The unexpected victory of Donald J. Trump in the 2016 U.S. Presidential election has raised numerous questions about the likely impact of a Trump Administration on the business community and the global economy. Because Mr. Trump offered few specific policy proposals during the campaign, it is unclear what policies he will pursue once in office. And while the Republican Party retained control of the Senate and the House of Representatives, putting both the Executive and Legislative branches of the U.S. government in unified control for the first time in six years, Mr. Trump campaigned as a populist outsider and his Administration may deviate from traditional Republican approaches in such areas as trade and entitlement reform.
In addition, because of the tepid support he received from the current and former elected officials and policymakers during the campaign and his lack of prior political experience, it is also unclear how President-elect Trump will structure and staff his Administration. Moreover, many of the President-elect’s chief advisors and principal surrogates have not been Washington insiders and include several critics of the Congressional Republican leadership. Many Republicans who served in past Administrations, particularly in the national security area, publicly stated during the campaign that they would not serve in a Trump Administration, and – even assuming that some of those individuals have had a change of heart – it is unclear that they will be asked to join the new government.
Another reason it is difficult to predict the makeup of Trump’s Administration is that hiring a candidate for a high level role in the federal government is not as simple as it might appear. There are over 4,000 political appointees in the executive branch, a far higher proportion than in most Western governments. Of these, more than 1,200 require confirmation by the U.S. Senate, a process that can involve a detailed review of candidates’ financial, tax, business, and public records. The Senate confirmation process, which can be derailed by arcane points of Senate procedure, can take months to complete, even for uncontroversial candidates. Individuals entering the federal government must also contend with a range of other legal hurdles, including financial disclosure and ethics laws that can prompt the divestment of significant holdings, as well as the onerous security clearance process. As a result of these obstacles, many candidates for executive branch positions retain private counsel to help them navigate the process.
Over the next two months, the Trump Transition Team will move to staff many of the key positions in the Trump Administration, and will also outline an initial set of policy objectives for the Administration, likely with a focus on the first 100 days. As a result, it should be more clear by Inauguration Day (January 20, 2017) how the Trump Administration is likely to approach, at least as an initial matter, several of the policy areas that may be of interest to multinational entities.
Below we have set out a list of important issues and decisions to watch during the Transition period for a number of key policy areas:
Will Dodd-Frank be repealed?
One issue for the Trump Administration is whether and to what extent to repeal the regulatory scheme established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was adopted in 2010 to address the causes of the financial crisis. At present, full repeal of Dodd-Frank is considered to be unlikely. Rather, it is anticipated that the Trump Administration will work with Congress to repeal individual provisions of the law.
Prime targets for repeal include the Volker Rule, which limits banks’ proprietary trading activities, and the imposition of special capital requirements for firms deemed to be "systemically important financial institutions" by the Financial Stability Oversight Council. A potential framework for reform is the Financial CHOICE Act, a bill sponsored by Republican Representative Jeb Hensarling (the Chairman of the House Financial Services Committee) that would repeal the Volker Rule and loosen certain other regulatory requirements, while potentially increasing capital requirements for the largest banking organizations. Other elements of the Financial CHOICE Act that may be taken up by the Trump Administration include eliminating risk retention requirements for asset-backed securities (for classes other than residential mortgages), repealing registration and examination requirements for advisers to private equity funds, removing many of the Dodd-Frank executive compensation rules, and enhancing Congressional oversight of the Federal Reserve.
Another potential target for reform is the Consumer Financial Protection Bureau ("CFPB"), the agency created by Dodd-Frank to oversee consumer protection in the financial sector. The Trump Administration and Congressional Republicans may seek to eliminate the CFPB, though at this point reform of the Bureau appears to be more likely. Reform measures may include replacing the CFPB’s director with a multimember commission, repealing several of the CFPB’s recent rulemakings, and changing the Bureau’s funding to make it subject to the usual Congressional appropriations process.
Could Glass-Steagall return?
The Trump Administration may also advocate for the reinstatement of Glass-Steagall, a law dating back to the Great Depression that required a separation between commercial and investment banking. President-elect Trump called for a "21st Century" version of Glass-Steagall while on the campaign trail, and Senator Bernie Sanders and other leading Democrats have also supported reinstating the divide between commercial and investment banking. Enactment of such requirements would require a complex and potentially destabilizing reorganization of many of the largest banking organizations, a countervailing consideration that may deter such action.
