Former US president Donald Trump vowed to convince foreign companies to shift their operations to the US using tax incentives as well as the threat of tariffs in an economic address aimed at addressing voter anxieties over jobs and wages.

“Under my leadership, we are going to take other countries’ jobs,” Trump said on Tuesday in Savannah, Georgia. “We are going to take their factories.”

The speech is part of a week of events where Trump and Democratic rival Kamala Harris are amplifying their dueling economic messages in swing states, with each candidate casting themselves as the best steward of the economy and seizing on a top issue for voters with less than 50 days to the election. 

“We’re going to bring thousands and thousands of businesses and trillions of dollars in wealth back to the good old USA,” Trump said. “I want German car companies to become American car companies. I want them to build their plants here.”

Trump’s efforts though will hinge on his ability to sell Congress on his planned tax cuts and on persuading foreign companies to uproot their entrenched supply chains. Many foreign automakers including Volkswagen AG, Toyota Motor Corp, and Hyundai Motor Co have built manufacturing plants in the US, but kept their headquarters overseas.

He singled out iconic American firms, urging them to ramp up domestic manufacturing.

“GE appliances were sold to the Chinese. IBM computers were again sold to China,” the Republican presidential nominee said, referencing International Business Machines Corp’s sale of its personal computing unit to Chinese-based Lenovo Group Ltd — a transaction completed in 2005 — and GE’s sale of GE Appliances to Haier in 2016.

Trump vowed to personally recruit foreign companies to move their manufacturing hubs to the US, dangling a further reduction in the corporate tax rate from the current 21% to 15%, low regulations and the creation of “special zones of federal land” for factories as incentives to produce domestically. He said he would appoint a manufacturing ambassador to recruit overseas companies to move to the US.

He also pledged to impose steep tariffs on companies that make products elsewhere who seek to sell into the US. 

“The only way they will get rid of that tariff is if they want to build the plant right here in the US, with you people operating that plant. We want American citizens, and we want their plants built here,” he said.

The former president has made tariffs a centrepiece of his economic pitch, framing it as a way to hit foreign adversaries, like China, with higher costs and offset the cost of household tax cuts. Trump has pitched a 10% to 20% levy on all imports, with even higher tariffs on Chinese products. He has threatened tariffs of up to 200% on some electric vehicles and Deere & Co tractors if they were to be made in Mexico.

Harris has seized on the proposals, calling the import levies a “Trump sales tax” on US consumers. The Republican’s tariff proposals would result in middle-income households paying US$1,350 (RM5,567.40) more annually, according to the Urban-Brookings Tax Policy centre. Harris is slated to make her own economic pitch to supporters in Pittsburgh on Wednesday. 

Trump defended his tariff policies on Tuesday, saying “billions of people around the globe will soon be buying products proudly stamped ‘Made in the US’”.

First term

Trump made a similar promise to attract foreign investment with a carrot-and-stick mix of tax incentives and tariffs during his first term with mixed results. The highest profile project, a US$4.5 billion plant that Apple Inc supplier Foxconn promised to build in Wisconsin, fell far short of its promises to employ some 13,000 people in the swing state and is widely seen as a dud. 

During Trump’s four years in office, foreign investors announced new projects in the US worth US$358 billion, according to United Nations (UN) data. That was a 22% increase from the four years before. 

But Trump’s four-year haul has been outstripped during President Joe Biden’s first three years in office, with foreign investors announcing US$426 billion in new factories, power plants and airports by the end of 2023, according to the UN. Biden’s investment boom has been driven by billions in government subsidies intended to promote the building of semiconductor and green energy plants in the US. 

The economy is a defining issue of Trump’s race against Harris, with polls showing voters favour the Republican presidential nominee on the issue, even as his Democratic rival has made inroads. 

Trade retaliation

Savannah, a growing port city in a swing state, was intended to highlight Trump’s goal of transforming the US economy into a greater exporter.

Economists said the combination of lower corporate taxes and threat of higher tariffs would likely prod some production to relocate to the US — though not without costs — warning that the policies would stoke inflation and kick off another round of global protectionism as trading partners retaliate.

“Trump’s policies are likely to set off a new era of protectionism around the world that will roll back trade integration and the benefits that consumers and firms have accrued,” said Eswar Prasad, a former International Monetary Fund official now at Cornell University.

If Trump wins, his efforts will hinge on his ability to steer a corporate tax cut through Congress. Analysts say more details are needed to understand how the policy proposal impacts trading partners and companies.

Still, the warning signs are clear, economists say.

