Protectionist policies may accelerate international expansion of US business

Protectionist policies may accelerate international expansion of US business
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The Trump administration’s “America First” policies on trade, immigration and taxes are meant to encourage businesses to hire American workers and invest in domestic operations. But a closer look shows the changes may prove counterproductive, creating new incentives for U.S. companies to expand internationally. Here’s how recent policy changes may accelerate outbound investments.

Tariffs distort trade

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Recent tariffs levied by the U.S. on steel and aluminum are meant to protect American producers by curbing cheap imports from China and other countries. It remains unclear whether these tariffs are actually a negotiating tactic and could all be settled with new trade agreements.

 

Ultimately, the duties hurt U.S. companies that rely on steel from China. These companies can either choose to pass on the higher costs of raw materials to customers, potentially reducing their competitive position, or find alternative suppliers. Some are even considering moving operations overseas where they could obtain cheaper steel.

American companies are also concerned that the steel tariffs could lead to a full-blown trade war. China quickly retaliated by announcing import taxes on $3 billion worth of American goods, including scrap aluminum, dried fruits, frozen pork, nuts and wine. President TrumpDonald John TrumpWarren: 'White supremacists pose a threat to the United States like any other terrorist group' National Enquirer paid 0,000 for Bezos texts: report Santorum: Trump should 'send emails to a therapist' instead of tweeting MORE then threatened to impose more tariffs on Chinese goods.

Trade barriers play a big role when American companies evaluate expansion to foreign markets. They may decide to open a factory in the new market, rather than pay tariffs to export products from American factories.

Stringent immigration regulations

President Trump has received a great deal of attention for his promise to stop illegal immigration from Mexico and deport undocumented immigrants. He has also taken steps to reduce legal immigration.

The U.S. has long been considered a top employment destination for highly skilled foreign workers, thanks in part to the H-1B visa program. Under the program, U.S. employers have attracted the best and brightest from around the world by offering employment to foreign workers in specialty occupations. This has helped fuel growth in American innovation hubs like Silicon Valley.

But new fears that H-1B visas will employ immigrants at the expense of American workers has led to greater scrutiny of the mainstay program by the Trump administration. Stricter vetting of H-1B applications could backfire. Workers from India, China and elsewhere may bypass the U.S. for more hospitable locales.

Canada and China, for instance, have launched programs that fast-track visas and short-term work permits for highly skilled foreign workers. U.S. companies will follow the talent pool. British Columbia is arguably becoming a viable alternative to northern California. If the trend continues, the next billion-dollar startup could come from Canada, not the United States.    

Changing tax code loads corporate coffers

Even the Trump administration’s biggest domestic policy achievement could have unintended consequences. Slashing the corporate tax rate to 21 percent from 35 percent was aimed at making America a more competitive place to do business. Companies have shared some of their windfall with employees and are spending more on capital projects, as the president predicted.

However, the tax overhaul and resulting available capital has generated interest in funding long-term growth initiatives, such as expanding into foreign markets. Adding fuel to that interest is that under the new U.S. tax law, profits made by American companies’ overseas subsidiaries will be taxed at 10.5 percent, half the 21 percent rate on domestic profits. Having a lower tax rate on foreign income creates incentives to shift operations offshore.

In addition, the limit on interest deductions in the new law is motivating global expansion because foreign acquisitions are now easier to finance than domestic deals. U.S. companies can buy a foreign firm, but “push” the interest expense onto the foreign business’ balance sheet to gain a greater tax deduction in the foreign jurisdiction.

Global expansion is complex but may be irresistible

Some companies have been turned off by the operational complexity involved with international expansion. Financial, legal and regulatory environments vary broadly country by country. But technology has simplified the flow of communication and commerce. And more jurisdictions are modernizing protocols to advance compliance, regulation and reporting methodologies, which make operating a business in foreign countries easier.

It’s also hard for American companies to ignore surging growth overseas. China’s economy is still growing at more than 6 percent a year, compared to 2.3 percent growth in the U.S. last year. Some 120 economies, accounting for three-quarters of the world’s GDP, saw an increase in year-over-year growth last year, the broadest synchronized global growth surge since 2010, according to the International Monetary Fund.

Trump leveraged voter frustration with immigration, economy and trade to win the presidential election. His policies, though, may do little to slow the trends of American foreign investment and the movement of production overseas.

Ultimately, the USA would be best served focusing on educational programs for US citizens and attracting foreign business investment. That is really how the economy will set itself up for future success.

Jason Gerlis is the managing director of TMF Group USA, an international business consultancy serving 15,000 corporate clients including LinkedIn, Netflix, Volvo and Dolby.