March 10, 2017 | Procurement Process and Excellence Blogs
Corporations and investors were buoyed by the Trump government’s proposal to substantially cut corporate taxes, ease regulations and increase spending on infrastructure, which would have supported the growth and prosperity of US companies. However, the recent actions of Trump’s government are aligned to their agenda of “new protectionism,” which includes a ban on immigrants from seven Muslim countries, impositions of higher import tariffs, an end to various free trade agreements and changes in energy policies are likely to have economic and strategic impacts on domestic and international markets.
Is the Trump government’s protectionism likely to trigger trade wars? The recent proposal of Trump administration regarding restructuring various existing trade agreements such as Transpacific Partnership (TPP) and North American Free Trade Agreement between the US, Canada and Mexico is expected to impact the country’s GDP growth, trade balance and employment. Companies in the US are attracted toward TPP partner countries such as Vietnam and NAFTA partner Mexico, due to the lower wages of about US$50-120 a month, compared to domestic wages of US$2000 a month. The abolition of TPP, which is mainly to restrict imports from China and other Asian countries, is expected to make it difficult for US companies to export to Asia, the fastest growing market in the world. The increasing threat of a trade war is expected to impact surplus countries more. Changing trade policies have also become a threat for European companies, mainly automotive companies such as BMW, Daimler and Volkswagen, which currently manufacture cars and parts in Mexico for the American market.
The trade barrier with Mexico is also expected to impact the US agriculture & animal husbandry industry, as the country is the third largest market for agricultural products, including corn, soybeans, dairy, pork and beef. This trade deficit might give domestic producers an opportunity to capture the void created by these policies. However, this trade void will come with price inflation in certain sectors, thereby hurting consumers and businesses which are highly dependent on this industry.
The policy change is not limited to trade agreements, but also includes the business travel industry where policy fluctuation is focused on the immigrant ban and change in business visa policy. Per Trump’s administration, the travel ban from seven Muslim countries is expected to establish strong security standards and prevent terrorists from penetrating the US. However, this rigid action will not only limit business travel from these Muslim countries, but may also cause business travelers from other countries to reconsider their future travel plans.
The Trump administration also introduced legislation in the US House of Representatives to raise the H1B visa minimum wage to US$130,000 from US$60,000 in some instances, thereby creating a barrier for IT service providers to employ skilled and cost effective foreign workers. Although the Indian IT sector will be impacted due to changing visa policies, the US too will feel the heat of this plan, as the availability of skilled American workers is not enough to fill this void, and most Fortune 500 companies are actively involved in outsourcing IT services in terms of both skill and cost advantage. This change in H1B visas is expected to add massive cost pressures and contract realignments in the US market.
The actions by Trump’s administration which are aligned to trade policy and travel restriction are expected to cause many changes in structure and performance of various sectors, such as Automotive, Agriculture and IT. However, certain policies of the current administration may have positive impact on industries such as the financial sector, which includes banks and financial companies. The government's proposal to cut corporate tax rates by 15% to 35% is expected to raise the annual profit of the six largest US banks by an average of 14%, as banks pay higher tax rates due to lower deductions compared to industrial or retail firms. The companies in the BFSI sector such as Wells Fargo & Co. and JP Morgan Chase & Co. would have saved US$3-4 billion in 2015 if the tax rate had been 15% and existing deductions were disallowed.
The uncertainty of policies by Trump’s government is restricting industries from formulating their future growth strategies. Policy framework will have significant implications on supply network, resource planning and manufacturing. Therefore, sourcing managers of companies with significant offshore or nearshore operations might need to reconsider their sourcing decisions in terms of cost, supply security, domestic production and future growth plans. For example, companies which are highly labor intensive driven (such as food) might need to initially pass price increases to consumers, and then search for suitable alternatives to deal with the localized production agenda of government. However, small boutique food firms may benefit from these price hikes, as their typical premium products see less of a price disadvantage. It is going to be a wait-and-watch game for companies to see how the Trump government finally implements these policies, as the government is still facing opposition from domestic and international businesses.