January 31, 2017

International Trade in the Trump Era

Only a week into his presidency, President Trump has taken steps to upend the United States’ paradigm on international trade. Behind an “America First” agenda, he is seeking to reinvigorate U.S. manufacturing, renegotiate key U.S. trading partner relationships, and challenge countries he views as threats to U.S. economic interests or national security. Although many of the details must still be determined, U.S. companies should begin evaluating their cross-border supplier and customer relationships now. There is a limited window in which U.S. companies can make their views known, and once the policies take shape, U.S. companies will need to determine how these seismic shifts in trade policy may impact them going forward.

Here are the core issues on which U.S. companies should be focused:

Renegotiation of Trade Agreements

The Trump administration believes multilateral negotiations put the smallest countries on a level playing field with the U.S. and result in trade agreements that raise the lowest common denominator for all countries involved. President Trump’s view is that the U.S. will have more favorable trade outcomes by taking a bilateral approach, where the U.S. can exert greater leverage. He is seeking to withdraw from or renegotiate several multilateral trade agreements, such as the Transpacific Partnership (which has already been dropped) and the North American Free Trade Agreement (NAFTA).

Shift in Trade Decision-Making to the White House

President Trump’s cabinet choices reflect a desire to centralize decision-making on trade matters in the White House. He is establishing a new International Trade Council, similar to the Economic Policy Council, with representatives from the major cabinet departments. Peter Navarro, an economics professor from the University of California, Irvine will be chairman of the council. Wilbur Ross, a venture capitalist, has been nominated as Secretary of Commerce. The President has announced Ross will have major new responsibilities for international trade negotiations. Robert Lighthizer, a Washington D.C. trade attorney, has been nominated as U.S. Trade Representative. Jeffrey Greenblatt, a long-time attorney for the Trump Organization, has been chosen to be a newly designated Representative of the President for International Negotiations. This restructuring will move international trade policy decision-making into the White House more than in previous administrations, which had dispersed that authority across multiple departments.

Critical Views on China

Many of President Trump’s cabinet members are strong critics of China’s trade practices. During his campaign, President Trump promised to designate China as a currency manipulator and impose a 45 percent duty on Chinese imports. President Trump is not expected to take that action now, but there is little doubt he will aggressively challenge China on U.S./China trade matters. He has already stoked the fire by challenging the “One China Principle” regarding Taiwan, and by pressing China on its asserted rights to disputed islands in the South China Sea.

Incorporation of Border Adjustment Tax into Corporate Income Tax

Although President Trump has expressed skepticism about the border adjustment tax proposed in the House tax reform plan, he and his staff have also suggested it is one idea for receiving payment from Mexico for construction of the border wall. Some version of that tax could ultimately be adopted. Essentially, the proposal would make revenues generated from U.S. exports tax-exempt while prohibiting U.S. companies from deducting expenditures for imports from their tax base. This could, at least in the short term, make U.S. exports more competitive in the global market while also increasing the cost of imports to U.S. consumers. U.S. retail associations and consumer groups have already begun drawing battle lines, and the proposal also faces potential challenges by foreign trading partners under the World Trade Organization.

Increase in Import Duties

Aside from the corporate tax effects, President Trump has proposed levying high import duties on goods manufactured by foreign plants of U.S. companies. This would encourage U.S. companies to relocate manufacturing operations to the U.S., but it would result in higher prices for U.S. consumers and could cause U.S. companies to sell those foreign-made goods in non-U.S. markets, rather than pay the U.S. duties. President Trump has indicated a willingness to allow U.S. companies to repatriate their foreign profits at a one-time tax rate of 10 percent as an incentive to bring those funds home for reinvestment. It is not clear how this proposal would intersect with the border adjustment tax, but it could result in a double hit on U.S. importers.

Economic Sanctions and Embargoes

President Trump’s potential amendments to U.S. economic sanctions and embargo programs are hard to predict. He has expressed a willingness to build stronger relations with Russia and to eventually consider rolling back Russian sanctions imposed by the Obama administration. Congress has bristled at that concept on both sides of the aisle, so existing Russian sanctions could be solidified by congressional action. On Iran, President Trump has called the Joint Comprehensive Plan of Action a terrible deal, and he appears open to withdrawing from it. Although that would not have a direct effect on U.S. companies (which generally cannot conduct business with Iran), it could affect foreign subsidiaries of U.S. companies which have been permitted to engage in trade with Iran under a general license. Finally, it isn’t clear whether President Trump will leave the door open to trade with Cuba as implemented by Obama to the limits of his executive authority.

President Trump is attempting to make good on many of his campaign promises. Although he will need to negotiate both with Congress and U.S. trading partners in order to implement many of those proposals, the potential impacts on U.S. companies could be significant. While it is still early in his term, now is the time for U.S. industry to evaluate the proposed legal changes, to make their voices heard, and to begin adapting to this new trade landscape.

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