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Trump’s Impossible Task

February 2017 Market Update

Before we get started, I want to preface by making it clear that I am not for or against Trump here.  This is simply an analyzation of whether his “Made in America by Americans” agenda is realistically achievable.

Throughout Trump’s campaign, time and time again, he talked about how manufacturing jobs had been shipped overseas.

The need to fix this problem became a foundation of his campaign for president of the United States. Let’s examine the reasoning behind why these manufacturing jobs have left.

The reality is, manufacturing tends to follow cheap labor and cheap currency, and oftentimes both.  Over the past 20 years or so, US manufacturing has been shifting overseas, primarily to China. There is no complicated plot for this, it all comes down to the simple reasoning that manufacturing in China was less expensive.  If you are a publicly traded company, your goal is to maintain or increase earnings to satisfy your shareholders, and you are going to try to decrease your costs wherever you can. One way of achieving that would be moving manufacturing to places where it is less expensive.

The question becomes: can Trump enact policies that will bring back those manufacturing jobs?  Barring a miracle, I don’t think so.  Right now, he has two major head winds; expensive labor and an expensive currency, both of which are manufacturing’s enemy. If a company can pay a worker $1 per hour to make a product in another country vs. paying $10 an hour in the U.S. for the same product, it doesn’t take a rocket scientist to figure out where they are going to manufacture their product. If a company can manufacture something in a country where the exchange rate is favorable, then their dollar goes much further and that’s just icing on the cake.

To make things worse for the Trump agenda, during his run for the White House he repeatedly stated we are in a “big fat ugly bubble” and it was primarily the Federal Reserve’s (Fed) fault for keeping interest rates too low for too long.  The Fed raised interest rates .25% last December and if they continue to raise rates, that should only make the dollar stronger because fixed interest investments like savings accounts, CDs, etc., pay more interest here in the US than they do elsewhere. Given that we are seeing negative interest rates in much of the rest of the developed world (-.4% in the Eurozone, -.5% in Sweden, -.75% in Switzerland, -.65% in Denmark, and -.1% in Japan)1, having a positive interest rate here (and rising) should put the dollar in even higher demand.  If I am right, this will simply make the dollar stronger vs. other currencies, therefore making goods produced here even more expensive, especially for foreign buyers. 

Trump does have two tail winds that could possibly turn in his favor: lowering taxes and reducing regulations.  Lowering taxes for US companies will help, but is it enough? I seriously doubt it.  Publicly traded US companies already have an effective tax rate of around 22%2 after all tax deductions are factored in.  How low do taxes have to go before it is more economically sound to manufacture here vs. overseas? I have not found anything stating a concise figure, but I have a feeling that tax rates would have to be basically zero for it to pencil.

Reducing regulations to make it easier and/or more affordable to manufacture here is something else that Trump can do to help US companies meet their bottom line. However, we are faced with the same questions as before, is it enough?  I don’t think so.  I go back to my earlier example. If a company can pay a worker $1 per hour overseas vs paying a worker $10 per hour in the U.S. to do the same thing, it is going to take A LOT to overcome the savings (and I’m ignoring any benefits from a favorable exchange rate).

The only way I see President Trump being able to bring manufacturing back is through the Border Tax Adjustment (BTA)3.  In essence, this is taxation of imports and non-taxation of exports, making imports more expensive.  This would allow for domestic manufacturing to be more competitive with overseas manufacturing, with the negative consequence being higher priced goods to consumers. As before, the question still remains, is it enough? It all depends on the BTA rate.  If a company can manufacture overseas for a fraction of the cost to manufacture here, even after paying the Border Tax Adjustment for importing back to the US, they are probably still better off cost-wise.

As much as many would like to see manufacturing jobs come back to the US, with how expensive labor is here and how favorable exchanges rates are right now, I don’t see how it is realistically achievable.  After all, companies are in business to make a profit, their shareholders invest to make a return on their investment, so companies are understandably always looking for ways to improve their bottom line. Bringing manufacturing back to the US will not improve profits, if anything, it will hurt them.  It is my opinion that if U.S. companies do bring manufacturing back, it will not be “Made in America by Americans”, instead, it will be “Made in America by Machines”. 

This is going to be a very interesting four years to say the least.

Brian J. Lockett, CFP®

BrianL@CWMnw.com

Sources:

1 www.TradingEconomics.com
2 https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Average-Effective-Tax-Rates-2016.pdf
3 https://www.fool.com/retirement/2017/01/24/what-a-border-adjustment-tax-is-and-why-you-should.aspx

 

 

 

 

This article has been prepared and distributed for informational purposes only and is not a solicitation or an offer to buy any security or investment or to participate in any trading strategy. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional. Past performance is no guarantee of future results.

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