Market update: What Donald Trump’s first 100 days mean to the bicycle business

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By Jay Townley, Gluskin Townley Group

President Donald Trump’s first 100 days in office was passed Saturday, April 29, 2017, and this report is based on a webinar the Gluskin Townley Group presented April 20th that has been supplemented to include events from April 21st to April 29th covering the issues of interest to the bicycle business in the topic areas of  the Affordable Care Act and Health Insurance, the Presidents Budget, the new administrations Trade policies as they are emerging, what some of the ramifications Tax Reform may have for the import dependent American bicycle business,  and how bicycling will be impacted by administrations intended budget cuts to the Department of Transportation.

Unfortunately, Health Care is in limbo for many bike shops and suppliers. The House of Representatives failed to pass Affordable Care Act reform in March.

However, the president and GOP leaders have signaled that they want to introduce new legislation now that the House is back from the spring recess. This creates a lot of uncertainty for companies providing their employees’ healthcare and for employees paying for their own healthcare insurance.

For small business owners, which includes the majority of those in the American bicycle business that uncertainty is a disappointment for those that had hoped the Congress would do something to bring the costs of health care down, making it less expensive to staff and provide benefits for the employees of their small businesses.

Since the Speaker and the Administration withdrew their bill to repeal and replace the Affordable Care Act, Kaiser Health News and National Public Radio have been telling listeners to: “Get set for revisions to your Affordable Care Act Insurance.”

According to this report, the administration is proposing changes to the rules and regulations governing the Affordable Care Act that the White House says should stabilize the insurance marketplace while repeal and replace legislation is working its way through the Congress or is stalled in the process.

While the administration’s proposed rule is aimed at stabilizing the existing health law’s insurance marketplace this action could have rapid, dramatic effects — perhaps as soon as this summer — on people who do not get insurance through work, and buy it on the Affordable Care Act’s exchanges instead, which, as we said, will impact a large number of bike shop employees.

If the rule and regulation changes the administration proposed in February hold up in the final draft, which is expected out soon, look for these changes:

  • Repay past-due premiums before being granted new coverage
  • Open enrollment shortened to six weeks from three months
  • 100 percent of applications outside the open enrollment period would undergo preapproval verification
  • Complex formula to divide plans would be tweaked

Finally, topping insurers’ wish list for other changes, which would require legislative action by Congress, would be permanent federal financial support for insurers that face high-dollar claims from some policyholders. Insurers have argued that change is important if they are to hold down premium costs across the board. Insurers also want a surcharge for people who let their coverage lapse, and the permission to charge older people five times more than younger ones, a practice known as “age rating.” The current limit is 3:1. Widening that ratio could lower premiums for young people but cause big hikes for people older than 45.

Despite a push by the White House and Administration to introduce a revised Affordable Care Act reform bill before the President’s first 100 days, no legislation was introduced before April 29 and the uncertainty continues into May and perhaps beyond – as the Administration continues to move forward with changes to the rules and regulations governing the Affordable Care Act that is still the law of the land.

Note: More details are provided in the Gluskin Townley Fifth Report about What the Trump Administration Means to the Future of the American Bicycle Business.

The Trump administration’s new budget blueprint aims to quantify the President’s agenda in dollars and cents.

The recently released plan calls for significant increases in military and border-security spending, along with corresponding cuts in many other parts of the government. The blueprint was designed to “send a message to our allies and our potential adversaries that this is a strong-power administration,” Office of Management and Budget (OBM) Director Mick Mulvaney explained as he previewed the document in a briefing with reporters.

It also sends a clear message domestically: This administration is willing to make drastic, controversial cuts to fund that “strong-power” message. That includes slashing spending on foreign aid and the environment, as well as long-standing programs aimed at boosting the arts and humanities. The question now is how much the Republican-controlled Congress will go along with the OMB interpretation of the President Trump’s agenda.

Like any White House budget, President Trump’s blueprint is more of a political document than an accurate picture of government spending. Congress controls the budget process and lawmakers may have very different priorities. As a statement of presidential intention, though, the blueprint is very clear.

