What the new U.S. president means for outsourcing
18 July 2019
President Donald Trump's inaugural address echoed themes not often heard in the United States since before the Second World War. It was a ringing endorsement of an "America First" platform, referencing strengthened borders and a desire to return jobs to the United States at the expense of other countries. Such a policy could have a major impact on companies that rely on outsourcing and global supply chains.
This kind of rhetoric has been a Trump staple since the Presidential campaign began and helped him ride a populist wave to victory in traditionally industrial states such as Pennsylvania and Michigan. Trump called out American manufacturers Ford Motor Company and Carrier by name during the campaign for their plans to move some operations to Mexico. Carrier famously backed away from that pledge after Trump's election, in return for tax breaks and other government concessions.
The billion-dollar question is how much of his fire-breathing, anti-trade rhetoric will translate into actual policy and what impact those policies might. Thus far, Trump has proposed a 20 percent tax on Mexican imports to pay for his proposed wall on the U.S. southern border, which could have a substantial impact on manufactured goods in Mexico, but would also theoretically require a renegotiation of the United States' trade agreements with that country. If the President decides to pursue a true anti-outsourcing policy, as he declared he would during the campaign, there are several key areas that are especially likely to be targeted.
- Pharmaceuticals: India, South Korea and China are home to substantial pharmaceutical and biologic drug manufacturers who target the lucrative U.S. market. The Trump Administration could make life more difficult for these manufacturers without passing any new legislation by increasing scrutiny through the Food and Drug Administration. The FDA is responsible for enforcing drug safety regulations and has the power to ban companies from exporting goods into the United States. Yet, the Trump Administration has also vowed to cut regulations and reduce the size of the Federal government, which could mean a lighter hand on regulatory mechanisms. Trump could accomplish both goals by focusing the FDA's enforcement efforts on overseas plants to the detriment of U.S. enforcement, effectively raising the cost of regulatory compliance overseas while reducing it in the United States.
- Back-Office Support: Trump's appeal during the campaign was largely to displaced industrial workers who had lost their jobs as companies moved factories and industrial positions to countries with cheaper labor forces. Many of those jobs have now become automated and are unlikely to return. To make good on his promise to bring jobs "back" to America, Trump may choose to go after the extensive information technology and support functions that have been outsourced to countries such as India and the Philippines in recent years. These jobs, while certainly less expensive in non-U.S. locations, are not likely to be replaced entirely by automation and could make for high-profile "wins" for the Administration. It is not hard to imagine President Trump cutting the ribbon on a new call center in Wisconsin that will house support functions for a U.S. company that were previously outsourced to India. Tax incentives for repatriating such services and tax or tariff penalties on overseas workers could be combined to make such moves more economically feasible for U.S. based companies.
- Worker Visas: The U.S. courts have frozen Trump's ban on visas for people from seven predominantly Muslim-countries, but the White House is said to be considering issuing a new version of that executive order that may pass legal scrutiny. Among those caught up in the previous order were many H1-B visa holders, which allow skilled workers to enter the United States and work legally due to the lack of skilled labor available for certain jobs. This program has long been a target of conservatives in Congress and might be due for substantial revision or rollbacks. Considering H1-B visa jobs are, by definition, highly skilled, they often are also highly lucrative and would give the Administration another visible "win" to sell to Trump's supporters. A Republican-led Congress is unlikely to block such attempts; opposition would likely come from the technology and pharmaceutical companies that benefit from the programs. Notably, the first court decision to stop Trump's Muslim ban was issued in a case brought partially by Microsoft and other technology companies alleging the ban hurt their ability to hire qualified workers.
Companies that depend on outsourcing to keep costs low could find themselves enveloped in the political storms currently raging in Washington, D.C. and vulnerable to substantial pressure from the U.S. government. Multinational corporations should evaluate their current and proposed plans for outsourcing positions or functions away from the United States in light of potential retrenchments and might be well advised to put such moves on hold until the Administration's policy becomes clearer.