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Trump鈥檚 tax plan unlikely to boost US reshoring
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US President Donald Trump鈥檚 new tax cut plan seeks to undermine US offshoring, which may be impossible and unwarranted in an increasingly global economy.
Recently, the White House released a tax cut plan for US companies and households. In particular, US corporate tax rates are too high internationally, which has led US companies to stash over US$1 trillion worth of cash abroad 鈥 while many reside in 鈥渢ax paradises.鈥
But is the plan viable and can it be executed in highly polarized Washington?
In 2016, corporate tax rates were around 30-35 percent in advanced Europe and Japan, except for the UK (19 percent). The current US rate (39 percent) is the highest among all G20 economies, including India and Brazil (35-34 percent) as well as China and Russia (25-20 percent).
Trump would like to halve US corporate rates to just 15 percent.
The White House is courting US companies by cutting the corporate tax rate and with a one-time repatriation tax rate stashed, which Trump hopes would return home US companies鈥 overseas profits and corporate operations.
While the plan may not pass Congress without offsets, critics in China and other emerging economies worry that an ultra-low US corporate rate could make US companies leave Asia. In reality, Trump鈥檚 reshoring efforts may be undermined by contradictory domestic politics, including the Fed鈥檚 tightening versus the White House鈥檚 expansion.
Internationally, reshoring goals must cope with opposing forces relating to growth in emerging economies, global profits associated with offshoring, low-cost industry margins, the attractiveness of China鈥檚 R&D hubs, and China鈥檚 shift toward consumption and innovation.
First of all, Trump has domestic obstacles. By promoting expansionary policies, he is pushing the Fed to tighten faster than it would prefer, which may boost interest rates and strengthen the dollar, which will work against expansion and exchange rates.
Second, as long as emerging economies continue to grow 3-4 times faster than in the US or Europe, a major outflux of foreign firms from China or other emerging economies remains unlikely.
Further, US trade deficits have been a regional issue since the 1970s starting with Japan, then with 鈥淎sian tigers,鈥 followed by China鈥檚 mainland. As costs are rising in China鈥檚 mainland, deficits in emerging Asia will rise, but the US will still lead the pack.
No race for the bottom
Fourth, relocation is most attractive to companies that rely on low-cost production. With their low margins and excessive pollution, these companies began to leave the coastal cities already a decade ago.
In China, the push is for higher value-added, not 鈥渞ace for the bottom.鈥
Besides, even when relocation offers some benefits, US and other multinationals may prove reluctant to move their core operations. With stagnating markets at home, an increasing number of these companies rely on consumption in China and other emerging economies for their profitability.
Sixth, high-tech companies cannot easily leave R&D concentrations in China because they must remain close to the cutting edge of global innovation and the world鈥檚 largest customer base.
Finally, China is no longer as exposed to export-led growth as it used to be prior to the global crisis. Beijing鈥檚 foreign reserves have increased very strongly to over US$3 trillion, while concerns over capital outflows have somewhat abated.
In brief, the news about the impending US reshoring is far too premature.
Dan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/
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