The administration is proposing cutting the EPA’s budget by 31 percent, from $8.3 billion in fiscal year 2017 to $5.7 billion in fiscal year 2018. That’s the largest cut among all Cabinet departments and major agencies.

The budget says that the proposed cut in funding is necessary “to ease the burden of unnecessary Federal regulations that impose significant costs for workers and consumers without justifiable environmental benefits.”

Climate research at NASA could also take a hit under President Trump’s proposed budget. “We’re not spending money on this anymore. We consider that a waste of your money,” Mulvaney said about NASA climate change research as he took questions from White House reporters about the budget plan at the press briefing.

Weather has been having a growing impact on the bicycle business. Specifically the influence changes in weather and weather events have on bicyclists riding as frequently or riding as far as they have in the past – because of weather conditions.

One way bike shops can manage this is by offering online bicycle riding conditions updates and an indoor alternative to ride on trainers or rollers and compete with themselves or other bicyclists.

Potential customers may justify not visiting a bike shop or other bicycle retailer because of concerns about air quality and the weather predictions they receive. Bicycle retailers can invite the local press to visit their indoor bicycling alternative and also promote the online availability of their bicycle riding conditions reports and also all the “gear” necessary to ride during mild weather changes.

We will have more about the budget proposal later in this article, but did you know that the “…U.S. is already in a trade war.”   

In an interview on CNBC at the end of March, Commerce’s Wilbur Ross warned the US is already in a trade war. Secretary Ross also told CNBC that: “The United States will no longer bow to the rest of the world on trade because President Donald Trump plans to act.”

“We are in a trade war. We have been for decades. The only difference is that our troops are finally coming to the rampart. We didn’t end up with a trade deficit accidentally,” he said, warning about the consequences of doing nothing.  “Our trade deficit overall is about $500 billion a year,” Ross said. “Quite miraculously, that also equals the net trade surplus with the rest of the world.”

Despite what some critics say, Ross maintained and obviously bike bixesbelieves that trade deficits — the disparity between imports and exports — matter. “If trade deficits are good, why is China so pleased that they run a huge trade surplus?” he asked during the CNBC interview. “It’s perfectly obvious that if China hadn’t been such a huge net-exporter it never would have grown at the rate that it did.”

Before we go further and more countries come up I would like to clarify the top five U.S. trading partners in 2016 were, in order of trade value, China, Canada, Mexico, Japan and Germany. To state the obvious, China and to a lesser degree Japan are important trading partners of the U.S. bicycle business.

This takes us back to Secretary Ross who went on to tell CNBC the Trump administration wanted to formally start the North American Free Trade Agreement renegotiation process before Congress went on April recess.  Accordingly, the Trump administration is gearing up for a rework of the NAFTA treaty between the U.S., Canada and Mexico, our number two and three trading partners in 2016 by the total value of trade.

Secretary Ross said the administration hopes to soon start the 90-day countdown clock to opening talks. A letter from the U.S. Special Trade Representative circulating on Capitol Hill suggests the administration may take a less extreme approach to NAFTA negotiations than expected.

During the election campaign President Trump threatened to pull out of NAFTA, which he called the worst trade deal in U.S. history. But, a draft outline of the U.S. objectives from the Trade Representative’s office suggests a more moderate approach, including goals on investment and labor that have enjoyed bipartisan support.

Jeffrey Schott, of the Peterson Institute for International Economics, says the letter provides the basis for constructive negotiations, but points out that: “It also contains a few seeds that could poison those talks and disrupt and perhaps blow up those negotiations.”

Among those volatile “seeds” is a reference to tax fairness that could foreshadow conflict over the border taxes Trump has threatened to impose on Mexico, or the Border Adjustable tax supported by the House leadership that would levy a 20 percent tax on all imports. Ross described the letter as “the very broad outlines of the topics we will be discussing.” Ross also said it did not represent a change in the administration’s thinking.

