A New Tax System and Protectionism. The US in Search of the Right Way

The Presidency of Donald Trump, who carried out the deepest reform of the US tax code since 1986, aims to boost the country’s efficiency and productivity, by developing satellite activities internally and improving competitiveness. Starting from quite an important sector as the automotive one, the effects of all this are already arising and the companies working in mechatronics and seeking for new markets should indeed be aware of what’s happening.

di Stefano Scuratti

The United States are the first market for Italian mechanical companies outside the European Union. In fact, the overall value of the purchase of mechanical goods reached about 8.3 billion in 2017, with an expected growth to 9.1 billion in 2020 (source: SACE Export Map, February 2018). Here are some of the possible causes of such an important development.

The tax reform
The Presidency of Trump has carried out the deepest reform of the US tax code since 1986 and the consequences of all this will be clear quite soon, given the immediate effect of the measures on the fiscal year 2018. In the last 8 years, the US have allowed their companies to tax profits developed abroad only if they were reported in the country. However, this process has caused an extremely negative effect on the American economy, which has led to the maintenance of financial instruments and also cash out of the country for approximately 3 billion dollars.
The “House GOP Tax Bill” tax reform marked a huge change for the American tax system in two main ways. The first was to bring the upper limit of federal taxes to 20% instead of 35%, while the second was to eliminate taxes on profits developed abroad. In fact, such profits will be taxed by the country in which they are obtained. As for the return of the profits already realized and accumulated abroad in the country of origin, the new law provides a one-time payment of 15% to repatriate cash profits and 8% for less liquid assets.

Boosting efficiency and competitiveness
The United States clearly aim to boost the country’s efficiency and productivity, developing its industry’s spill over effects in the domestic market, by developing satellite activities internally and improving the competitiveness of the industrial and political system in comparison to Asia and Europe.
Two effects of the Trump administration’s bet were to maintain in the US several companies ready to invest in the nearby NAFTA countries and, related to the recovery of foreign capital, the announcement made by Apple at the beginning of 2018. In fact, the company from Cupertino will indeed pay for the effect of the new tax system about 38 billion dollars in taxes to recover hundreds of billions from abroad into the US. The same company also declared to have a plan for investments in structures of about 30 billion for the next five years with an estimated development of 20,000 new jobs. The announcement was followed by a price increase on the stock market of around 1.7% with a new record of $179.10 (Bloomberg, Technology, January 18, 2018). As in the case of Fiat Chrysler, Apple has also set up stock bonuses worth around $2,500 for its employees.

The figures of the automotive industry
The Motor & Equipment Manufacturer Association (MEMA) declared at the beginning of 2017 that the sector of car parts production grew by 19% from 2012, developing more than 870,000 jobs.
Such an industry employs over 4 million Americans, including indirect workers, represents about 3% of workers in the US manufacturing and 2.4% of the country’s GDP.
The automotive industry in the US, one of the largest in the world, had a production of about 12 million vehicles in 2016 and sales for about 17.5 million units.
The automotive industry developed in America thanks to the construction of 32 production plants in 14 States for a total investment of about 75 billion dollars.
In addition, 16 States have been affected by R&D facilities to serve the needs of the automotive sector. As stated by the Auto Alliance, the industry spends about $105 billion worldwide for R&D activities, of which only 18 billion are spent in the US.

A new definition of national competitiveness
While in the last few decades especially the smallest nations used low taxes as the only means of attracting investments, today the US and England put important incentives on the plate. On the one hand, a drastic tax decrease to compete with emerging economies and, on the other hand, incentives for technological investments addressed to increase job hiring, aimed at an ever higher employment rate.
It is a three-party agreement between State, companies and workforce. The development plan of Industry 4.0 in Italy seems to be part of the re-shoring projects carried out by several Western nations.
This should perhaps be joined by a more severe tax decrease that may allow for a greater attraction of foreign direct investments.