Climate of Uncertainty

It's more questions than answers on issues like trade and transportation under the new Trump Administration.

Climate of Uncertainty

Published Apr 28, 2017 1:59 PM by Matthew Thomas and Stefanos Roulakis

(Article originally published in Mar/Apr 2017 edition.)

With the presidential campaign fading in the rear-view mirror, the task of delivering on campaign promises of jobs, economic growth and a resurgent manufacturing sector is front and center. The sort of questions that tend to go unasked – or unanswered – during presidential campaigns, like how to pay for new programs and what sacrifices will have to be made to deliver on campaign promises, are now squarely on the table. The result, unfortunately, has been an ongoing climate of uncertainty in the maritime, energy and trade sectors.

Budget Shock

For example, the maritime industry was rattled in recent days by reports of an Administration proposal to sharply cut funding for the U.S. Coast Guard. The proposal, which was walked back quickly after strong bipartisan objections from Congress, provoked shock in shipping circles: How could a White House that ran on a platform of strengthened national defense, immigration policies and border controls make crippling cuts to the agency tasked with securing our maritime borders?

Shipping professionals immediately recognized that any cuts to the Coast Guard budget would hit the merchant marine hardest since the Coast Guard would be forced to put services such as inspection and prevention programs on a lower priority than national security, law enforcement and search-and-rescue programs. And any hopes that the new Administration would prioritize bigger-ticket items for Coast Guard investment, like addressing the critical U.S. icebreaker deficit with Russia, are starting to look farfetched.

Similarly, the President’s proposed 2018 budget would cut the Department of Transportation’s budget by 13 percent – a far cry from the campaign promise to boost spending on infrastructure. The cuts would include elimination of the discretionary Transportation Investment Generating Economic Recovery (TIGER) grant program. Last year over $60 million of the $500 million in TIGER grants went to ports and intermodal infrastructure, according to the American Association of Port Authorities.

While a substantial infrastructure package is still possible in this Congress, Hill leaders suggest it will be deferred until numerous other Herculean undertakings, including health care, tax reform and the 2018 spending bills, have been completed. Funding for such a package, if it materializes, remains wholly undefined.

Maritime Policy

In general, it will take significantly more time before we see the outlines of a broader Trump Administration maritime policy emerge. It’s worth noting, however, that those who anxiously awaited the Obama Administration’s perpetually pending National Maritime Strategy were left empty-handed, so what else is new? With several hundred subcabinet slots unfilled, the new Administration is building out its leadership teams in federal agencies at a far slower pace than any recent White House.

Accordingly, any shifts in policy focus or priorities for federal maritime programs like shipyard grants, cargo preference, Title XI loan guarantees and the Maritime Security program will likely come well down the road. At least the Federal Maritime Commission deserves kudos for breaking some ground since the Inauguration, pushing out deregulatory rule changes (which admittedly had been in the works for a while, on a bipartisan basis) that ease administrative filing burdens on liner companies.

No Trade War –Yet

But it is the Administration’s and Congress’ trade policies that are the biggest source of looming uncertainty for the shipping and energy industries. Fortunately, the new President did not touch off a trade war with China, the U.S.’s largest trading partner, immediately upon taking office, although he did scrap the Trans-Pacific Partnership agreement.

As a result, there is intense interest (including at the recent G20 trade summit in Baden-Baden, Germany) but little clarity on how the new Administration plans to convert its blustery campaign talk on trade into policies without inadvertently undercutting U.S. commercial or security interests.

The White House recently delivered its 2017 Trade Policy Agenda to Congress, identifying four priorities:

•  more aggressive use of trade remedies (antidumping, countervailing duties, safeguard measures),

•  using leverage to open foreign markets,

•  renegotiating trade agreements (with a new emphasis on bilateral deals), and

• “defending national sovereignty” – that is, the principle (already enshrined in U.S. law) that WTO decisions will not be treated as binding domestic law inside the U.S.

It remains to be seen, however, whether these priorities can be advanced deftly enough to ovoid triggering escalating tit-for-tat trade wars that could impact trans-Pacific cargo volumes.

The Border Adjustment Tax

On the tax front, debates are ongoing over the proposed House Republican plan that would convert the corporate income tax into a destination-based cash flow tax, similar to a modified value-added tax. A key component of this new tax would be “border adjustment,” which would eliminate businesses’ ability to deduct the value of goods imported into the U.S. and eliminate taxes on U.S. exports sold abroad.

The effects of this proposal on trade are hotly debated and could be substantial. In theory, the tax benefits for exports and higher taxes on imports would be offset by an increase in the value of the dollar, lessening the impact on trade. However, many economists argue that this is likely an oversimplification.

In the energy sector, domestic refiners are objecting that the new tax scheme would penalize them for utilizing foreign oil and even put them at a disadvantage versus their foreign competitors for the purchase of domestically produced oil (which could be shipped overseas tax-free). Similarly, large retailers have come out swinging against the tax because it would increase the cost of consumer goods imported from abroad, as most are.

It is this little-understood border adjustment tax that could end up having the biggest impact on ocean-borne trade flows of any policy on the table in Washington right now.

State of Limbo

While it has been a tumultuous two months for the political world, these issues do not yet appear to have had major impacts on the maritime, energy and trade sectors, but all eyes remain on the White House for the next steps in federal budget, infrastructure and trade policies.

The new Administration’s slow start in implementing policy changes will leave industry members in a state of limbo until it can begin to drill down on the details of governing and implementing policy.

- MarEx

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.