The uncertainty that weighed on U.S. businesses in 2018 is unlikely to wane this year. If anything, it may grow worse as corporate America faces greater scrutiny from empowered congressional Democrats while contending with Trump administration trade policies that have disrupted supply chains and curbed profit.
The White House’s double-digit tariffs on nearly half of U.S. imports from China, levies on steel and aluminum shipments, and uncertainty over the future of a key agreement between the U.S., Mexico, and China are all dragging on global commerce.
And even though manufacturers have already begun replacing Chinese supplies with purchases from countries like Vietnam, South Korea, and Mexico, their expenses may still climb, according to Randy Frederick, vice president of trading at Charles Schwab & Co.
“As most of these countries have higher labor costs than China, those higher input costs must be absorbed by a combination of higher prices to the end consumer or lower profit margins — in most cases, both,” he told the Washington Examiner. “Neither bodes well for earnings growth in 2019.”
The challenges are increasingly priced into U.S. stock markets, which ended 2018 with frenetic fluctuations despite record profits for many companies after a GOP-controlled Congress reduced the top corporate tax rate to 21 percent from 35 percent in late 2017. Experts predict earnings growth will dwindle this year as the effect of those cuts wanes.
And with Democrats regaining control of the House of Representatives, drugmakers, big banks, tech giants, and other sectors are bracing for not only more oversight but the risk of sweeping legislation that could crimp profits.
Big Pharma
Drug companies appear unfazed so far by the Trump administration’s attempts to lower treatment costs, but the stakes will rise in 2019 with Democrats in control of the House and several sweeping proposals from the administration poised to advance.
Among other things, Democrats are seeking to target the patents that allow brand-name drugmakers to profit from blockbuster medications for a decade or longer. It’s a fiercely protected part of the industry ecosystem, however, and alterations are unlikely to get the Republican buy-in necessary for passage.
Most far-reaching is a bill from Sen. Elizabeth Warren — the Massachusetts Democrat who recently formed an exploratory committee for a 2020 presidential run — that would effectively turn the federal government into a generic drug manufacturer.
“No private manufacturer will ever be able to compete with a product that is essentially subsidized in its entirety by the federal government,” one drug lobbyist said. “What an expensive, administratively complex, and utterly impractical solution.”
In addition to fending off unwanted policy shifts on Capitol Hill, the industry will also be fighting a proposal from the Trump administration to tie reimbursement rates for the sector’s most lucrative medications to international pricing. Opponents argue such a system embraces socialist ideals, given that several countries impose price controls to keep treatment costs down.
Big Tech
In one of the most consequential years for social media firms in the past decade, 2018 set the stage for new regulations that may force the industry to reconsider how companies gather, utilize, and protect user data.
In the aftermath of Facebook’s Cambridge Analytica scandal — in which a consultant linked to Trump’s 2016 campaign improperly gained access to personal data of some 87 million users — Congress set its sights on consumer privacy protection, and companies like Twitter and Apple were caught in its crosshairs, too.
Crafting such a measure, however, has been an historically difficult task. And with a diverse coalition of stakeholders — many that have conflicting desires — the effort is expected to be one that fuels significant lobbying this year.
Big Banks
Large U.S. financial institutions just completed one of their best years ever as the GOP-led tax law fueled record profits, and many will benefit from rising interest rates, which they pass on more quickly to borrowers than depositors. The latest increase — in December — also heightened volatility in financial markets, which may benefit the trading desks of Wall Street firms.
There are pitfalls ahead, however. Rates that remain relatively low overall may spur banks to extend riskier loans in order to grow, stoking fears that lenders will be caught flat-footed in the event of an economic downturn.
Their leaders may have to address such concerns under the lights of a congressional hearing room: House Democrats, led by Financial Services Committee Chairwoman Maxine Waters of California, are expected to conduct more stringent oversight of the industry in 2019 than their GOP colleagues did while holding the majority.
Wells Fargo, the third-largest U.S. lender, may face particular scrutiny. The San Francisco-based lender recently agreed to pay $575 million to settle claims from all 50 states that its lending practices harmed customers, the latest in a series of agreements after a 2016 deal with regulators over the creation of millions of unauthorized customer accounts.
Congressional interest will likely remain heightened through 2020, with potential presidential campaigns by Democratic financial-industry critics like Warren and Sens. Bernie Sanders, I-Vt., and Sherrod Brown, D-Ohio.
Detroit’s ‘Big Three’
Carmakers were on edge for much of the past year as the Trump administration irked Canada and Mexico with double-digit metals tariffs while forcing renegotiation of the North American Free Trade Agreement.
While talks yielded a deal, the U.S.-Mexico-Canada Agreement faces uncertain odds in Congress. And a potential move by the White House to fully withdraw from NAFTA — to force Democrats to approve the new pact or risk a future without any agreement — would upend complex supply chains that stretch across the three countries’ borders.
Equally as consequential, the U.S. and China are working on a broad deal to address a trade imbalance between the two nations and Beijing’s theft of U.S. intellectual property. Should an agreement not be reached, the White House says it’s prepared to impose new tariffs on $267 billion in Chinese products and more than double existing levies on $200 billion in shipments.
Such an escalation would have dramatic consequences for U.S. carmakers who import many electrical components from China. Compounding concerns, manufacturers are already struggling to revamp operations to address shifting markets for automobiles.
Ford previously announced it would lay off workers amid an $11 billion restructuring plan after profits plunged in the three months through June, and General Motors is facing federal pressure over its decision to shutter several North American plants and cut 15 percent of its workforce.
