Political trends affecting your business in 2018 and beyond

In this article, Part 1 of a four-part series, we have drawn upon notable sources such as The Economist, Kiplinger and Bloomberg Businessweek to provide an overview on trends that may impact Vistage members. We have made every effort to present a neutral reporting of political factors affecting business in 2018 and beyond.

The president’s challenges in executing his legislative agenda will prompt use of executive order to institute regulatory changes. As many of his cabinet and agency appointments took some time to confirm, 2018 will mark significant shifts in the regulatory environment. The president’s directive is to cut two regulations for every new one put in place.

Expected activities in 2018 include:

• Trump will appoint a new head of the Consumer Financial Protection Bureau (CFPB), who will roll back the policies of former Director Richard Cordray, described as an “aggressive watchdog” for consumer protections. Financial services firms are hoping for respite from exhaustive controls on everything from social media to how they collect debt.
• The recent appointee to run Health and Human Services will skirt ACA provisions if Republicans cannot repeal and replace Obamacare. By executive order, elements of the bill have already been rolled back, including allowing smaller companies to buy coverage that does not meet all the bill’s standards.
• There will be an overhaul of welfare programs once the president feels he has the political capital to tackle entitlements.
• Immigration policy will remain front and center, and Republicans will revisit the work permit program, which was rolled back via the president’s executive order. The announced hiring of 10,000 ICE agents will lead to greater enforcement and H1B and L1 visas are being highly scrutinized. The “Dreamers” (DACA) program is slated to be phased out by March of 2018. E-Verify will expand into more states. It will be more difficult to hire employees in states lining the Mexico border.
• The Equal Employment Opportunity Commission will rewrite rules governing wellness to ensure that such programs are voluntary.
• There will be an expansion of tariffs and taxes of imports in industries viewed as receiving unfair foreign subsidies, from washing machines to solar panels. (See the list of trade remedies in force by the U.S. government.)
• The judge overseeing a dispute in the management of $1 trillion in student debt recently removed herself from a skirmish with the Trump administration. She had barred the agency from collecting any debt, leaving millions of debtors unserved. A new judge is expected to turn the spigot back on.

Mid-year elections in 2018 will be a referendum on the Trump presidency. As many as a dozen House Republicans will simply retire. The losing party typically bounces back after a presidential loss. Democrats will focus on key seats considered in play in Washington, Colorado, Iowa, New York, Virginia and Florida. Democrats are likely to win seats in the House, but may not win a majority that would return Nancy Pelosi to the Speaker seat. Should Democrats prevail, Trump’s legal challenges could expand as Democrats are more likely to use talk of impeachment to advance their agenda, especially as the Mueller-Russia investigation takes shape.

Trump’s stunning victory may impact how political campaigns are run in the future. As “down-ballot” races gain importance, candidates will be spending money in untraditional markets, and ramping up spend on social media, targeting and testing specific audiences. Some foreign elections could be decided by social media and the backlash against Google and Facebook could impact elections. The Supreme Court will take on a key gerrymandering case, and may find the redrawing of election districts unconstitutional, a ruling that could shift the balance of power.

The topic of the day is tax reform, which will have to be reconciled by the House and Senate. Of great curiosity to Vistage members is the proposed 20% corporate tax rate, and movement toward a 25% rate on pass-through income. (To view a chart of how the current bill might impact you, see Trump’s Tax Plan and How It Would Affect You.)

Some potential winners include:

• Corporations — Corporations will have a 20% tax rate (down from 35%) and will have less motivation to report earnings overseas.
• Equipment manufacturers — Customers will have the ability to deduct the full cost of equipment purchases through 2022.
• Large accounting firms — These firms will see a bonanza of work from tax reform.

And potential losers:

• Companies holding cash — Companies will have to pay tax on cash held abroad.
• Unprofitable companies — The bill would limit net operating losses (carry-overs).
• Drug companies — The law would eliminate tax credits for clinical trials of drugs for rare diseases.
• Service-based, pass-through entities — Only part of their income will qualify for the 25% pass-through rate.

