On Thursday, November 2nd the U.S. House of Representatives released a draft of their latest tax bill titled, the Tax Cuts and Jobs Act. While on the surface the plan seems like a boon for corporations whose tax rate would be cut from 35 percent to 20 percent, the benefits become less clear when we consider an anti-tax-avoidance provision included in the bill that specifically targets multinationals that have shifted operations and profits overseas and store cash in foreign subsidiaries.  These proposed changes to the U.S. tax code add to the momentous challenges facing global supply chains, such as, Donald Trump’s criticisms of U.S. trade agreements, including NAFTA and the TPP and the OECD’s Base Erosion Profit Shifting (BEPS) Action Plan released last year, which targets corporate tax avoidance across the 35-nation bloc.  With governments around the world increasingly struggling under historic debt loads and political parties with nationalist agendas gaining influence across the globe, what will be the effect of proposed tax measures and future trade policy decisions on the complex global supply chain that is relied on by nearly every multinational?
Tax regimes and trade agreements are integral considerations in the capital budgeting process for companies that have supply chains and operations that span the globe. Firms such as PWC, KPMG and EY provide multinationals with sophisticated consulting services that allow them to consider geographical tax and treaty differences in order to make optimal investment decisions. Any changes to international tax or trade treatment can have massive and persistent ramifications for companies and their earnings.  It has been widely reported that Technology and Pharmaceutical companies that tend to be more aggressive in their tax avoidance measures will be massively affected by these changes; however, U.S. automakers with some of the most globally integrated supply chains will face massive disruption as well. Ford in particular is at risk from these changes as they have long-term, capital-intensive projects owned by foreign subsidiaries that supply products to the U.S. Earlier this year we got an early glimpse of how Ford is reacting to political developments when they announced their intentions to move production of their Focus model that had been produced in Michigan to China instead of Mexico.  The announcement was a result of a complex analysis of material and labor costs, trade negotiations, tax implications and logistical supply chain risks. The company’s decision to locate the factory in China coincided with Trump’s threats to rewrite NAFTA and punish companies moving jobs overseas.
Over the short term, Ford is continuing to focus its lobbying efforts on Congress and the White House. Ford’s lead lobbyist in Washington, Ziad Ojakli, has been with the firm since 2004 and has close connections with the Republican party. The American Automotive Policy Council that represents U.S. automakers in Washington has also been active since the Trump administration made its original threats to NAFTA and the auto industry. There is some concern, however, that Republicans in Congress who are sympathetic to the industry’s issues feel helpless in influencing the agenda of the White House.  Over the medium term, Ford will be reevaluating its location decisions for future plants as shifting political risks are updated and incorporated into the firm’s capital investment models. Depending on the specifics of changes to the tax code and NAFTA, the company may be forced to continue to shift plants out of North and Central America and into Asia.
In addition to its lobbying efforts in the U.S., Ford should begin to reach out to foreign governments that might be made more competitive as a result of the impending policy changes. They should also continue to focus on improving the efficiency of their production process with a specific focus on reducing labor inputs. Labor costs have traditionally been the most significant cost difference when comparing manufacturing in the U.S. relative to other countries and a lower labor cost may reduce the incentives for Ford to move plants overseas. Over the longer term, the firm will need to figure out a way to balance the need to respond to negative political developments while making the capital investments needed to supply its global markets.  This will include weighing the incremental benefits of a globally distributed supply chain with the increasingly volatile political climate as it makes decisions that can affect profitability for many years to come.
1. Do the benefits from increased tax revenue to the U.S. Government outweigh the potential harm to U.S. multinationals and their ability to compete in a global marketplace?
2. Are nations becoming obsolete in a world where corporations are becoming more and more globally connected from a both a supply and distribution perspective?
Word Count: 776
1. Jopson, Barney (2017). US tax reform targets avoidance by multinationals. Financial Times. Retrieved from https://www.ft.com/content/23060b2c-c037-11e7-9836-b25f8adaa111
3. OECD. Lippert, Tyler H,PhD., J.D. (2017). OECD base erosion & profit shifting: Action item. Northwestern Journal of International Law & Business, 37(3), 541-563. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1945555756?accountid=11311
4. Kiley, David (2017). Forget Mexico: Ford moving Focus production from U.S. to China, with eye on profitability. Forbes. Retrieved from https://www.forbes.com/sites/davidkiley5/2017/06/20/ford-will-move-focus-production-from-michigan-to-china/#2fda1404ef5d
5. Swanson, Ana & Kitroeff, Natalie (2017). ‘Army’ of Lobbyists Hits Capitol Hill to Preserve Nafta. New York Times. Retrieved from https://www.nytimes.com/2017/10/24/us/politics/nafta-lobby-congress.html
6. Balraj, N., & Vetrivel, M. (2016). The impact of international business on the global economy. Splint International Journal of Professionals, 3(9), 50-56. Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1906046902?accountid=11311