Ten Business Implications of a Trump Presidency
At a recent FT|IE Corporate Learning Alliance breakfast meeting, FT editors and PwC partners discussed how a Trump administration might affect the business environment. Here are ten key insights from the meeting:
1. Assessing policy risks and constraints. Despite stock markets optimism about a Trump presidency, analysts have probably not fully priced in the political risks—or even understood them. Indeed, businesses worldwide face unprecedented levels of political uncertainty. One way to frame these risks might be to map: i) Mr Trump’s leadership style and policy direction; ii) the political constraints in Congress and elsewhere; iii) his potential impact on international relations; and iv) how all these factors interact.
2. A decade of lost earnings. Many reasons have been given for Donald Trump’s election victory. One persistent theme that applies across developed economies is the fall in average real incomes since the 2008 financial crash. Millennials have been particularly hard hit, though Trump voters, like Brexit supporters, tended to be older, rural or non-graduates. As such, average earnings trends may provide a useful leading indicator of political change, while productivity growth may be a good sign of sustainable recovery.
3. Appointments provide policy clues. Mr Trump’s economic appointees, including Steven Mnuchin (Treasury) and Wilbur Ross (Commerce), suggest an economically liberal orientation, especially regarding financial regulation. Appointments to a 16-person business advisory councilreflect a credible mix of business views. These include Blackstone chief executive Stephen Schwarzman, General Motors chief executive Mary Barra, and former General Electric CEO Jack Welch. A ‘deregulating’ administration would benefit several key industries, including the financial sector by watering down Dodd-Frank regulations, the pharmaceuticals sector by relaxing rules on inversions and consolidations, and the energy sector by deregulating land use and pressing for energy independence.
4. Corporate tax cuts likely to be passed. Trump’s tax policy involving corporation tax cuts from 35% possibly to 15%, coupled with closing of loopholes, is the most likely campaign promise to be adopted if aligned with House Republicans’ tax plans. Although attractive to investors in the US—encouraging inward FDI and M&A—revenue raised may not compensate for lower rates as often occurs in smaller tax havens. Unlike President Obama, Mr Trump seems less concerned about tax avoidance and inversion deals. He will be able to act unilaterally to encourage companies to repatriate some of the trillion dollars currently parked overseas to avoid tax.
5. Limited fiscal expansion. Markets may be assuming a Reaganite stimulus, but spending hawks in Congress (especially if they agree to tax cuts) will most likely block full-scale infrastructure spending, though some large-scale projects will go ahead. Depending on how many, there may be scope to change the structure of the bond markets by issuing longer-dated government securities. Higher spending would also support global growth, though higher interest rates (more likely if Janet Yellen is replaced at the Fed) would dampen credit-dependent consumer spending and imports.
6. Trade: global disaster or policy backtracking? Mr Trump’s promises to renegotiate US trade agreements would represent the gravest risk to business. New trade conflicts could blow apart the post-war trading order with colossal harm to global growth. However, a largely free-trading Republican Congress is unlikely to endorse Mr Trump’s more aggressive proposals. He is more likely to resort to a few high-profile interventions to satisfy his voting base. A much hoped-for post-Brexit trade deal with the UK, however, will not be a priority.
7. Global talent less welcome. Despite inflammatory campaign statements about immigration, Mr Trump did not mention the issue when he outlined goals for his first 100 days. He may still be committed to preventing US firms exporting jobs, but is likely to face resistance from pro-business Republican supporters of immigration and the wider business community, especially in Silicon Valley. Mr Trump may continue President Obama’s tough stance (he has already deported some 2.5 million illegal immigrants) preferring to highlight certain cases to mollify his anti-immigration base. As with Brexit though, the souring atmosphere around foreign workers, as well as possible new visa restrictions and the potential for retaliation by other countries, will present major worries for professional services companies that depend on moving talent around the world at short notice.
8. Domestication of global supply chains. Less open trade and immigration policies, and related political tensions, will raise business operating risks even if the worst outcomes are avoided. Uncertainty might disrupt multinationals’ highly-integrated global supply chains, deterring investments in overseas facilities and accelerating the ‘reshoring’ trend.
9. A weaker global order. The biggest political risks lie in foreign affairs—where the President can act alone—with important knock-on effects for business. Mr Trump appears to be neither ‘idealist’ wanting to spread democracy, or ‘realist’ seeking a stable balance of power. He seems more guided by short-term ‘transactional’ dealmaking rather than building an enduring international architecture that serves US interests over the long run. This approach may fuel fears about whether the US will ‘show up’ when its allies are in danger, and force vulnerable countries to seek alternative trade and security arrangements.
10. A free hand for Russia. The most striking result of a ‘transactional’ foreign policy, may be felt in Eastern Europe, where Moscow may be given a free hand to act in return for backing the US elsewhere—possibly the Middle East. The appointment of Rex Tillerson, as a pro-Russian Secretary of State, highlights two dangerous assumptions: that Russia is a benign actor with clear limits on its ambitions; and that Mr Trump and his team have no Kremlin- related business connections that might influence his policy decisions. Unwanted Russian advances in Central Eastern Europe would profoundly affect the investment outlook there.