With this background, the President woke up Wednesday morning April 26 and tweeted that he was seriously considering tearing up NAFTA, resulting in phone calls from the Canadian Prime Minister and the President of Mexico, and by the end of the day the President said he wasn’t going to tear-up NAFTA, yet told the leaders of Canada and Mexico that he wanted to reopen negotiations to get a better deal – which Commerce Secretary Ross and the office of the USTR had indicated was the Administrations intention a week to ten days ago.

Has the Administration already started a trade war with Canada – or simply signaled how the NAFTA negotiations will go? This could be another “seed” that could “poison” reboot of NAFTA negotiations, or it all could be the opening gambits in negotiations. At the end of April the Department of Commerce announced imposition of Anti-Subsidy Tariffs of 20-percent against Canadian softwood lumber imports, used primarily for home construction – and Canada negatively responded, to say the least.

While bicycles and related products are not at all involved, the administration has chosen to take its first proactive “Anti” trade action against America’s second largest global trading partner. According to the U.S. Census Bureau $544.9 billion in trade was done with our neighbor to the North during 2016 and Canadian businesses exported $266.8 billion in goods, including bicycles and related products to the U.S., while Americans exported, or sold $278.1 billion in goods and services, again including bicycles and related products to Canada.

It should come as no surprise that Canada is the largest export market for U.S. bicycles and related products so the bicycle business should be watching carefully to see if this trade dispute over softwood spreads and becomes a real trade war.

Mexico was the third largest U.S. trading partner in goods in 2016, totaling $525.1 billion. Exports were $231.0 billion and imports totaled $294.2 billion. The primary exports to Mexico were automotive parts and accessories, electric apparatus, and computer accessories. On the import side, the primary categories were also automotive parts and accessories; trucks, buses, and special purposes vehicles; and passenger cars.

Elsewhere in the trade arena, help with North Korea trumped calling China a currency manipulator, at least for now, as the presidents of the U.S. and China spoke of agreements reached at their summit at President Trump’s resort in Palm Beach, Fla., April 6-7, including an apparent deal to cooperate in grappling with the North Korean.

“You and I, Mr. President, increased our mutual understanding and established a good working relationship,” President Xi Jinping told Trump, when Trump called Xi in a follow-up to their meeting at Mar-a-Lago.  Xi added that the two sides had “reached important consensuses” on key issues, and that China “is willing to communicate and coordinate” on the North Korean issue.

“I think we had a very good chemistry together,” President Trump said of Xi at a press briefing after the meeting, and added: “I think he wants to help us with North Korea.”

While neither side would say exactly what sort of deal was struck, it seemed to confirm observers’ predictions that both leaders went into the summit expecting to size each other up and see to what extent they could do business with each other.

“The way you’re going to make a good trade deal,” Trump says he told Xi, according to The Wall Street Journal, “is to help us with North Korea.” In an earlier tweet, Trump had threatened to resolve the North Korean issue alone, if China refused to help.

Chinese analysts reported that Beijing is receptive to a “transactional” U.S. president.

“Both sides seem to have achieved some of the objectives they sought from each other’s concessions,” says Cheng Xiaohe, a North Korea expert at People’s University in Beijing.

Cheng says Xi is likely to have sought – and received — assurances from Trump that the U.S. would hold off on using military force against North Korea, giving tougher sanctions and diplomacy more time to work.

China, meanwhile, was spared being branded a currency manipulator by the Trump administration. One of Trump’s foremost campaign pledges was to punish China early in his presidency for depressing the value of its currency in order to boost exports and maintain a trade surplus with the U.S.  That position is at odds with the facts, as China has been spending down its foreign reserves to prop up the value of the Yuan since mid-2014.

Reversing his position just before the summit, Trump said in an interview with The Wall Street Journal that China was no longer manipulating its china flagcurrency, and that he realized that punishing China over this issue could cost the U.S. China’s cooperation on North Korea.

Currency exchange rates are not the only trade frictions between Beijing and Washington. China’s lax protection of intellectual property, dumping of
commodities such as steel, and U.S. companies’ access to the China market are also of concern. Whether Chinese leverage on other issues might make these concerns go the way of currency manipulation, remains to be seen.

