Of all of incoming President Donald Trump’s fiscal policies, none likely will have as much impact as his (and Republican Speaker of the House Paul Ryan’s) proposed corporate border tax.
Very simply, the border tax will be a 20 percent tax on imports and a 12 percent subsidy for income earned from exports. In effect, this will be a virtual 15 percent devaluation of the dollar when it comes to imports and exports.
With all else being equal, it’s expected that this will result in a 2 percent drop in trade imbalance, the equivalent of $400 billion, or a virtual erasing of the current trade deficit. The effect of this would be to cause the U.S. dollar to surge and inflation to increase via a 5 percent rise in the Consumer Price Index (CPI). Some analysts are predicting a rally by the dollar of up to 15 percent.
“There will be a major border tax on these companies that are leaving and getting away with murder,” Trump stated. “You’ve got a lot of places you can move,” he added. “As long as it’s within the U.S.”
This was after Trump blasted General Motors for one of its Mexican car plants, tweeting, “General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”
Whether this tax would be legal under rules of the World Trade Organization (WTO) is an open question, but officials from the Trump administration say they will take the issue up with the WTO if necessary.
This proposal of “re-shoring” (as opposed to offshoring) has not been finalized yet, so right now, the types of goods it will cover is not clear.
However, international trade will most certainly be affected. Also affected will be corporate policies of keeping profits outside the U.S. When corporate earnings repatriation and subsequent Federal Reserve actions are taken into account, the strengthening of the dollar could be even greater than 15 percent.
According to analysts at Deutsche Bank, “the proposed changes to the US corporate tax code could be one of the most important shifts in US tax and international trade policy in a generation.”
However, this tax still has to be approved by Congress, which will not be a minor hurdle. Opponents of the tax include importers, big retailers, apparel makers and non-export-driven businesses.
Some of those businesses include those belonging to the wealthy Koch brothers, who are known for their heavyweight political muscle—they’ve previously backed Republican candidates for president and Congress, but famously refused to donate to Donald Trump’s presidential campaign fund.
Both Goldman Sachs and Credit Suisse have analyzed who would be the winners and losers business-wise of such a tax. According to the two investment banks, U.S.-based manufacturers, U.S. oil refiners, U.S. telecom companies and health care service providers would be big beneficiaries of the tax while retailers, automakers and oil and gas companies would be among the most negatively affected companies.
In essence, large importers would have a higher tax rate and/or higher cost of goods sold (COGS), which would likely lower their income. Specific winners would include 3M and General Electric, while specific losers include Michael Kors, Nike, Target and Emerson.
Companies that already do much manufacturing in the United States would be positively impacted; these include Raytheon, Monsanto, Adobe Systems, Reynolds American, Starbucks, Kraft Heinz, Altria Group, Cisco Systems and Intel.
Companies with high foreign earnings and low foreign tax rates would feel more pain; these include Agilent Technologies, eBay, NetApp, St. Jude Medical, Cooper Companies, Amgen, Celgene, Expedia, Electronic Arts, Paypal Holdings, First Solar, Abbvie and Hanes Brands.
Basically, the message the tax sends is that exporting is smarter than importing; there will be strong financial incentive to do the former rather than the latter. Companies with greater international exposure will likely see benefits, whereas companies that are selling primarily imported good to U.S. consumers will suffer.
A side effect of the tax may be to further pressure emerging markets, as the already-stronger dollar has increased dollar-servicing costs in terms of local currencies.
There will be pressure on currency pegs and tighter liquidity conditions, according to Martin Enlund, the chief currency strategist for Swedish financial services company Nordea Markets. “In short, while the fiscal effects on the U.S. dollar could be substantial by themselves, the implication from changed trade fundamentals could actually be a ‘yuuuge’ deal,” he said.
“Exchange rate adjustments are never as easy as theory would have it, and gray swans abound.”
Regards,
Ethan Warrick
Editor
Wealth Authority
