We don’t want your business

Markets have reactively positively to the impending return of Donald Trump to the White House. The scale of the victory surprised even the most ardent Republicans, and having achieved a majority in the Senate and more than likely in the House as well, he has a relatively clear path to pass much of what he promised during his election campaign.

Attention now turns to what a President Trump term will actually deliver and the implications for the US economy and international corporates who want to do trade with the US. His promises during the campaign combined to be one of the most radical reshaping of the US fiscal backdrop ever. The headline policies included reducing corporate tax rates from 21% to 15%, thus going further than just extending the existing the 2017 tax cuts that were due to expire next year with as yet unfunded fiscal easing. With the US deficit at $1.8 trillion, national debt at $35.5 trillion (123% of GDP), and interest on federal debt in excess of $1.1 trillion, unfunded tax cuts are likely to be closely scrutinised by the bond markets.

The 2017 Tax Cuts and Jobs Act (TCJA) created a single flat corporation tax rate of 21% as well as reducing the tax rates paid by most income brackets, so a reduction to 15% will represent a large boost to corporate post-tax earnings. Many companies may use this benefit to increase research and development and capital expenditure, which should act as a boost to the US economy, but there is no obligation to do so.

One of the policies that many sectors welcomed most warmly was the promise to cut red tape and reduce regulation. The S&P 500 banking sector rose by almost 12% on the day after the election as the sector is seen as having the most complicated regulation and controls. Unlike the Biden administration which threatened (but never enacted) to ban drilling, Donald Trump wants to “Drill, baby, drill” from day one, which may create a point of discussion at the COP29 conference in Baku this week.

The most controversial policy, however, is the desire to raise tariffs to levels not seen since the 1930’s. There is probably little opposition to significantly raising tariffs on Chinese imports, as the Democrats did not roll back the ones that President Trump imposed in his first term, however, the level he proposes will be complicated to control as we expect that many Chinese companies will try and disguise their country of origin, re-routing through third parties. The proposal during the election campaign was for a 60% tariff on all imports from China and 10% on imports from the rest of the world, effectively tearing up years of trade agreements and creating a problem for the Chinese who are throwing trillions of Yuan into their economy as they attempt to restart their economy after the real estate crisis and record low levels of consumer confidence.

In light of the risks of this policy coming into force, it could be as surprising as to why global equities outside the US have reacted positively to the US election result. On speaking to many company managements we find that most of them have a plan on how to minimise the effect of import tariffs should they be enacted, which is not unexpected. Another explanation is that given the level of the US deficit, even a Republican congress may try to reduce the implications of such a measure, possibly creating exemptions or renegotiated trade deals such as NAFTA.; undoubtedly the US lobbyists will be working overtime.

Given the controversial nature of tariff implementations, and the risk of a tit for tat response, we do not expect these measures to be implemented on day one, and that they may be watered down in due course, however, any tariffs are likely to be negative for global GDP and increase inflationary pressures outside the US. Deregulation and lower tax rates should benefit US corporates, especially if it leads to more investment, and given the importance of the US consumer any increase in confidence towards their economy should be beneficial. It is worth keeping in mind that Europe remains the largest trading partner of the US, accounting for 17% of total volume, and it is unlikely that the EU will take a 10% tariff without some sort of response or concession sought.

Writing this note on Armistice Day, we hope that that countries across the world, can remember to work together for their mutual benefit, but realise that sadly the incoming administration in the US desires a more isolationist stance, and global corporates may need to adapt their investment priorities.