U.S. Chemical Balance of Trade Will Turn Positive If New Administration Changes Tax Law

imgresAs an unreconstructed cheerleader for the petrochemical industry and its massive exports, it has always been annoying to me that our balance of trade is nevertheless negative due to our similarly massive import of pharmaceuticals.pharma-imports The line with dots represents the balance of trade, as shown in the American Chemistry Council’s Guide to the Business of Chemistry 2016. Pharma imports (in blue) are at historic highs  ( most likely due to Obamacare, though we should acknowledge that millions of people are now getting the meds they could not previously afford). Note that these high imports have nothing to do with labor costs (as, China-, Mexico- and other imports from low labor cost countries do), since labor plays essentially no role in pharma production. This is, as said earlier, largely a tax issue. The ten top global pharma companies include Pfizer, Merck, Johnson & Johnson and GlaxoSmithKline, and have annual sales totalling $ 150 billion. These firms produce a substantial percentage of their pharmaceuticals outside the U.S., send them to the U.S.  yet are allowed by our tax laws to keep much of the profits on these sales building up in countries with lower corporate income taxes.(e.g. Ireland). It has been estimated that U.S. companies as a whole have around $ 400 billion of cash stashed overseas in profits taxed at low levels in those countries. Pharma firms lead in this area.  so two questions arise: First, if these U.S. firms are allowed to moved some of this cash to the U.S. at a relatively low tax rate, the “windfall” to the U.S. government could be used to pay for badly needed infrastructure improvements. Just as importantly, lower U.S. corporate taxes would presumably induce these companies, as well as the big European firms (Roche, Novartis, Sanofi, etc) to shift more of their production to the U.S. where their biggest market exists. again

Looking at the numbers in this graphic leads one to a few tentative conclusions relative to U.S. pharma imports, which totaled 86.1 billion dollars in 2015. Firstly, China, India and Japan export a total of only $ 20 billion in pharmaceuticals to the whole world, so we know right away that the bulk of U.S. imports come from Europe. Secondly, the largest pharma exporters by far are Germany and Switzerland. Not surprisingly, the largest global companies are headquartered in the U.S., Germany and Switzerland. Germany has already decided that the best way to serve the U.S. market with Mercedes, BMW and Audi cars is to build in the U.S.  The pharma industry is, of course, quite different (think of car styles and shipping costs for cars), but it seems reasonable to believe that global pharma companies will produce more in the U.S. and that our balance of trade in chemicals/pharmaceuticals will therefore be favorably affected under the new administration.

Looking at the broader picture, electronic imports to the U.S. in 2015 amounted to $ 332 billion!.Vehicles $ 283 billion! Apple is warehousing its cash (greater than Pfizer’s) abroad. Trump is already challenging the company to move production of the iphone to the U.S. Perhaps our infrastructure problems may soon receive some help.

(Full disclosure: I voted for Hillary, but perhaps some good will nevertheless come from the other guy’s victory, assuming Congress and the pharma lobbyists can fashion a new tax approach)

 

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