With respect to financial services regulation, much will turn on who the Trump Administration chooses to fill key positions. These include the Secretary of the Treasury, who acts as the principal economic advisor to the President and has broad responsibility for economic and financial policymaking, the Chairman of the Securities and Exchange Commission, which is responsible for regulations and civil enforcement affecting the securities industry, and the Chairman of the Commodity Futures Trading Commission, which is responsible for regulations and civil enforcement affecting futures and options markets. Another critical position is Chair of the Federal Reserve Board, though incumbent Chair Janet Yellen has indicated she intends to serve through the end of her term, in January 2018.
What will happen to Obamacare?
During the campaign, President-elect Trump advocated replacing the Affordable Care Act (generally known as "Obamacare"), a position that has long been advocated by Republicans in Congress. Since the election, Mr. Trump has indicated that he would like to consider retaining certain of the more popular features of Obamacare, such as the rule that prohibits insurance companies from denying coverage for pre-existing conditions, though it is unclear how those features, which entail significant moral hazard, could be incorporated into a new system without mandating participation by healthy Americans, a feature of Obamacare broadly reviled by many of Trump’s allies.
What are the GOP’s plans regarding Medicare?
In the period immediately after the election, Speaker of the House Paul Ryan mooted a proposal to privatize Medicare, the single-payer healthcare insurance system for Americans 65 and older. While Medicare reform has long been favored by Republicans in Congress, the issue was not a major flashpoint during the campaign, and it is unclear whether Trump is likely to support Speaker Ryan’s proposal. Medicare privatization is strongly opposed by Democrats, and this issue is already shaping up to be one of the major conflicts for the coming legislative session.
The key agencies for administering changes to Obamacare or Medicare are the Department of Health and Human Services ("HHS") and the Centers for Medicare and Medicaid Services ("CMMS"). President-elect Trump recently chose Representative Tom Price of Georgia and Seema Verma, the CEO of health policy consulting firm SVC Inc., to head HHS and CMMS, respectively. Representative Price has indicated his support for repealing both Obamacare and Medicare.
TRADE AND SANCTIONS
Is there a path forward for the Trans-Pacific Partnership ("TPP") and the Transatlantic Trade and Investment Partnership ("T-TIP")?
President-elect Trump casts future U.S. participation in the TPP and T-TIP into doubt. For a Republican, Trump has been notably hostile to trade liberalization, and has roundly critiqued the TPP as a "bad deal." Combined with growing anti-trade sentiment on the left wing of the Democratic party, Trump’s trade skepticism also makes further progress on T-TIP negotiations highly unlikely.
What is likely to happen to the North American Free Trade Agreement ("NAFTA")?
President-elect Trump has also expressed hostility towards NAFTA, and has indicated that he intends to renegotiate the deal with Canada and Mexico. The NAFTA Treaty contains a withdrawal clause, and if the Trump Administration does not win concessions from other NAFTA participants, Mr. Trump has indicated that he may seek to unilaterally exit the agreement. Doing so, however, could raise novel questions of U.S. constitutional law regarding presidential authority to exit treaties, and it is unclear whether Trump would have the authority to trigger withdrawal without Congressional approval. In the event that Congressional approval is required, the pro-trade bloc in Congress may be able to prevent a NAFTA exit.
Will the Trump Administration impose new tariffs?
President-elect Trump has proposed charging significant tariffs on goods from countries such as China and Mexico, including a 35 percent tariff on cars built in Mexico by Ford and a 45 percent tariff on Chinese goods. As with other trade issues, one key consideration is the extent of presidential authority to act unilaterally. Congress is constitutionally charged with imposing tariffs, though Trump may be argue that existing laws give him sufficient authority to impose tariffs by executive action without seeking new legislation.
What approach will the Trump Administration take to sanctions on Russia, Iran, and Cuba?
While President-elect Trump has offered little guidance on how his administration will manage economic sanctions, it is likely that sanctions will continue be a frequently deployed foreign policy tool during the next four years. With regard to specific sanctions targets, there is a general expectation that the new administration’s posture toward Russia will relax, while tightening toward Iran and Cuba. Stepped-up enforcement of existing sanctions would also not be surprising.