Twelve appropriations bills required to fund the U.S. government in 2018 have passed in the House, including $1.2 trillion in spending and $87 billion in funding for the “Global War on Terror.” (See appropriations.)

While the final Senate-House bill is under review, the national defense budget for 2018 will be $700 billion, including more money for missile defenses, a modest increase in troop numbers and military wages. Budgets illustrate shifts from traditional warfare to low-risk weaponry such as drones.

The Federal Agriculture Reform and Risk Management Act (also known as “the farm bill”) will have to be reauthorized by September 2018. Comments from Trump on reducing subsidies will be in conflict with Republicans from rural districts who rely on the funding for their districts.

A year into the Trump presidency, American foreign policy is surprisingly similar to the year prior. While Trump angered many by withdrawing from the Paris Agreement, Iran nuclear deal and the Trans-Pacific Partnership, the administration has stayed the course with NATO and not entered into any new wars or regional conflicts.

Trump has had to expend leverage in Asia (in lieu of trade talks) in the tense standoff with North Korea, which continues to launch missiles into the Sea of Japan. In particular, China has been reluctant to intervene. Leaders in countries such as South Korea and Japan are unwilling to be viewed as “soft” in negotiations with Trump. Look for more multi-nation accords where such leaders can take cover in the confusion of complex trade deals. Trump will continue to expand influence with countries such as India and Japan.

Another impact of North Korean saber-rattling is ticket sales for the upcoming Winter Olympic Games in South Korea, which are about 70% short of targets. The games are expected to cost South Korea about $12 billion, mostly in infrastructure improvements.

In China, the recent National Congress yielded promises of political reform in an effort to “modernize the state governance system.” While President Xi Jinping makes waves about shuttering poor-performing companies, reforms are very modest and do not adequately address intellectual property protection, cyberattacks or human rights. In fact, President Xi Jinping has tightened his grip on power.

ISIS has shifted focus away from large-scale, planned attacks to lone wolf tactics now that it has lost its strongholds in Iraq and Syria. Crown Prince Mohammed bin Salman’s actions to purge his adversaries in Saudi Arabia offer both needed reform and a threat to the political underpinning in the Middle East. In particular, Trump has angered the Iranians (many of whom were not ideological nationalists). Iran’s oil imports have doubled since 2015 and the country’s back-channel support of rogue groups continues.

Mexico’s economy is slowing down. Trump’s immigration policy is impacting relations with our neighbor to the south, particularly in industries such as automotive and solar, which took part in a “nearshoring” movement in recent years. The U.S., Mexico and Canada seem to be far apart on any rewrite of the North American Free Trade Agreement (NAFTA).

Latin America’s two largest economies, Mexico and Brazil, will hold elections in 2018, and leftist leanings in Mexico could affect a change of power that may threaten the region’s relative stability. Three years of scandals in Brazil put the country on tenuous footing. As the middle class expands and gains access to online information, there will be less tolerance to corruption there. There will also be a gradual transition in Cuba, and Raul Castro will retire in February 2018.

According to the International Monetary Fund, inflation in Venezuela is set to jump a staggering 2,300% in 2018. While the violence reported this summer has subsided, the jobless rate of 30% or more means it is likely that further violence will unfold. South America is likely the next flashpoint in global unrest. For outsourcing, American companies are gravitating toward more stable countries such as Colombia.

Like the United States, the EU is in the midst of political chaos given dynamic change in the UK, Germany, France, Spain and Italy. While the global economy seems braced for an expansion, there is also fear that much of its growth has been a result of aggressive tactics by central banks tapering back efforts to flood markets with liquidity.

British Prime Minister Theresa May is embroiled in controversy and barely holding on to power after a June referendum. Brits remain divided about Brexit, and a clear strategy has failed to take shape. Meanwhile, a sex scandal in the Parliament could turn favor back to the Labour Party. Even Angela Merkel, Germany’s powerful Chancellor, has lost influence.

Italy has elections in early 2018, and there is pressure from the populist Five Star Movement to retract from the EU. Spain is also in chaos given the recent secession vote. Ninety-three percent of Catalans do not trust the government. Catalonia represents one fifth of Spain’s economy.

