While there are many things to consider, one of the most important questions from a business perspective is: how will the new administration impact global supply chains?
The winning promise
Motivated by the ongoings of the pandemic, the Biden administration is determined to ensure that the U.S. will not face any shortages of essential products in times of crisis.
To achieve this and also tackle the current pandemic, Biden plans to implement fundamental reforms that will enable the domestic production of essential goods which will also create new jobs and protect the country’s supply chains against national security threats.
These reforms will not be limited to medical supplies. With national interest and security in mind, Biden also plans on closing supply chain vulnerabilities and build stronger domestic supply chains for the energy sector, telecommunications, raw materials, and key technologies.
Although it may not look like it at the first glance, the end goal of this promise is to become resilient, not necessarily self-sufficient.
The immediate plan
Starting with a 100-day review process to identify critical national security risks across U.S. supply chains that he plans on implementing as a quadrennial rule, Biden will strive to achieve the following objectives, as stated in his campaign’s published framework for securing U.S. supply chains:
- Use the Defense Production Act (DPA) to put Americans to work manufacturing critical products, including those immediately needed to respond to the COVID-19 pandemic.
- Use federal purchasing power to bolster domestic manufacturing capacity for designated critical products.
- Build long-term supply chain resilience for pharmaceuticals.
The published framework puts on display many more of Biden’s objectives, all dancing around the same vision of inbound administration.
The foreseeable impact
Although the world has been hoping to see a more global stance from the U.S. after the election, it seems like the new administration is focused primarily on its domestic ongoings.
The consensus is that the Biden administration will start restoring the country’s relationships with other global powers and form stronger alliances with multilateral organizations, but it won’t return the country to an integrated global economy in the immediate future.
A reflection of this is the Biden proposition to penalize offshoring and reward investments in U.S.-based manufacturing that consists of three key components:
- Offshoring tax penalty: 28% corporate tax rate, plus a 10% Offshoring Penalty surtax, on profits of any production by a U.S. company overseas for sales back to the U.S.; Companies will pay a 30.8% tax rate on any such profits.
- “Made in America” tax credit: 10% advanceable tax credit for companies on a broad range of investments designed to create manufacturing jobs in the U.S.; Eligible projects include saving closed or closing factories, increasing domestic production, modernizing manufacturing facilities, expanding manufacturing payrolls, and any investment in onshoring jobs.
- Elimination of offshore tax loopholes: Closing the tax loopholes in the 2017 Republican tax law that don’t fully tax the foreign profits of U.S. companies.
Biden’s plan to ramp up production and stockpile vital goods will have effects that expand beyond the manufacturing sectors. The storage capacity needed for the planned amount of domestic production will undoubtedly create industrial real estate challenges, equipment and automation concerns, skills expectations, and spending power issues.
Despite this, many U.S. companies are already making decisions to shift at least some production either in the country or in locations across Southeast Asia or Central and South America. The incentives to produce domestically is definitely creating a trend that companies hop on already. It is yet unclear what the outcome will be, but it’s certain that the way businesses produce, store, and shit essential goods must change.
While this planned revival of the U.S. economy satisfies U.S.-based companies, the political debates around many of Biden’s propositions, the current COVID-19 situation, and the work to reverse some of the dealings of the former administration, will probably prevent the Biden administration from completing the plan as envisioned.
However, as U.S.-based companies have already started to look inward, international and multinational businesses are starting to consider the ramifications of the propositions made by the new administration. Companies are already trying to determine what a higher tax rate would mean for them and if it would make sense for them to continue doing business in the U.S. or if it will become too expensive.
Yet, Biden is expected to have a softer approach than the former president when it comes to international business. The new president is expected to re-engage with allies from Asia and the EU. Although China will pose some unique challenges for the new administration, Biden is expected to be more collaborative and less confrontational in his approach to establishing trade relations with the country.
One of the more optimistic outlooks on the impact the Biden administration will have on supply chains suggests that, once the US economy returns to its desirable status, Biden will favor the return to global growth. Middle Eastern countries especially rely on global trade and their economic well-being depends on an effective global supply chain.
Many revenue-starved countries around the world that are also struggling with the negative effects of the pandemic want to maintain and grow their economic relationships with powerful countries like the U.S. and China. For their sake, let’s hope that reducing trade tensions is on the new president’s priority list in the near future.