Is a shake-up coming to international competitiveness?
Some thoughts on BrexiT, the Trump Presidency and a tilt in the international competitiveness landscape......
Already several major location decisions and trade deals (read Boeing, Ford, Lockheed Martin) have been announced – perhaps so far as the result of high profile jaw boning. Yet, thus far, much of Donald J. Trump’s Make America Great agenda has not or may never come to fruition. However, there are several aspects that merit close monitoring and analysis by lower profile global enterprises planning their location strategies.
Potential initiatives that must be considered include:
Regulatory environment is a significant factor used in evaluating alternative sites. The administration has been quickest and most able to act on the deregulation front. Energy investments in the U.S. shale industry are already reaping huge rewards or at least postponing costly modifications mandated by the previous administration. Other industries likely to find increased investment in the U. S. include chemicals, telecoms, and financial.
Labor flexibility and labor relations is another site selection factor that should benefit from a less restrictive regulatory environment in the U.S.
President Trump has also threatened to use the bully pulpit to limit price increases particularly in the pharmaceutical and defense industries. However, thus far it is uncertain to what extent he wants or can push this. It appears that he is more interested in a collaborative approach to reduce underlying costs than to reduce profit margins.
Once a corporation has determined to enter or expand in a particular market selling price is not an intrinsic part of the location evaluation, however, prospects for lower profitability can blunt the initiative before it gathers steam.
Corporate Tax Reduction
This can have a significant impact on U.S. competitiveness if it can be pushed through Congress. Our work, particularly with pharmaceutical companies and others with a high profit margin have shown that the tax structures in locations such as Ireland, Singapore, and Puerto Rico can dramatically tilt the location equation.
The ability to invest the trillions of dollars sitting offshore in the U. S. without paying significant additional U. S. corporate income taxes, along with continued reduced taxation at home, would surely favor an increase of the fraction of world investment done in the United States. Although not a tax expert, this writer understands that in many cases corporations receive a credit against high U.S. tax rates (35% nominally) for those income taxes already paid to a foreign entity. Thus lowering the repatriation tax below the 25% rate already charged in many developed countries would only benefit, perhaps unfairly, those companies that have unrepatriated profits in tax havens.
Border Adjustment Tax
Little detail has been forthcoming about the BAT except that it has been compared to the Value Added Tax which is common in most of the world. We have not found the VAT to be a significant factor in site location decisions. Both importers and local companies pay the VAT on goods sold domestically. Since domestic companies receive a credit for the input VAT they pay on materials, plant, and equipment and are exempt from the VAT on exported goods they are placed on an even playing field with foreign competitors.
In general, the VAT is not of concern in offshoring decisions for call centers and shared services centers as again the input VAT costs are credited and services revenues exempt from the tax. (Some countries such as Brazil, however, may withhold a separate services income tax.)
What the VAT does do, in a macro sense, is shift some of the overall national tax burden to other countries where labor is performed to create imported goods. To the extent that enables a reduction in overall corporate income taxes, there may be some incentive to companies to manufacture domestically as discussed above.
H1 Visas / Immigration Restrictions
There has been an outcry, mainly from Silicon Valley, that any reduction in the H1 visa program would choke off the supply of talent that they need and require them to look elsewhere to make investments in technology. To an extent, also, immigrant unfriendly policies will reduce the pool of applicants who want to come to the U. S. under either H1 visas or as immigrants bringing their families along with them.
On the lower end of the wage scale, further restrictions of immigrants from poorer nations may pose upward wage pressures on a labor market already near full employment.
Renegotiation of Trade Agreements
With an emphasis on fair trade as opposed to opposition to free trade, any renegotiation of trade pacts with individual countries may not greatly impact location decisions. More markets may be opened to American manufacturers and some foreign subsidies such as Canadian subsidies to domestic milk producers and Chinese subsidies to steel manufacturers reduced. Projections of inflation and currency exchange rate fluctuations are built into site selection models and perhaps new trade agreements will add clarity to these projections.
Health Care Legislation
Much has been written about the uncertainty small businesses face regarding health care legislation and their reluctance to expand. However, on a global scale the United States remains very favorable with fringe benefits generally averaging about 35% of direct wages as opposed to burdens of greatly than 100% found in South America and other locales. Thus changes in the ACA should not be a major concern for larger corporations deliberating location strategy.
Political stability has been a factor used in location evaluations and not only has acted as a deterrent to investment in failed states but also to a lesser extent in considering nations such as Argentina. However, there is no reason to believe that the U.S. faces a constitutional crisis, and many commentators suggest business would be more confident with Michael Pence as President. Nonetheless, there may be some hesitancy to increase investment in the U.S. until the 2018 Congressional elections are complete. A change in control of Congress may bring an abrupt halt to many Trump initiatives.
With regard to the judicial branch, the appointment of Justice Gorsuch to replace Justice Scalia should limit sudden changes precipitated by the Supreme Court.
Federal Government Downsizing
The United States unlikely many other nations, notably Ireland, Costa Rica, Singapore, etc., does not have a national economic development agency promoting foreign investment in the U. S. from offices abroad. That work is left mainly to state economic development organizations, many of which have international offices.
Nonetheless the presence of U. S. consulates abroad is an asset for companies investigating foreign investments. President Trump is proposing large budget cuts for the Department of State and presumably also for the Department of Commerce. In our international location searches, particularly in less developed countries, these organizations and the literature they publish have been assets. Particularly, the U. S. Commercial Service, whose primary mission is to promote export of U. S. manufactured products, has been a valuable resource with country guides and local knowledge in understanding foreign investment climates.