U.S.-Russia relations remain strained, and not only as a result of meddling in the U.S. election. The U.S. is reviewing aid to Ukraine while trying to combat Russian “aggression” in the region. As Putin will soon enter his final term, the jockeying to replace him has already begun.

Recent mass shootings have added pressure on legislators to pass tougher gun laws. The focus is on stricter enforcement that regulates purchases. There is a bipartisan effort in Congress to ensure existing regulation that keeps convicted felons and the mentally ill from purchasing guns.

Criminal justice reform is expected. In a rare showing of bipartisanship, both parties seem to understand the flaws in a system that jails non-violent offenders, at a time when drug addiction is proliferating. Three-strike rules are losing favor.

The humanitarian crisis in Puerto Rico continues as FEMA is under fire. Poor infrastructure and local corruption abounds. The pledge of $44 billion in aid is viewed by some as inadequate given the lack of power, food and infrastructure in a territory that was already in deep trouble (after its bankruptcy filing in May).

There is movement by states and local municipalities to safeguard against natural disasters, and to reinforce infrastructure. Miami passed a $200 million bond measure to improve seawalls, drains and roads. A federal infrastructure bill, promised by Trump as a candidate, could reemerge with potential improvements slated in Florida and Texas. Companies involved in building infrastructure (building roads and the like) will have huge opportunities in recovering regions. (You can donate to relief efforts for Hurricanes Harvey, Irma and Maria at the Red Cross.)

Within states, governorships have become a race of millionaires. Election spending in Illinois was up by 741%, including $15.6 million in television ads bought by J.B. Pritzker, the Democratic nominee. Recent losses by Republicans in Virginia and elsewhere are the precursor to more mudslinging next year. Senate Majority Leader Mitch McConnell will be under pressure to keep Republicans in power.

Tech giants have become a convenient villain for politicians around the world. Facebook, Amazon and Google are facing a “tech-lash” including penalties and fines as a result of privacy issues, hacking and countries trying to control internet content.

Marijuana’s acceptance is spreading like wildfire. With California, Maine and Massachusetts legalization in January, the market for recreational pot will triple.

2017 was a tumultuous political year to say the least. 2018 should be equally interesting and the possibility of the pendulum swinging violently is an opportunity and threat that every management team should weigh carefully.

Related reading:

• Political trends affecting your business in 2018 and beyond
• Economic trends affecting your business in 2018 and beyond
• Technology trends affecting your business in 2018 and beyond
• Social and ecological trends affecting your business in 2018 and beyond

Sources

• Trump’s fight over consumer bureau with two directors ‘may end up in court’, The Guardian
• The Kiplinger Letter, November 17, 2017
• The Kiplinger Letter, October 13, 2017
• The Kiplinger Letter, October 13, 2017
• Six Seats the Democrats Are Fighting for to Help Flip the House, Bloomberg Businessweek
• The 2018 Fortune Crystal Ball: 59 Predictions for the Year Ahead, Fortune
• The Trump Effect: Campaigns in 2018 and Beyond, The Street
• The 2018 Fortune Crystal Ball: 59 Predictions for the Year Ahead, Fortune
• The House Tax Cut: Who Gets What, by Peter Coy- Bloomberg Businessweek
• Senate passes $700 billion defense policy bill, CNBC
• Trump Hunts for Trade Deals in Asia, Bloomberg Businessweek
• Tickets Aren’t Selling for the 2018 Winter Olympics, Bloomberg Businessweek
• What Political Reform Looks Like in China, Huffington Post
• The Kiplinger Letter, November 17, 2017
• The Heart of the Deal The Economist
• Elections: Mexico and Brazil Vote, Bloomberg Businessweek
• The Strife of the Party, Bloomberg Businessweek
• The 2018 Fortune Crystal Ball: 59 Predictions for the Year Ahead, Fortune
• Dissatisfaction was widespread in Spain even before Catalan secession vote, Pew Research
• The Kiplinger Letter, November 9, 2017
• The Kiplinger Letter, November 17, 2017
• Governors’ races have become contests between bajillionaires, The Economist
• The Pendulum Swings, The Economist

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