U.S. Trade, Tariffs and Tax Breaks

In Articles, Investments, Taxes by Brad Stark

By Brad Stark, MS, CFP®
Founder and Chief Compliance Officer

Over this past week, the Trump Administration has back-pedaled on a number of campaign stances (NATO, China as a currency manipulator, Federal hiring freeze, views of Janet Yellen at the Fed). This appears to be a pivot toward the center. The administration has not formally addressed tax changes or trade/tariff policies, but those are coming up. My particular viewpoint is that tariffs will not come about in any meaningful way unless the opposing party significantly provokes a standoff.

For a little background, tariffs – which are taxes or duties on imported/exported goods – are largely considered economic detractors, with the end product being trade wars that cause higher priced goods and lower productivity. In layman’s terms, it is counter-productive to economic activity for all involved. That hurts the Trump agenda (and it hurts China and Mexico, for instance).

During his time on the campaign trail, President Trump focused on trade imbalances, particularly with China and Mexico. Just looking at the numbers, it is obvious where the focal points of policy will most likely occur (and have already started):

  1. Energy
  2. Objective = Domestic production.
    Pro: Creates domestic jobs, keeps the money in the country.
    How: Decreased regulations for the coal / drilling industries and expanded exploration fields to most likely continue.
    Con: Domestic environment.

  3. Computers
  4. Objective = Domestic production.
    It’s too early to tell what the “big conversations” with China will uncover.
    The eventual likelihood but unknown loser to this is the American consumer through higher prices and Chinese production.
    The potential benefactor: Domestic jobs and manufacturing.

  5. Automobiles (Transportation)
  6. Objective = Domestic production.
    Pro: Creates domestic jobs. This has already been a focal point with more domestic production and expanded plants promised (operations already moved or pledged to be moved from Japan and Mexico to the US).
    How: Through either tax breaks or the threat of tariffs.
    The loser to this: foreign countries and their workforce.

What levers can the government really “pull” to address the trade deficit without creating a trade war (that no one wants, including the current Administration)? They can lower taxes and reduce regulations, which, in turn, lowers operational costs and makes domestic producers more competitive. They can also give substantial tax breaks for domestic producers that sell overseas (little to no taxes on foreign sales and low to zero repatriation of foreign profits). If they do this, it makes the U.S. stand on a more equal footing to other countries we trade with.

How do you get these programs through Congress? One solution may be to push tax breaks and threaten tariffs if they are not passed. While controlling all branches of government, one would think the “bluff” would not be called and I am only suspecting it is a bluff (the tactic has already worked for/against Carrier, Ford and others).

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