However, the most recent reaction in the Chinese press is one of concern about the situation with North Korea and the potential of trade negotiation becoming more acrimonious with the U.S.  This means the American bicycle business still has to weigh its short term and long term sourcing strategies very carefully relative to potential disruptions with China, and in fact any import source going forward.

The “Better Way” tax reform plan proposed by House Speaker Paul Ryan, and Ways and Means Committee Chairman Kevin Brady, as we have previously reported, would move the federal tax system toward a consumption tax, which is in many respects similar to the European value added tax (VAT).

The plan would eliminate most tax deductions and credits, including deductions for imported goods and interest expenses. As most companies in the American bicycle business already know, under current law, the U.S. has a true “income tax,” which is a direct tax on the income of a corporation. But not on the total income; rather, the corporation is permitted to deduct both the cost of any goods sold — whether produced or purchased for resale — and general and administrative expenses. Once a company has settled onto a net income number, a 35 percent income tax is paid.

Under the “Better Way” tax reform plan the corporate tax rate would be lowered from the current 35 percent to 20 percent. The current range of seven personal tax rates from 10 percent to 39.6 percent would be compressed to three brackets of 12, 25 and 33 percent.

President Trump issued a tax reform plan on April 26, before the “first 100 days” and it features a corporate tax rate of 15 percent delivering on Trump’s campaign promise and also allowing a pass-through rate for business owners so if you own your own business, income from that business would be taxed at the corporate rate of 15 percent. 

There is no border-adjustment tax and the White House says the House version with a border-adjustment tax did not “work in its current form.”  

A slight adjustment to individual tax rates: White House officials said there would be three tax brackets with rates of 35, 25, and 10 percent, down from the current seven brackets.

A doubling of the standard individual tax deduction and a one-time repatriation tax that would allow companies to bring back money from overseas to the US with a slightly lower, one-time tax. The White House did not clarify the rate at which this money would be taxed.

While the American bicycle business is ready for some form of tax reform that will lower the taxes suppliers, bike shops and employees pay, there is the reality of the Administration and the Congress finding the revenue to make lowering taxes possible.

The border adjustment tax concept the House proposes is a way to increase revenue flowing into the Treasury while allowing taxes to be lowered on businesses and some individuals. The problem is the concept would probably increase the price at retail for most if not all consumer goods, including food – effectively shifting the financial burden of reducing taxes to retailers and consumers.  A border tax has become very unpopular and is getting a huge pushback from both the public and members of Congress.

However, the Presidents April 26 tax reform proposal doesn’t address the question of finding the revenue to make lowering taxes possible – other than lowering taxes will result in a robust economy that will grow sufficiently to generate the revenue needed to off set tax reductions.

city of london cyclingThe Impact of President Trump’s budget plan on bicycling in America: The League of American Bicyclists (LAB) have done an excellent job of analyzing President Trump’s Budget plan and its potential impact on bicycling in America.

Caron Whitaker, the LAB Vice President Governmental Affairs refers to President Trump’s plan as the “skinny budget” which, as we have already reported, includes significant cuts to non-defence discretionary funds, including a 13 percent cut to the U.S. Department of Transportation (DOT).

In addition to the 13 percent cut to the DOT, the budget plan includes a zeroing out of TIGER (Transportation Investment Generating Economic
Recovery grant program), severe cuts to Amtrak long distance trains and limits transit “New Starts” to projects where funds have already been obligated. The cut of 13 percent puts the DOT in the middle of cuts to non-defense agencies, while the Treasury and Justice departments only had 4 percent cuts and of course EPA with a 31 percent budget cut.  

The budget does not directly affect transportation alternatives, or other so called core programs that are important to bicyclingbecause the Highway Trust Fund (HTF) funds them. The HTF in turn is basically a lock box of funding that can only be spent on transportation. This could be why the DOT budget was only cut by 13 percent. These other programs: TIGER, Amtrak, Transit “New Starts” programs are not part of the HTF, so they are more vulnerable to the budget process.

