers of American products.

Speaking to a group of tax professionals at Grant Thornton’s executive workshop, “Operating in a Changing Landscape,” Fred Hochberg, former Chairman and President, U.S. Export-Import Bank and current Fall 2017 Resident Fellow, The University of Chicago Institute of Politics, asserted that “When it comes to trade, there’s a lot of uncertainty. Canada and Mexico are two of our biggest trading partners and our largest destinations for exports so this is a very sensitive issue.”

The workshop is part of the year-long program series— Future Ready Business: Washington Impact — developed in partnership with Bloomberg BNA to help businesses understand and prepare for sweeping tax- and regulatory-policy changes.

“If I were a betting person,” Hochberg said, “I’d say there’s a very good chance that NAFTA negotiations will implode. The rhetoric coming out is not positive and we haven’t been able to tackle a lot of the low-hanging fruit.” He added, “I’m not very optimistic, particularly against the backdrop of potentially pulling out of the Iran deal and walking away from the Climate Accord and Trans-Pacific Partnership.”

Hochberg has suggested that the U.S. is beginning to be seen as a government you don’t want to enter into deals with. Given the current polarized political situation, prospects for future trade deals are slim.

“I cannot imagine Donald Trump and his administration going forward with the trade agreement,” Hochberg said. “If a trade agreement is meant to fix our account surplus so we can address a deficit of imports and exports, that’s not really the goal of a trade deal. Frankly, if we have a tax cut and middle class people have more money, we’ll probably be importing more goods because people will have more cash in their pockets.”With both Mexican and U.S. mid-term elections to contend with, NAFTA negotiations have already stalled with little progress made in finding common ground. “There hasn’t been a great track record of trying to find common ground,” Hochberg said. “I certainly wouldn’t be investing now based on a continuation of NAFTA.”

With an eye on bringing factory jobs back home, the president has criticized NAFTA for creating an unfair playing field, allowing Mexico to take jobs from the United States and opening the border to cheap, tariff-free goods. Nevertheless, a potential exit from NAFTA could result in increased tariffs on products and a disruption to long established supply chains.

Presently, under NAFTA, the U.S., Canada and Mexico pay nothing on most goods that cross the border. But should the U.S. exit the pact, tariffs that Canada and Mexico places on goods could increase as high as 150 percent. The result could be a spike on prices which would cut into company profits.

However, Hochberg told the Grant Thornton group of tax professional attendees that the impact of a NAFTA exit on manufacturers is still in question. “A lot of these supply chains and businesses have been long established,” he explained. These trading relationships help make sure U.S. products can stay competitive with other major global players in Asia and Europe. If NAFTA were to be dismantled, Hochberg said the impact on businesses would clearly depend, in part, on how they would be taxed.

United States has the lowest average tariffs of North American countries under the World Trade Organization

Indeed, recent analysis from ImpactECON suggests that higher tariffs that would result from a NAFTA exit would cost the U.S. 256,000 jobs, including at least 50,000 in food and agriculture, and the farm sector would lose $13 billion in GDP alone.

Corporate taxation provisions included in the House Republican plan are also important components of the national business climate.  If enacted, the Tax Cuts and Jobs Act would change the taxation of foreign profits by moving toward a territorial system, which would generally not tax U.S. companies’ overseas profits.

The Trump administration has promised to impose a “very large border tax” on U.S. companies that shift production to other countries. Unlike a border adjustability tax which was initially proposed but then dropped, such a tariff would likely target individual companies, industries and countries. If carried out, the move would represent a reversal of recent policies, including NAFTA, which has sought to reduce tariffs and deepen cross-border integration, with unpredictable effects for the global trade agenda.

An interesting side note to the administration’s America-first trade agenda is the state of the U.S. Export-Import Bank (EXIM) which is currently seeking to fill the position of Chairman as well as several board members. While the president vowed to shut down the 83-year-old bank while on the campaign trail, three months into office, he changed his mind. The Senate Banking Committee recently began confirmation hearings for the five nominees the president nominated to sit on the board of the bank, including his nominee for chairman and president, former New Jersey Rep. Scott Garrett, one of the bank’s most vocal critics.

“It’s a little perplexing because President Trump has talked about developing more manufacturing in the United States, creating more jobs in the United States and selling more products abroad,” Hochberg, who served as the bank’s chairman from 2009-2017, said. “That’s exactly what the EXIM bank facilitates—to provide buyer financing and working capital for companies to sell overseas. The choice of Scott Garrett is a peculiar choice to be perfectly blunt.  This is a person who voted twice to close the bank---and not just passively voted—but actively was part of a team of people from the Freedom Caucus who were against the bank. If you want to promote more jobs in America, increase exports and make sure that we can be competitive and go toe-to-toe with the Chinese, Koreans and Germans, it’s perplexing to choose someone who has such a challenging view of the bank.”

Indeed, Garrett’s nomination is widely opposed by U.S. business and manufacturing groups and by many Democratic senators, who say that he cannot be trusted to restore the bank’s full lending and guarantee capabilities that have been hobbled since a 2015 fight in Congress over its reauthorization.

While Garrett refused to tell skeptical senators at his confirmation hearing that his past views about EXIM were wrong, he indicated he would support the next reauthorization of the bank scheduled for 2019.

Although it’s unclear whether Garrett can be confirmed, Hochberg suggests that he can be credible “if he chooses to listen to customers and business exporters.”  He urged him to visit some of the supply chain companies and small business importers that employ Americans in all 50 states.

In 2012, coming off of the financial crisis, the EXIM completed about $36B in loans, guarantees and insurance.  Last year, it was $5B, a level that had not been seen in over 40 years. “As my counterpart in the United Kingdom used to say, ‘Just because you haven’t had a fire in 5 years, you don’t sell the fire station and get rid of the firetrucks,’” noted Hochberg. “The EXIM Bank exists to deal with those crises----whether it’s global or isolated such as was the case with the Asian debt crisis.  It steps in when there’s a crisis. That’s what you need it for.”

The EXIM Bank is more critical than ever if U.S. hopes to keep pace with global powers like China, Hochberg explained. “China is a very dominant player, especially in Africa and Latin America. We are woefully underrepresented there. Even if you do no business in Asia, you need to be following China.”

In fact, earlier this year China’s President Xi Jinping recommitted to China’s “One Belt, One Road,” a strategy of export growth and economic diplomacy that will finance the construction of hundreds of Chinese-built infrastructure projects in more than 60 countries around the globe.

“It may not necessarily be a new path,” Hochberg explained, “but it is a more solid continuation of the trend China is pursuing. The time is ticking for American manufacturers to get back into the arena.”

Tax reform might help spur movement in trade negotiations but it won’t likely resolve broader trade challenges.  Resolution of NAFTA issues, coupled with a strong import and export policy, are needed to make the administration’s America-first agenda a reality. However, with tax reform proposals in hand alongside regulatory reductions, U.S. businesses are primed to strengthen their competitive position in the global marketplace.

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