context: Domestic policy advisors are concerned about the effects of Trump's tax plan. This commentator argues that the aim of the plan is not only short-term stimulus to the economy, but more importantly a structural reform that addresses loopholes that incentivise multinationals to flee to tax havens.
The real issue in the United States plan to reduce corporate tax from 35 to 21 percent and tax overseas profits is its effect on multinationals, argues Zhang Monan 张茉楠 China International Economic Exchanges Centre researcher. Her research shows that MNCs account for 60 to 70 percent of value created in global trade. To this end, Trump seems to have made a smart move, notes Zhang; by forcing capital and manufacturing to relocate back to the US, Trump is propping up the global competitiveness of American MNCs and the rest of its businesses. The tax reform is designed to fill loopholes in the US tax system and bring investment back to the US, she notes.
That makes the tax reform larger than the tax reduction itself, and signals a fundamental shift in the global industrial investment environment, says Zhang. In her analysis, the global trade cycle and global capital flows will be profoundly impacted.
China must pay strong attention to this, she urges, because it was a major beneficiary of the last round of globalisation initiated by Reagan. By becoming the preferred processing hub for multinationals, China connected to the upstream and downstream and has become a crucial link in global value chains.
Zhang suggests China accelerate its transformation away from manufacturing and towards market and innovation-oriented investment to further promote its global influence and attractiveness for industrial and financial capital.