As noted the budget plan eliminates TIGER (Transportation Investment Generating Economic Recovery grant program), which hurts biking and walking, and multi-modal projects. The TIGER program is a discretionary program that funds’ projects hard to fund under normal transportation funding programs. As an example, it funds projects that cross state and jurisdiction borders.

The TIGER program originated as part of the stimulus project, and gave the US DOT significant discretion in how to direct funding. The DOT, under the previous administration, prioritized multi-modal projects (such as requiring biking and walking access on bridges) and funded larger projects like Vision Zero in New York City, Complete streets redesign in Dubuque Iowa, and a trails network in the Philadelphia, Pennsylvania, region.

The Future 

The Affordable Care Act and Health Care remains in limbo for many bike shops and suppliers, and as the Congress and the Administration work hard at a compromise that will be acceptable to the GOP majority in the House and the Senate the Administration is moving forward with changes to the rules and regulations governing the Affordable Care Act that is in force and effect now that could have significant ramifications both in cost and coverage that will impact bicycle business employers and employees this summer and going forward.

Look for the changes to the rules and regulations to emerge over the next 60-days and before legislation working through the House late summer or after recess. Don’t expect a new law to replace the current Affordable Care Act before the end of 2017 or early 2018.

The Trump administration’s new budget blueprint aims to quantify the President’s agenda in dollars and cents and it has sent a clear message to all the branches of the U.S. government.

What comes next is the actual legislation containing the federal budget that has to work through both houses and lands on the presidents’ desk for signature into law. We will see during the legislative process how close the actual budget bill is to the President’s budget blueprint. Expect to see the 2018 budget legislation as soon as there is a resolution in the Congress to repeal and replace the Affordable Care Act. box

Has the Administration already started a trade war with Canada – or simply signaled how the NAFTA negotiations will go?  It could be both and in
any case watch for the 90-day notice of the U.S. intention to reopen negotiations within the month of May as trade disputes over lumber and milk from Canada and exports of U.S. corn to Mexico as well as who is going to pay for the Wall flair up and impact trade negotiations with our second and third largest trading partners – potentially impact U.S. exports of bicycles to Canada.

China is assisting with the North Korean “situation” but President Trump has already put South Korea on notice that he wants to renegotiate trade agreements with one of our strongest alliance partners in Asia, and he also wants payment for the missile defense system that is being installed – all of which may lead back to trade tension with China over other trade issues as the North Korean winds down.

Look for potential trade pressure on our largest trading partner and number one source for bicycles in the coming months resulting in reopening trade negotiations before years’ end that will impact the American bicycle business in some way going into the 2018-2019 seasons.

The “Better Way” tax reform plan and President Trump’s tax reform proposal of April 26 are now both on the table and it is now up to the Republican controlled House of Representatives and the White House to devise a single tax reform proposal and guide it through the 115th Congress before the end of 2018 and the American bicycle business shouldn’t expect any tax relief for their businesses before.  The biggest issue will be whether there will be a boarder tax provision or not – and how tax cuts will be offset.

Trump Administration measure of “efficiency”.  The League of American Bicyclists (LAB) asks: “Why cut transit, Amtrak and TIGER when the President wants to invest a trillion dollars into infrastructure?”   It does seem counter productive to cut transportation funding when the president has promised significant investment in infrastructure. According to the Mick Mulvaney, Director of the Office of Management and Budget (OMB) the budget cuts “less efficient [programs] than the infrastructure package that we’re working on for later on this year.” 

The LAB points out that “efficiency” can be in the eye of beholder, and depends on the measurement. “Director Mulvaney’s remarks should be a caution for those who care about bicycling and walking in America. We can argue that bicycling and pedestrian projects are less than two percent of the transportation budget and account for 12 percent of all trips, that they create more jobs per million dollars spent and that they reduce congestion and improve air quality.” We’ll need to learn more about how the Trump administration and the Office of Management and Budget measures “efficiency.”

The Future for the U.S. bicycle business will be all about disruption and the changes that come with it!

Read more of Jay Townley’s commentary on the global bicycle business here.