Impacts of the Administration on the Maritime Industry
On January 20, 2017, Donald J. Trump took the oath of office and was sworn in as the 45th President of the United States of America. Below is a synopsis of some of the potential important impacts the Trump administration may have on the maritime industry.
Financial Markets & Trade
Note that even greater change is expected under the new administration. We look for modifications to trade, regulations, sanctions, and taxation, to name a few. With these changes comes uncertainty, and it is during these times that we as professionals tend to experience an increase in our clients’ need for advice. Similar to the effects seen in the UK as a result of Brexit, shipping companies and those who are associated with the maritime industry will seek guidance on potential effects on maritime law and new or repealed taxation policies. Changes by the new administration will affect both the domestic landscape and international communities.
On February 3, 2017, the President signed an executive order to scale back the Dodd-Frank Act as part of the administration’s goal to decrease financial regulation. Along with the uptick in the US capital markets, this could result in a significant upsurge in companies that desire US public offerings, as they no longer will be as difficult to do here.
On April 26, the administration released its plan for tax reform. Included in the plan were proposals to change individual, corporate, and flow-through tax rates, eliminate certain deductions, and change the US to a territorial tax system, at least for business entities. The President’s tax reform plan seeks to reduce corporations’ top tax rate from 35% to 15%. This should entice more foreign businesses to invest in US companies.
Currently, US corporations are taxed here on both their domestic and repatriated profits from foreign corporations. Although US companies are allowed to apply foreign tax credits against repatriated foreign profits to decrease their net US tax liability, it’s more tax efficient to leave these earnings outside the US, as the related tax credits most likely will not entirely eliminate the US tax on foreign earnings. To remove this concern and provide an incentive for US corporations to bring cash back here, the administration’s plan includes a one-time reduced tax on repatriated earnings. Although this reduced tax rate has not been defined, the Treasury Department has indicated it will be competitive and will encourage businesses to bring back trillions of dollars that will flow into the US economy.
The administration’s territorial taxation policy would limit the taxation of US businesses to domestic profits only, whereas any profits earned overseas would be subject only to the tax in the respective foreign jurisdiction. This proposal aims to eliminate the current worldwide system the US currently employs and encourage cash to be returned untaxed to the US. However, it is unclear how this proposal would affect existing negotiated tax treaties based on a worldwide system, or how US operations of foreign businesses would be affected.
How the administration’s proposals will affect trade is being fiercely debated. Along with more favorable market conditions, exports will likely increase, and imports may have more restrictions. The combined tax benefits for exports and higher taxes on imports are expected to be offset by an increase in the value of the dollar.
Additionally, it is anticipated that the new administration will continue sanctions against countries like Iran, Syria, and North Korea, and increase the focus on equality with our other trading partners. These sanctions will further empower the US to pursue countries and/or companies that may violate our trade agreements, i.e., China.
Defense and Infrastructure
The new administration is expected to have a major impact on our defense industry. The navy has acknowledged that readiness and maintaining/sustaining the current fleets are priorities, all of which cost billions of dollars. There are currently 274 ships in the U.S. Navy. As of March 2017, the navy has been funded to increase the fleet size ultimately to 308. However, after the navy’s most recent force structure review, it is looking to increase the fleet to 355 ships. This objective could be achieved in a 30-year ship building plan, if properly budgeted, resulting in approximately 2.5 – 3 new ships built each year over this timespan.
In May 2017, the administration released its proposed budget for FY 2018. Of the approximately $639 Billion budgeted for defense spending, the navy is expected to receive about $171 Billion, which is $6.5 Billion more than in FY 2017. These funds are expected to fully fund all planned ship depot maintenance, and will help clear a backlog of deferred maintenance on many of the fleet’s vessels and increase the fleet’s readiness. But, it will not provide as much for naval shipbuilding, as had been hoped for originally. The Pentagon comptroller John Roth emphasized that the FY 2018 budget is about preparing the military for the future, rather than expanding its size. Although approximately $20 Billion would be used to build new vessels, the total funding for shipbuilding is reduced by approximately $1 Billion, compared to the FY 2017 budget.
Budget reductions for port funding were also announced as part of the FY 2018 budget. For example, a budget reduction of 52% and 23%, to the Department of Homeland Security’s Port Security Grant Program and the Harbor Maintenance Trust Fund, respectively, has been proposed.
The President used the slogan “Put America First,” during his campaign, and appointed Elaine Chao to lead the Department of Transportation. Having served as Secretary of Labor under President George W. Bush, Ms. Chao has extensive government management experience. Previously, she was the Deputy Maritime Administrator and the Chair of the Federal Maritime Commission. Ms. Chao will be a crucial supporter of the administration’s transportation initiatives.
In addition, President Trump appointed retired Marine Corps General John Kelly to head the Department of Homeland Security. Secretary Kelly, who served in the US military since 1970, is highly qualified to lead this agency that is responsible for managing our country’s borders, preventing terrorism, and enforcing immigration laws, all while promoting US domestic maritime interests.
In conclusion, the Trump administration’s first four months have been a challenge. It will take time to implement major policy changes that make significant impacts on the maritime industry. The country can remain hopeful that the Trump administration and the 115th Congress will continue to support and further expand upon maritime programs, all while promoting national security needs and further advancing our interests both domestically and abroad.