Oh, we have no idea yet how big and consequential the synergy between all of President Trump’s economic policies are toward an almost unfathomable MAGAnomic result; but we’ll find out really soon, BIGLY.
The international community is just now beginning to recognize how intensely sequential the domestic MAGAnomic tax policy is when combined with the international America-First trade policy therein.
2018 will be the year when every international trade partner reassess their best financial interests; and with the tax outline codified into law, POTUS Trump, Secretary Ross, Secretary Mnuchin and U.S. Trade Representative Lighthizer are about to initiate the biggest multinational trade shift in the history of international economics.
Yes folks, I’m actually talking about that phase when we discover we are living within the orbit of: “almost too much winning”. This is where we begin to recognize that 5%, 6% and even 7% GDP growth is easily attainable. Here’s how it works.
Previously the larger multinational corporate community used the tax rates of lesser industrialized nations as a strategic gateway to offset costs held within the largest market in the world, the United States. With the U.S. changing the entire dynamic behind the tax rates, the same companies now enter a phase of recalculating the production costs.
In direct realignment with the tax rates, the Trump policy cuts the costs further by eliminating regulation and unleashing energy development, which again lowers costs. Energy costs third in line of importance behind labor and raw materials in most manufacturing cost considerations.
The combination of manufacturing automation, decreased U.S. regulations, and now lower tax rate provisions entirely changes the cost dynamic. Add in the transportation costs inherent with bringing foreign products to the U.S. market and, well, you can quickly see how the multidimensional strategy makes the best financial sense to manufacturer right here in the U.S.A.
As a noted left-leaning Canadian outlet notes:
(Via National Post) […] “Foreign companies that operate in North America are now going to look at, ‘Do I invest in Canada, with a small population, small market, to serve the North American market, or do I go to the United States?”‘ said Mintz, of the University of Calgary.
“When they look at Canada they now see … similar tax rates and similar burdens (to the U.S.),” he added. “Then they look at regulations in Canada, which are increasing as the U.S. is reducing theirs.”
The U.S. trade czar leading the NAFTA negotiations, Robert Lighthizer, toasted the bill’s adoption, calling it a monumental win that will make American business more competitive, and reduce the U.S. trade deficit. (read more)
There is no incentive for the U.S. to remain inside NAFTA. We are the market everyone want’s and needs access to. We are the consumer. President Trump has signaled his intention to leverage access to our markets as part of the larger trade initiatives. USTR Robert Lighthizer is now holding a much stronger hand than just a few months ago thanks to the Tax bill.
Additionally, even European nations are beginning to realize their manufacturing access to U.S. markets will now be much weaker. Cue Germany:
Handelsblatt – […] “The tax competition will have a new dimension,” said Christoph Spengel, chairman of the corporate tax department at the University of Mannheim. Mr. Spengel, who is also a research associate at the Center for European Economic Research, and a group of tax experts at the university have done a detailed comparison of the two countries’ tax systems and published a report under the heading, “Germany loses out in US tax reform.”
Clemens Fuest, who heads the Ifo economic think tank, also said he believed German business would suffer. “Investments and jobs will migrate to the US,” he said. (read more)
German companies that already do the manufacturing inside the U.S. will not be impacted. However, German companies that rely on exports into the U.S. are now in a very tenuous position. Their best hand becomes actually moving operations into the U.S., hiring U.S. workers, and producing the end product right here.
See how that works.
Now, sticking with the Canadian and German examples cited, it becomes transparently obvious how GDP growth rates explode. Remember, the U.S. GDP is the combined value of everything produced and serviced in the U.S. “minus” the value of our imports.
If we drop $1 billion in imports and instead manufacture the $1 billion in products here in the U.S. the GDP growth rate is measured in terms of $2 billion in growth. The GDP growth rate as a percentage increases two-fold.
This is why five, six, and even higher percentage increases in GDP growth are possible. It is our MARKET size that dominates the leverage in the equation.
In addition to leveraging economic power for national security, Treasury Secretary Mnuchin and Commerce Secretary Ross are working on long term economic benefits: Trade renegotiation, exports, and investment along with capital/credit availability. Simultaneously EPA Administrator Scott Pruitt is working on short-term economic benefits: energy development, deregulation, etc.
Lowering energy costs has an exponential benefit to the overall economy. Not only does it drive down the cost of domestic highly consumable products, but it also binds the building blocks of the manufacturing and production sector. Lower energy costs offset higher wages on products manufactured for export and helps keep the U.S. competitive.
President Trump is uniquely qualified as a successful businessman (non-politician) to have developed actual life-skills on Main Street that help him see the bigger value in policy shifts. Politicians usually speak in esoteric terms about economic “costs”; but President Trump has direct experience in how shifts in costs can directly contribute to the Main Street economy.
Domestic manufacturing and industry sectors have three top-tier costs as they transfer to Main Street: 1) Raw materials (or finished goods depending on sector); 2) Labor costs; and 3) energy costs. If you lower any of the three drivers you lower the cost of business operations.
President Trump is actually the only President in modern history who is working to lower both material costs and energy costs simultaneously. In doing so, the short term benefit to the middle-class worker is a lower consumable good prices and subsequently a higher level of disposable income.
In essence by lowering material and energy costs the internal economic action actually gives a raise to the middle-class faster than waiting for full economic expansion/growth to drive wage rates higher.
See how that works?
In the longer term, as the economy expands, there will be a natural pressure on wage rates to rise – as competition for labor drives up labor value.