As the new Administration’s priorities become clear, it will be important to identify areas where U.S. sanctions goals veer from those of its allies. Materially conflicting approaches (e.g., between the EU and U.S. approach to Iranian and/or Russian sanctions targets) could create headaches for international corporates and financial institutions struggling to ensure compliance with all of the sanctions requirements that are applicable to them and their customers.
President-elect Trump’s focus on trade issues, including the renegotiation of existing trade deals, is likely to put the Office of the U.S. Trade Representative in the spotlight. In addition, the President-elect has proposed to consolidate some trade-related authority in the Commerce Department, in part by establishing a new "American desk" within the Commerce Department to manage the entire trade portfolio. Alternatively, given his interest in trade deals, Trump may have the White House play a more central role in trade issues.
What will happen on corporate taxes?
One area where Mr. Trump and the Republican Congress are in broad agreement is lowering corporate tax rates, and reforming the corporate tax code. This is likely to include a "repatriation holiday" for U.S. companies to bring overseas profits into the U.S. at a one-time reduced rate (e.g., 10%), along the lines of the last such holiday in 2004. A tax holiday may also be linked with infrastructure investment, as discussed further below. Overall, Mr. Trump has proposed to reduce the U.S. corporate tax rate from 35% to 15%, and to eliminate certain corporate deductions.
What will happen on individual taxes?
With respect to individual taxes, Mr. Trump has proposed cutting the top rates from 39% to 33%, and cutting the number of brackets from seven to three. He has also proposed to eliminate the special Obamacare tax surcharges. Lastly, he has proposed to cap deductions, and to eliminate the estate tax (other than capital gains held until death and valued at over $10 million (under existing law, the heirs acquire appreciated property at a basis equal to the value at the date of death or a later valuation date). On individual taxes, there are significant differences between the President-elect’s proposals and the tax reform plans issued by the Senate and House tax-writing committees, and many of the details would need to be hashed out in the legislative process.
Will the Trump Administration try to close the carried interest loophole?
Mr. Trump has also proposed to reform the so-called "carried interest loophole," under which profits earned by a general partner of a partnership are taxed at the lower capital gains rate, rather than as ordinary income. This special tax treatment results in significant savings for executives in private equity, real estate, and venture capital firms that use partnership structures. While the tax treatment of carried interest is controversial, the current scheme has a number of prominent defenders in Congress and on K Street from both parties, and repeal would likely involve a major legislative battle.
Will the Trump Administration push for major infrastructure legislation?
President-elect Trump has made investment in U.S. infrastructure a key plank of his campaign. Moreover, the need for infrastructure spending is a potential area of bipartisan agreement, with Congressional Democrats in particular having pushed infrastructure plans in recent years.
The big question with respect to infrastructure is how to fund higher spending. Trump has made a number of proposals on infrastructure funding, with a particular focus on encouraging private investment through tax incentives. The President-elect has also called for increased use of public-private partnerships (or "P3") and the establishment of a national infrastructure bank, as well as the adoption of regulatory reforms to facilitate development. Alternatively, infrastructure investments could be funded in part through deficit spending—despite the focus on deficits in recent years, there is some indication that Congressional Republicans may be more comfortable with deficits during a Trump Administration.
Will the Trump Administration build the Wall?
Finally, the future of the wall on the U.S.-Mexico border, one of President-elect Trump’s signature campaign proposals, is far from clear. The wall would be an enormous undertaking, and would require juggling issues relating to funding, logistics, and U.S.-Mexico relations. Much of the land on which the wall is to be built is currently in private hands, and in recent years Republicans have expressed hostility towards the use of eminent domain to expropriate private property.
For infrastructure spending, it is unclear what will be the key positions. Much depends on the structure of the infrastructure plan, and whether it relies on newly-created positions like an infrastructure bank. Moreover, Trump could establish an "infrastructure czar" as part of the White House staff to oversee efforts across federal agencies. For the wall, the most important position is the Secretary of Homeland Security, who is responsible for antiterrorism, border security, and immigration and customs. * * *
Much still remains to be done in the transition process, and the Trump Administration’s plans will almost certainly continue to change and evolve. We will continue to follow Mr. Trump’s planning and update our clients as necessary. Please contact any of the lawyers below if you have questions or would like to discuss these issues in greater detail.