The promise to impose new tariffs on manufacturers would likely see a rush of imports to the US, as companies race to get their products to the American market ahead of any changes, and with knock-on consequences for world trade in the months after, said Inga Fechner, a Frankfurt-based global trade economist at ING.

“If Trump is elected as the US president, structural competitiveness and stricter trade policy measures worldwide are likely to intensify, affecting global trade in goods,” she said.

Source: Theedgemarkets

On Sept 16, Intel CEO Pat Gelsinger wrote to his staff on how to meet the headwinds facing Intel, including specific comments on Intel Malaysia operations. The key moves involved: (a) spinning off its foundry business which incurred losses of US$2.8 billion (RM11.8 billion) in the second quarter alone as an independent subsidiary; (b) a strategic collaboration with Amazon Web Services (AWS), with co-investment in custom chip designs, such as an AI fabric chip for AWS on Intel 18A, a custom Xeon 6 chip on Intel 3, including designs based on Intel 18A, Intel 18AP and Intel 14A chips; (c) announcement of awards valued up to US$3 billion in direct funding under the CHIPS and Science Act from the US government; and (d) continued consolidation and restructuring to deliver US$10 billion in cost efficiencies, which included laying off 15,000 staff by the end of the year.

In terms of production by geography, Intel will continue to invest in wafer fab projects in the US, whereas in Europe, projects in Poland and Germany would be delayed by approximately two years. “Malaysia remains an active design and manufacturing hub through our existing operations. We plan to complete the construction of our new advanced packaging factory in Malaysia but will align the start-up with market conditions and increased utilisation of our existing capacity,” Gelsinger said.

Intel’s restructuring occurs within a buoyant semiconductor market condition, where the latest industry statistics show that global semiconductor industry sales hit US$51.3 billion in July 2024, an increase of 18.7% compared with July 2023. The Americas market experienced particularly strong growth in July, with a year-on-year sales increase of 40.1%.

As McKinsey identified in its 2020 review, the semiconductor industry is dominated by a few top players who almost monopolise specific chips in certain sectors, such as Intel dominating the PC market, Qualcomm chips in the smartphone market, TSMC manufactures chips at 10nm or below, ASML produces the bulk of advanced lithography equipment, Samsung produces memory chips and Nvidia dominates the graphic cards market. Once a company achieves leadership in manufacturing and research and development (R&D) through intellectual property rights protection, it not only wins a dominant share of that market sector but it then enjoys, through economies of scale, lower costs and increasing competitiveness.

Consider fab construction. The cost of building and equipping an advanced semiconductor production facility with 5nm chip output now runs about US$5.4 billion — more than three times the US$1.7 billion required for a fab with 10nm production lines. The high costs of building and running these fab plants mean that asset-heavy vertically integrated companies like Samsung and Intel have a high asset base. Fabless producers like Nvidia, Qualcomm and so on, which outsource their production to TSMC, concentrate on software and chip design and accordingly have a smaller asset base and higher revenue.

Although Intel’s wafer fab projects have consumed over US$120 billion in asset investments, its revenue lags behind some of its key competitors. Samsung generates almost four times more revenue than Intel, at US$209 billion. In addition, Intel’s revenue trails behind specialised competitors like Nvidia and TSMC. In terms of market cap, Intel’s current market valuation of US$91 billion is no longer in the ranks of the top 10 semiconductor companies globally. With a slide in share prices, the employee or management share options are worth less than before, which means that attracting or retaining top talent through share option incentives would be less effective than for companies whose share prices are still rising.

German semiconductor Infineon, which has just invested almost US$8 billion in building a new fab plant in Malaysia, saw its revenue growth averaging 18% between 2020 and 2023 while market cap grew 8% per annum on average, both higher than Intel’s growth.

The separation of Intel’s foundry business into an independent subsidiary means that Intel is moving towards a fabless model. By collaborating with tech giant Amazon in chip design and production for Amazon’s specific needs, Intel has now recognised that it needs to sharpen its manufacturing processes and design capabilities, in one sense operating similarly to TSMC’s collaboration with Apple. These large-cap tech giants, with market valuations of more than US$1 trillion, can afford to co-share the high investment with Intel for these specialist chips.

One of the reasons why the semiconductor market is still booming is due to the rise of artificial intelligence (AI), which requires huge data centres to crunch the Large Learning Models. Moreover, as geopolitical tensions increase, higher defence spending means that the demand for smaller, faster and specialist chips with high memory for specific military uses will remain strong.

