An Era of Political and Economic Uncertainty

The incoming Trump Administration is facing a changing world that has created political and economic uncertainty around the globe. Much is still changing on a daily basis so it is too early to fully understand the issues let alone what the best options are for resolving the issues.

A scan of the Internet identified the Political and Economic Uncertainties in the following areas:

  • Europe, the European Union and NATO
  • Middle East and Africa
  • Asia Pacific
  • The US Economy
  • The US Trade Deficit

The DTC sponsored Speaker Series has arranged for five speakers that have extensive experience and in-depth knowledge in one or more of the above areas to talk about the options for addressing the uncertainties. Since many of the areas are in a state of flux, the DTC will work with each speaker a few days before their presentation to decide what will be discussed.

Europe, the European Union and NATO

Europe, the European Union and NATO have experienced the reality of changing times, often accompanied by dissatisfaction and unrest.  What began as a fiscal crisis followed by economic anxiety, concerns about terrorism and rising nationalism intensified as more than one million refugees entered into a Europe last year.  Europe is now undergoing a significant transformation that will surely have repercussions throughout the world and the US.

Middle East and Africa

In the Middle East the Sunnis and Shia are at war with each other, ISIS is losing territory and Russia has chosen sides with Iran, Iraq to tilt the civil war in Syria to Bashar al Assad. The Russian involvement tilted the civil war to Assad. Becoming an ally with Putin in the middle east means you will be seen as an ally with Iran.

Asia Pacific

Kim Jong Un gave a televised speech on Sunday New Year’s Day, in which he said his country was preparing to test an intercontinental ballistic missile—which could be equipped with nuclear warheads and could possibly reach the United States—for the first time. On Monday morning President-elect Trump responded with a pair of tweets that stated “North Korea just stated that it is in the final stages of developing a nuclear weapon capable of reaching parts of the U.S.,” Trump tweeted. “It won’t happen!”

In an interview with the Wall Street Journal published Friday January 3, the president-elect was asked whether he supported the One China policy, and he replied: “Everything is under negotiation, including One China.” Chinese Foreign Ministry Spokesperson Lu Kang said in a statement posted to the ministry’s website. “There is only one China in the world, and Taiwan is an inalienable part of China’s territory,”

China is the only country that has any influence with North Korea and even their influence is very limited.

The US Economy

We have a US economy that’s not working for everyone. The number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979. The real median household income of Americans who have completed high school–but have not attained a higher degree–also peaked in the 1970s and has declined since then. But American workers at $37.71 average hourly manufacturing compensation, including benefits are still much more expensive than those in many other countries. For example, Germany is $42.42, France is $37.59, Britain is $31.44, Japan is 23.60, Brazil is $7.90, Mexico is $5.90, China is $4.12 and India is $1.59

The Congressional Budget Office (CBO) projects a $534 billion deficit in fiscal year 2016, about $100 billion more than in 2015. If current laws generally remained unchanged, the deficit would increase from 2.9 percent to 4.9 percent of GDP over the next decade.

Donald Trump has stated that he intends to upgrade our military, invest significantly in infrastructure, make tax cuts and not cut Medicare or Medicaid. The CBO will project the impact on the deficit when the Trump Administration submits a plan to Congress.

The US Trade Deficit

The United States has the world’s largest trade deficit and has run one since 1975. In 2015, the deficit on goods and services was $500.4 billion, higher than the $490.2 billion deficit in 2014. The deficit occurred because exports, at $2.3 trillion, were lower than imports, at $2.761 trillion. The U.S. trade deficit in goods alone was $762.5 billion, 2.4 percent higher than last year.

US Manufacturing in China

More than 40 percent of the U.S. trade deficit in goods was with China. America’s $367 billion deficit was created by $483,2 billion in imports, primarily consumer electronics, clothing, and machinery.  It outweighed the $116.2 billion in U.S. exports to China.

Apple now manufactures iPhones in China because most of the components of iPhones and iPads — the supply chain — are now manufactured in China, so assembling the phones half-a-world away would create huge logistical challenges. It would also reduce flexibility — the ability to switch easily from one component supplier or manufacturer to another. Manufacturing an iPhone in the United States would cost about $65 more than manufacturing it in China, where it costs an estimated $8.

Note that many of the imports from China are U.S.-based companies that ship raw materials to be assembled cheaply in China. They are counted as imports even though they create income and profit for these U.S. companies.

US Manufacturing in Mexico

It is evident that for several industrial sectors including automotive, aerospace, electronics, and medical devices, Mexico has progressed through 2 stages of manufacturing competitiveness: (1) Cost and (2) Proximity to end markets; while the third and current stage is developing lower tier suppliers of both foreign and Mexican origin.

A number of companies have relocated some manufacturing and distribution capacity from Asia to Mexico. The three main reasons are: (1) The quality of the workforce as Mexico has a workforce with many years of experience manufacturing to the highest standards. With the current economic downturn, it’s easy to find experienced engineers, managers, and operators at very competitive salaries. (2) Mexico has accommodating legal and labor laws. A new company can easily arrange to have a “white” union—one that is basically controlled by the company. In addition, the legally mandated minimum wage and benefits are very low compared to the United States, Canada, and Europe. And there are incentives for establishing manufacturing plants in many states. A common example is an exemption from payroll taxes granted for a specified number of years by state governments. (3) Finally, Mexico offers savings in transportation costs not only to the United States but also to other Latin American countries, such as Brazil. And because Mexico itself is a major consumer market, goods produced there can be made for local consumption.

Tariffs versus a Destination-Based Cash Flow Tax (DPCFT)

In December the president-elect wrote on Facebook “Any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35 percent for these companies wanting to sell their product, cars, A.C. units etc., back across the border.”

Speaker Paul Ryan and Ways and Means Chair Kevin Brady have proposed a destination-based cash flow tax that would eliminate the aspects of the tax code that encourage businesses to locate jobs overseas. It could be an engine for domestic job creation and economic growth. However, the Koch network is an advocate of free trade and has already criticized House Speaker Paul D. Ryan for backing the idea of a border adjustment tax.