Over the 20 years I have contributed to this column, we have discussed the global economy and how businesses in West Michigan are impacted by trade and tax policy. About the time I became the primary contributor for Money Matters, the North American Free Trade Agreement was getting up and running. More than 20 years have passed, and international trade and investment is more important than ever before.
International trade and investment impacts our daily life. Think about the routine in a typical day in one’s life: You purchase your morning coffee at Tim Horton’s; you have lunch at Burger King; your mobile devices use the T-Mobile network; you drive the kids to their sports practice in your Honda Odyssey; the Honda is insured by Farmers Insurance; you stop at a BP service station and convenience store where you purchase an Ice Mountain bottled water for the kids as they head off to practice.
What do all of these items have in common? The products and services are sold by companies that are foreign based and have significant operations in the United States. This demonstrates we can’t escape having a connection to international trade and investment.
Many of us have family members who may work for U.S. operations of foreign-based companies. The Right Place program indicates on its website more than 130 foreign companies from 16 countries have a bricks-and-mortar presence here in West Michigan and employ West Michigan residents in their operations.
The Organization for International Investment indicates more than 5 percent of Michigan workers (nearly 200,000 jobs) are attributable to 940 foreign companies with operations in Michigan. Michigan is similar to most other states with foreign-based companies with significant operations.
In the past decade, we have heard our share of news reports of jobs being outsourced from the U.S. to lower cost jurisdictions. Granted, there were some jobs that ultimately were outsourced, but we didn’t hear as much about the jobs that were attributable to foreign companies locating business operations here in the U.S. and, in particular, West Michigan. Many refer to these jobs as being insourced.
In the future, it is likely even more Michigan jobs will have a foreign connection. The trends in merger-and-acquisition activity likely will result in more U.S. companies having a foreign parent company. The U.S. (with its 300 million plus consumers) is an attractive marketplace for businesses around the world. As the BRIC — Brazil, Russia, India and China — countries grow and become more developed, it is likely we will see more investment activity in the U.S. from companies based in those countries.
There is another side to foreign trade. Many Michigan-based businesses have product sales outside the U.S. The U.S. Department of Commerce estimates nearly 300,000 jobs are attributable to businesses with export activities in Michigan. The two largest export destinations for Michigan businesses are Canada and Mexico. This may be due to NAFTA and geographic proximity.
The NAFTA debate in the 1990s still has some impact on the discussion on trade agreements more than 20 years later. We saw and heard the recent debate in Congress about giving the president trade promotion authority to negotiate additional trade agreements with our trading partners. After some lively discussion on the issue, it appears this may be one area where both Congress and the president have some common ground.
Trade legislation and trade agreements, like other changes, take time to fully reap the benefits of the change. The difficult part is the short-term distortions that can often create discomfort and pain before the benefits of the change arrive. The distortions often give rise to pointed discussion and political rhetoric about protectionism and raising tariffs on imported goods.
Tariffs can be a two-edged sword. We often forget that a contributor to the depth and length of the Great Depression in the last century was the imposition of the Tariff Act of 1930, or the “Smoot Hawley” tariff. This legislation increased tariff rates on thousands of goods. The interesting fact reviewing the history surrounding the legislation was that most Democrats were opposed to the increased tariffs on imported goods. The Smoot Hawley Act was passed by a Republican-led Congress and signed by a Republican president.
The resulting tariff wars impacted world trade and the depression that was already in place. Retaliation by our trading partners occurred soon after, and the Great Depression lasted for many more years. Some hard lessons hopefully were learned from that episode in our nation’s economic and trading history.
Now, 85 years after Smoot Hawley was enacted, the U.S. continues to have a debate about trade and whether to pursue free trade policies. The world has changed in so many ways, yet some failed economic policies of the past seem to resurface in the discussion.
The economic impact of foreign trade offers significant opportunities for those that embrace the trend. The Michigan Economic Development Corp. has its State Export Trade Program, or STEP, for small businesses launching into the export arena. There are tax benefits also available for export activity. The Internal Revenue Code has the Interest Charge Domestic International Sales Corp. or IC-DISC, provisions, which can result in favorable tax rates for export profits of businesses that utilize the specific tax incentive.
International trade and investment activities are here to stay. More trade deals are likely to be concluded in future years. There are numerous opportunities for businesses to take advantage of the activity the foreign trade deals seek to encourage. Those businesses that do will likely see the impact on their bottom line.
Bill Roth is a tax partner with the local office of international accounting firm BDO USA LLP. The views expressed above are those of the author and not necessarily of BDO. The comments are general in nature and not to be considered specific tax or accounting advice and cannot be relied upon for the purposes of avoiding penalties. Readers are advised to consult their professional advisers before acting on any items discussed herein.