The demand for chips will continue to increase by quantity, as will the supply, but as the global semiconductor supply chain begins to decouple, when China begins to design and manufacture its own chips, the risk is that existing large American, European, Japanese and South Korean companies will face losing market share in the China market to Chinese domestic chipmakers. The Chinese market is already the world’s largest consumer of semiconductors, purchasing more than 50% of the chips manufactured globally. At the same time, China has also been the biggest buyer of semiconductor production equipment. One in two of ASML’s lithographic machines were sold in China in the second quarter of 2024. Further curbs or sanctions by the US on ASML sales to China would hurt ASML sales. Lower sales with high fixed asset and R&D costs mean that chip and production costs in a decoupled semiconductor market would inevitably rise.

Assembly test and packaging manufacturing used to be a high-cost and low-margin business which was offshored or outsourced to Asian countries. Penang was the first offshore assembly plant for Intel, and Malaysia’s semiconductor strategy goal is also set to make the country one of the top overseas advanced 3D packaging facilities.

We are now seeing different multinationals, as well as Chinese and other investors, coming to Malaysia to build data centres as well as new advanced packaging facilities. Domestic advanced packaging companies and semiconductor equipment makers will have to continue to invest in R&D and collaborate with foreign partners in order to maintain a competitive edge in the global semiconductor ecosystem.

This is both an exciting phase of market development, fraught also with uncertainties. One thing is for sure — the funding costs of the semiconductor market will continue to rise, meaning that only the tech giants with big market caps or governments with deep pockets will be able to stay in the game of the high tech, high stakes semiconductor market. There are also market niches where smaller and more nimble players can survive or even thrive. That’s the core business of private equity and more speculative tech-based stock markets.

Source: Theedgemarkets

U.S. fiscal health is expected to deteriorate further as political polarization makes it hard for any new presidential administration to negotiate steps needed to reduce the national debt burden, according to ratings agency Moody's.

The U.S. sovereign fiscal profile is likely to weaken under either of the candidates in the Nov. 5 presidential election - Democrat Kamala Harris and Republican Donald Trump, the agency said in a report issued .

"The incoming administration will face a deteriorating U.S. fiscal outlook, as declining debt affordability will gradually weaken U.S. fiscal strength," the report stated. "In the absence of policy measures that can curb these trends and help limit fiscal deficits, deteriorating fiscal strength will increasingly weigh on the U.S. sovereign credit profile."

Moody's lowered the outlook on its triple-A U.S. credit rating to "negative" from "stable" in November 2023.

That came months after a rating downgrade of the sovereign credit profile by another ratings agency, Fitch, following political brinkmanship around raising the U.S. debt ceiling.

Moody's remains the last of the three major rating agencies to maintain a top rating for the U.S. government. Fitch changed its rating from triple-A to AA+ in August 2023, joining S&P, which has had an AA+ rating since 2011.

Moody's said it expects the U.S. government to run fiscal deficits of around 7% of gross domestic product per year over the next five years, and that deficits could rise to 9% by 2034, which would push the debt burden to 130% of GDP by then from 97% last year.

"U.S. fiscal strength will materially weaken in the absence of meaningful policy steps to reduce the fiscal deficit, rein in new borrowing to fund those deficits and slow the rise in interest expense that consumes an increasingly large share of government revenues," the agency said.

"These debt dynamics would be increasingly unsustainable and inconsistent with an Aaa rating if no policy actions are taken to course correct," it added.

Fitch said last month the U.S. fiscal profile is likely to remain largely unchanged regardless of who wins in November.

COMPOSITION OF CONGRESS

A decisive factor for the U.S. sovereign fiscal outlook will be not only the outcome of the presidential race, but also the composition of Congress as determined in the November elections, as the balance of power in the legislature could limit an incoming administration's ability to secure passage of legislation, Moody's said.

Congress is currently divided, with the House of Representatives narrowly controlled by Republicans and the Senate by Democrats.

"We anticipate that the U.S. government will remain divided, preventing sweeping fiscal reforms by the new administration. As a result, fiscal policy proposals by both candidates will likely require intense bipartisan negotiations and compromise," Moody's said.

On the other hand, a potential sweep by either party could lead to material changes in policies that may have broader effects on the economic growth outlook and the credit profile of public and private sector entities.

"Credit risks lie in the possibility of abrupt and disruptive changes to tax, trade and investment, immigration and climate policies among other areas," it said.

Trump said last month that U.S. presidents should have a say over decisions made by the Federal Reserve, indicating he could break with traditional policies toward the independence of the central bank.

Moody's said political influence over monetary policy decisions would be "credit negative" and may have repercussions on investor confidence in the U.S. financial markets.

More broadly, an "erosion of institutional strength can undermine confidence and impair the implementation of countercyclical policies, negatively affecting growth, financial markets and the operating environment for debt issuers," it said.

Source: Theedgemarkets