President Donald Trump’s Policies and Their Effect on Merger Activity

The global economy has been shifting tremendously since 2016. Led by Brexit, rise of populism in the continent of Europe, and Trump’s presidential victory, globalization has been shaken to its core and has become blighted by uncertainty, both from a political and economic perspective. Political uncertainty for the sake of our arguments is epitomized by the election of Donald Trump. By adjusting our studies for the effects of electoral results, and noting their dramatic effect, we should be able to make a link between those results and cross-border merger and acquisition activity. Our essay will attempt to examine how his polices on factors such as taxation, trade, politics, and international relations have interacted to affect merger activity, both on a local and global scale.

President Donald Trump made several bold promises during his route to presidency, particularly with regards to tariffs, taxation, and repatriation. Beginning with tariffs, Trump promised to rebalance the trade deficit with China. To do so, he has slapped several rounds of tariffs on Chinese goods, with the latest round at the beginning of September 2019, hitting a 15 percent tariff on 110 billion dollars’ worth of Chinese imports. He also proposed tariffs in May on 300 billion dollars’ worth of Chinese goods, a further escalation of the simmering tensions between the world’s two largest economies. This is over and above the 10% duty on 200 billion dollars’ worth of Chinese imports in 2018. As with regards to taxation, during his campaign speech, the president promised a major revamp of the tax laws in the U.S, with promises of major tax cuts, cutting corporate tax rates to as low as 15 percent. The president has remained true to his word with the introduction of the Tax Cuts and Jobs Act in 2017, which cut corporate taxes from 35 to 21 percent. It also aided repatriation by relieving taxation on profits earned abroad. All of these factors have had their impact on business investment decisions on a global scale.

The trade war has taken its toll on its two main counterparties-America and China. For America, due to the President’s efforts to target China and its products vis-à-vis punitive tariffs and executive orders, many companies will begin to contemplate relocation of business activities to other countries to avoid costs of the continuing fallout between the world’s two largest economies. These actions would cause diminishing foreign market presence and increase in costs of foreign products brought into the United States. As for China, loss of access to American technology, an important weapon in the president’s arsenal, would cause an economic slowdown for China, particularly as it continues its journey to become a global powerhouse. Another factor causing China a headache is that America, through CIFIUS continues its intense scrutiny of inbound foreign investment in the name of national security, particularly from China, in areas such as technology is blocking several deals involving acquisition of low-cost tech startups in the name of national security. Several Chinese sectors, such as tech and construction, stand to be affected the most from the fallout of this trade war.

America, despite what the President likes to claim, has a lot to lose as well from the fallout of the trade war with China. Primarily, it will have to look for a low-cost production alternative and noting that since China’s rise as a global economic power, it has cemented its status as a leader in the global production market, will probably find cheaper alternatives hard to come by. Moreover, as Chinese investments in America dry up, other regions and countries could become the beneficiary of a liquidity inflow that could alter the global investment landscape. However, despite all the geopolitical headwinds and regulatory uncertainty, it is unlikely that merger and acquisition activity will deter, particularly with technological disruption and industrial shifts that require companies to continue to adapt to remain competitive.

However, as the trade war between America and China continues to escalate, the global economy will eventually become parsed, and allies of the respective countries would follow their trade partners on to either side. The rules of trade, with respect to goods, services, information, technology, and assets would have to be phenomenally revamped to accommodate this new economic state.

The outcome of this split would be increase in interest in strategic merger activity, primarily to eventually create a supply chain that is immune to global uncertainty. Despite its appeal, it will be a challenge to convince investors of taking on such an investment, particularly if it will have a high price tag. However, it will be the promise of a high return that will entice investors to take on such a risk.

The primary driving factor for merger activity is the tax cuts, which are expected to result in a huge inflow of repatriated funds into the United States, and with the recent slowdown in share repurchase, it is expected that corporations would want to make use of this excess cash they are accumulating, thereby giving a huge boost to merger activity. The tax cuts will also boost corporate confidence with regards to future values of deals, further encouraging corporations to pursue strategic deals. The tax cuts also have put the United States on a par with so-called tax havens, thereby limiting incorporation and tax evasion in these areas to avoid U.S corporate taxes, and increasing inflow of cash back to the U.S.

President Donald Trump, whether by chance or design, has crafted a fiscal policy that encourages firms to increase their repatriation of cash to the United States, thereby increasing their ability to pursue merger activity. The effects of his tax cuts have overshadowed the uncertainty of his trade policies and created an environment that supports merger activities for years to come.