“This is an explicit goal of the Trump administration,” says Edward Alden, the Bernard L. Schwartz senior fellow at the Council on Foreign Relations (CFR), and an expert on US economic competitiveness. The carrot is lower taxes. “The stick is that you may get whacked with a tariff if you invest somewhere else.”
Some businesses are making strategic investments in the US. In January 2018, Samsung Electronics Co Ltd said its new US washing machine plant started production. LG Electronics has unveiled plans to open a new washing machine factory in the US in the final quarter of 2018. In April 2018, SunPower Corp. announced plans to buy US solar panel producer SolarWorld Americas in a bid to offset the impact of Trump’s import tariffs.
The question is what happens from here. The TCJA could spur other jurisdictions to lower their corporate income tax rates to match the US’s top rate of 21%. But while tax competition is nothing new, countries today must balance the need to attract economic activity by reducing corporate income tax rates or offering incentives with the need to maximize tax collections through transparency and digitalization initiatives.
Along with changing the US tax system, Trump views reforms to the international trade system, including the recently announced tariffs, as part of his “America First” plan.
And his actions have pleased many domestic steel and aluminum producers and labor groups, who support the tariffs. Since these tariffs were enacted, several steel and aluminum companies announced that they will reopen idled facilities. Supporters have downplayed the likelihood that higher steel and aluminum prices resulting from the tariffs will have a negative impact on the US economy, noting that these products often are a small portion of the overall content of manufactured goods.
But some automakers have warned that the tariffs could lead to higher prices. Ford Motor Co said in a March statement that “despite the fact that Ford buys the vast majority of its steel and aluminum for US production in the US, this action could result in an increase in domestic commodity prices – harming the competitiveness of American manufacturers,” according to a Reuters report.
Canada, Mexico and the US have been renegotiating their North American Free Trade Agreement (NAFTA), which entered into force on January 1, 1994. Trump has called it the “worst trade deal,” saying it has hurt US workers and companies. Mexico and Canada have approached the negotiations as an opportunity to deepen economic integration in North America.
The three countries have completed seven rounds of discussions, with nine chapters (including competition, telecommunications and regulatory practices) and six annexes (such as technology, chemical and pharmaceutical) concluded. There are contentious issues that still need to be resolved, however, including rules of origin for the auto sector, market access for agriculture and a sunset clause.
In June 2018, President Trump said he could imagine negotiating separate deals with Canada and Mexico. Canada and Mexico are still pushing for a trilateral agreement.
At the beginning of 2018, the US began renegotiating its free trade agreement with South Korea (KORUS FTA) as Trump complained about the rising trade deficit with that country. In March 2018, the two countries announced they had reached an “agreement in principle”.
Trump also announced plans to exit the new Trans-Pacific Partnership (TPP) trade agreement in January 2017. Japanese Prime Minister Shinzo Abe used that maneuver to take on the role of champion for the deal. The remaining 11 countries, including Canada and Mexico, signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March 2018. The following month, Trump said he would reconsider joining if it were “substantially better” than previously, according to a Reuters report.
Elsewhere, the UK, which has been part of the EU (previously the European Economic Community) since 1973, is preparing to depart. The UK is hoping to keep the benefits of the single market and customs union during a transitional period from March 29, 2019 to December 31, 2020. Brexit will likely complicate taxes and tariffs, alter the movement of goods and require additional documents for both UK-based and non UK-based businesses.
While businesses may hope for the best, they should plan for additional uncertainty and market volatility ahead. Overall, the appetite for new free-trade agreements has declined since the 2008 financial crisis, according to an EY analysis of International Monetary Fund (IMF) data.
While there was a proliferation of free trade agreements focused on trade in goods and reducing trade barriers, the second-generation of free trade agreements targeting the protection of intellectual property (IP) and trade in services have slowed, according to Adrian Ball, EY Asia-Pacific Leader for Indirect Tax.
“The world of trade has been flipped on its head,” says Ball.