Regardless of whether you agree that he’s the right man for the job, President-elect Trump’s imminent arrival in the White House will impact global markets. Predicting the actual shape this will take is further complicated by the few concrete policies Trump identified during his campaign, namely:
- Reducing the company tax rate;
- Stopping US companies (and in turn, jobs) moving overseas;
- Restricting immigration of high-skilled workers; and
- Abandoning free trade agreements including the Trans-Pacific Partnership Agreement.
We consider each of these in turn below and their potential impacts on Australian startups and businesses.
Reducing the Company Tax Rate
Trump has some bold goals in the tax space indicating that he would lower the corporate tax rate from 35% to 15%, potentially creating favourable conditions for Australian startups looking to flip-up to the US. The President-elect’s overall sentiment on the campaign trail has been returning manufacturing and jobs to America. He may then offer tax incentives to drive investment in American companies and limit investment in foreign companies.
However, even with a Republican-controlled Congress, it’s unlikely that Trump will be in a position to drastically reduce the company tax rate. If he did, the Australian government would need to think carefully about our competitiveness in international markets. Singapore and Hong Kong already have lower tax rates, and if the US followed that route, Australia would be very uncompetitive internationally.
But realistically – taxation is a marginal consideration – it’s clearly attractive for international startups, but not a deciding factor and Australians primarily look to the US to access a market with over 300 million customers.
Stopping US Companies Moving Overseas
Trump has been vocal in his condemnation of moving US companies and jobs offshore. He has taken aim at Apple for their use of Chinese factories and workers in the production of their widely used products.
The process to build and assemble the components for Apple products involves a significant number of suppliers spread across numerous countries. Building new factories in the US and training workers would cost billions. Consumers would likely bear the costs of disrupting Apple’s global supply chain. It would also reduce Apple’s competitiveness against main rivals, like Samsung.
Trump has also indicated that he will impose hefty tariffs on goods manufactured in China (45%) so as to encourage companies to shift production back to the US. He also warned Ford that vehicles manufactured in Mexico would attract up to a 35% tariff, hoping this will push current production stateside and prevent further expansion of plants.
Producing goods in the US at a higher cost, or punishing businesses for using offshore manufacturing plans, will likely increase the cost of goods to the consumer. Australians will in turn feel the price increase on Apple products as well as countless other gadgets and goods US companies develop.
A possible response to a rise in production costs will be increasing R&D spend on automated production methods to try and lower costs without using foreign labour. So, within decades if not sooner, automated production lines will replace many of the jobs Trump is looking to recreate.
An alternative response is upskilling manufacturing workers to prepare them for work in industries where the US is currently lead developer. Some suggestions include looking to emerging tech products businesses such as SolarCity and Tesla have developed, rather than traditional petrol powered vehicles or consumer electronics.
Restricting Immigration of High-Skilled Workers
The President-elect’s attitude towards immigration has been to require American companies first hire local talent. He has indicated he will restrict and limit H1-B visas – the primary source of acquiring overseas high-skilled talent.
This could impact Silicon Valley which heavily depends on attracting skills and ideas from around the globe. A recent study by the National Foundation for American Policy of 87 ‘unicorn’ startups identified that immigrants founded 51% of these startups that are still privately owned and valued over US$1 billion. Immigrants are also ‘key members of management or product development’ (CEO, CTO, VP of Tech or engineering) in over 70% of these startups. These 87 startups have generated around 760 jobs and are valued over US$165 billion.
SpaceX, founded by South African/Canadian/American businessman Elon Musk, employees more than 4,000 staff. Uber, co-founded by Canadian businessman Garrett Camp, employs 900 staff and provides work to more than 160,000 ‘partners’ in the US alone. Stripe, a payments processor, founded by Irish brothers Patrick and John Collison is now valued at over US$5 billion and employs 500 people. Patrick recently stated in an interview that he and his brother were lucky getting into the US and that others shouldn’t have to rely on luck to move to the US – especially when their business is at such a fragile stage.
Australian startups may benefit from such a policy if local talent, particularly developers, choose to remain here instead of moving to the US. Sydney is currently ranked 16th in the Global Startup Ecosystem Ranking 2015. To attract top talent, Australia would need to overcome its relative geographic isolation (when compared with London, Berlin, Singapore, Paris, etc.) by providing an ecosystem that justifies the big move. This would require a multifaceted approach that would:
- Allow founders to move to Australia easily;
- Nurture early-stage startups with tax incentives and direct funding;
- Support investors and make investment in startups more attractive and accessible;
- Encourage overseas talent to move to Australia; and
- Ensure an internationally competitive company tax rate to keep businesses onshore once they become successful.
Abandoning Free Trade Agreements
Trump has signalled that he will not agree to the Trans-Pacific Partnership (TPP) – a multilateral agreement that has been under negotiation for several years. The controversial trade agreement including terms relating to intellectual property rights which, according to DFAT, were intended to:
- Streamline intellectual property transactions;
- Increase transparency;
- Lower the costs of doing business; and
- Support Australia’s creative and innovative industries by promoting certainty.
The benefit for Australian businesses would be higher confidence in protecting IP rights with partner nations, subsequently increasing investment. Trump’s approach that the US will sever trade agreements is not an immediate beneficiary could signal potential issues for Australia.
Trump’s upcoming presidency is rife with uncertainty. Drastic reductions in corporate tax, forcing US companies to bring production stateside again and implementing huge tariffs to make US products competitive in the US market could dramatically impact business worldwide.
The market’s reaction to Trump’s election may see founders and employees hesitate or disregard moving to the US and investors curtail new investments until when the future seems less troubled.
To capitalise on this change Australia should look to become a viable, and attractive, alternative to the US. While this is no mean feat, there are a number of steps that can be taken to improve the startup ecosystem and promote ideas and investment in Australian startups.
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