US Startup Trade Businesses: A Game-changing Year Ahead

US Startup Trade Businesses: A Game-changing Year Ahead

The election of US President Trump will lead to major uncertainty surrounding US trade policies and tax regime. Start-up trade businesses will also have to factor in major uncertainties surrounding the dollar’s value and the risks of retaliatory policies by key US trading partners. The overall trade environment is likely to be radically different within the next 12-18 months.

The most important element is that companies will need to build in substantial margins in terms of operating costs and maintain sufficient flexibility to deal effectively with potential policy changes and shifts in currency valuations. Whether Trump’s repatriation plan will work out or not, a solid business should, in theory, always sustain regardless of the conditions.

Strong competitive position for US importers…

The dollar pushed sharply higher from mid-2014 once the US finally completed its quantitative easing programme to buy government bonds. US yields had been artificially low which held the currency below its natural level and there was a strong dollar rebound once this pressure eased.

The dollar trade-weighted index overall strengthened to the highest level for 14 years following President Trump’s election victory.

Although the currency has dipped lower this year, the current position for start-up businesses looking to import goods is extremely favourable in costs terms. Stand-out markets to source imports are Germany and UK with Sterling still close to the weakest level in 31 years against the dollar while the weak Euro has made German goods very attractive.

… but rules of engagement are likely to change

There are major concerns that the US Administration will take a much more aggressive stance on trade and any shift in economic policy could have a dramatic impact on trade viability.

Trump’s top trade advisor Navarro has recently criticised Germany for operating with a substantially undervalued Euro and accused the country of exploiting the US. Trump has already pledged to renegotiate NAFTA which will have a potentially very important impact on Canada and Mexico. The Administration has also accused China and Japan of using devaluation policies and money-market manipulation to exploit the US and gain an unfair advantage.

Companies could still be relatively comfortable with shifts of costs of less than 5%, but there is an important risk that changes could be more in the region of at least 20% over a relatively short period of time. Changes of this magnitude would have serious implications for companies looking to start import trading.

There will be proposals for tax reforms including a reduction in business taxes. There will be major uncertainty over the measures and any changes could be delayed in Congress for months, but the overall thrust of economic policy is likely to be relatively favourable.

Border adjustment tax could be crucial

One of the key reforms proposed by Republican members of the House of Representatives is a ‘border adjustment tax’. Under the proposal, companies would no longer be able to deduct the cost of imported goods form taxable profits while exports would not be taxable. There are still substantial uncertainties surrounding details of the policy, but there would effectively be a tax on imports and an export subsidy.

Any potential subsidy to exporters would make it significantly more attractive for new exporters. There are, however, big uncertainties over the scope for overseas retaliation and any US action could also be declared against WTO rules. There are expectations that the dollar would strengthen if the tax is imposed which could lessen the negative impact on importers and curb the benefit to exporters.

There is also uncertainty whether President Trump would back such a tax given that he has expressed mixed views on the concept. He has shown clear intent that U.S business will create more jobs and repatriate their profits from abroad, but there are also important wider uncertainties how Congressional Republicans will interact with the Trump Administration.

Dollar policy also a key focus

The US Administration’s dollar policy will be an extremely important focus over the next few months. Under the Clinton, Bush and Obama administrations, the US has maintained its ‘strong dollar’ policy. Although this has been a notional policy rather than being actively pursued, US Administrations have not looked to talk down the dollar.

Given that the Trump Administration is looking to boost US industry and lower the trade deficit, there has been increased speculation that the Administration will decide to abandon the strong dollar policy and look to push the currency weaker. Trump will certainly look to boost the US competitive position.

Any attempt to talk the dollar lower could trigger sharp US currency losses and substantially change the position for US companies in trade.

The role of the Treasury Secretary will be crucial in this debate and Nominee Munchin’s appointment has been held up in the Senate. Now that he is confirmed, early rhetoric on the dollar will be an important focus.

There will, however, be important risks of global retaliation to any punitive US measures and there will also be the risk of a general slide towards global protectionism which could have serious implications for trade volumes.

All the bad news could be priced in for exporters

With the dollar notably strong in global terms, the environment for US exporters will remain challenging in the short term. More positively, however, the current environment will provide an important benchmark for new entrants into the market. If a company can secure a strong export base with acceptable margins at current exchange rates, then there is a strong probability that the business will be viable over the medium term as the most likely outcome is for conditions to have improved by the end of 2017.

Importing from the UK still very attractive

Even allowing for major uncertainties surrounding the regulatory and trade environments, the overall cost advantages of importing from the UK are still likely to be compelling for the year ahead given the extremely attractive level of Sterling in historic terms.

A relatively safe play is still likely to be trading with Canada despite uncertainty surrounding NAFTA. The overall evidence suggests that Canada will not be a target of US trade policies, although there is no room for complacency.

Author

Our staff writers come from all over the world, but one thing unites them – their passion for sustainability.

Leave a Reply

Your email address will not be published. Required fields are marked *