Policy Risk Monitor – January 16, 2025
A weekly news scan of key policy areas to help firms identify and monitor policy risks.
Tax
Treasury Nominee Says Extending Tax Cuts is Most Important Issue
Treasury Secretary nominee Scott Bessent said extending the 2017 tax cuts is “the single most important economic issue of the day,” in testimony before the Senate Finance Committee. “This is pass-fail. If we do not fix these tax cuts, if we do not renew and extend, then we will be facing an economic calamity and, as always, with financial instability that falls on the middle and working class.” Bessent said Trump administration must prioritize investment that grows the economy over "wasteful spending that drives inflation." He said “President Trump has said Social Security and Medicare will not be touched.” He also said he would ensure that the U.S. dollar remains the world's reserve currency.
Trump Indicates Support for SALT Deduction Increase
President-elect Donald Trump told New York Republicans to negotiate a “fair number” for the deduction for state and local taxes (SALT). “The president certainly wants to increase the deduction for SALT to provide more relief, because he knows that our mayors and governors are crushing taxpayers,” Rep. Nicole Malliotakis told Politico. The Tax Cuts and Jobs Act (TCJA) limited the SALT deduction to $10,000. During the campaign, Trump announced that he would support eliminating the $10,000 limit, but his economic advisers have since supported doubling the deduction limit to $20,000. One option could be to index the limit so it keeps pace with inflation.
Democratic and Republican members of Congress from states with high property taxes want the limit removed or raised, but Republicans from low-tax states oppose the change. Rep. Mike Lawler of New York said. “I’ve been very clear from the start, I will not support a tax bill that does not lift the cap on SALT.” Other Republicans are concerned about the impact of the SALT deduction on their plans to reduce the deficit. There is concern that these differences could frustrate Trump’s tax agenda given the Republicans slim majority in the House.
Trade
Trump Says He Will Create an “External Revenue Service” for Tariff Collections
President-elect Donald Trump said he will establish a new “External Revenue Service” to collect tariffs, duties, and other foreign revenue. The Commerce Department, U.S. Trade Representative, and U.S. Customs and Border Protection currently collect these revenues. Trump posted on his Truth Social network:
"Through soft and pathetically weak Trade agreements, the American Economy has delivered growth and prosperity to the World, while taxing ourselves," Trump wrote on his social media platform Truth Social. "It is time for that to change. I am today announcing that I will create the EXTERNAL REVENUE SERVICE to collect our Tariffs, Duties, and all Revenue that come from Foreign sources. We will begin charging those that make money off of us with Trade, and they will start paying, FINALLY, their fair share. January 20, 2025, will be the birth date of the External Revenue Service. MAKE AMERICA GREAT AGAIN!"
Trump Team Discussing Gradual Tariffs Using Emergency Powers
President-elect Donald Trump’s economic team are discussing increasing tariffs gradually each month by about 2% to 5%, Bloomberg reported. This approach is intended to increase negotiating leverage while limiting inflation. The president would use executive authority under the International Emergency Economic Powers Act to impose the tariffs. The advisers working on the plan include Scott Bessent, nominee for Treasury Secretary, Kevin Hassett, incoming director of the National Economic Council, and Stephen Miran, nominee for chair of the Council of Economic Advisers.
Canada Prepares Retaliatory Tariffs on U.S. Products
Canada is preparing tariffs on up to $105 billion in U.S. imports if President-elect Donald Trump puts tariffs on Canadian goods and services. Trump has threatened to impose 25% tariffs on all Canadian goods. Canada’s plan includes a list of targets that could include almost all U.S. exports to Canada. Canada’s trade chief would not rule out an export tax on Canadian oil and gas to the United States. During his first term, Trump put tariffs on Canadian exports of steel and aluminum to the United States. Canada then imposed retaliatory tariffs on a limited number of U.S. products.
Mexico Introduces Plan to Reduce Imports from China
Mexican President Claudia Sheinbaum announced an economic plan to reduce imports from China Under “Plan Mexico,” the government would offer tax deductions and other incentives for nearshoring and increase the local content of goods made in Mexico. The announcement aligns Mexico’s trade relations with the United States and Canada.
Biden Adds More Chinese Companies to Xinjiang Forced Labor Ban
The Biden administration banned 37 companies from China’s mining, solar, and textile sectors for alleged human-rights abuses under the Uyghur Forced Labor Prevention Act. The additions bring the total to 144 companies since the law was passed in 2021.
Biden Proposes New Export Controls on AI Computer Chips
The Biden administration proposed a new regulatory framework for export controls on computer chips and technology used in advanced artificial intelligence (AI) projects. The framework could impact 120 countries. The controls are intended to slow China’s development of AI and preserve U.S. leadership in AI and of AI-related computer chips. “If it’s China and not the United States determining the future of AI on the planet, I think that the stakes of that are just profound,” said White House national security adviser Jake Sullivan said.
The framework three-pronged strategy: (1) updates controls for advanced computing chips by requiring authorizations for exports, reexports, and transfers (in-country) involving a broad set of additional countries; (2) institutes new controls on the model weights of the most advanced closed-weight AI models; and (3) imposes security conditions to safeguard the storage of the most advanced models in destinations to protect U.S. national security and to mitigate the risk of diversion for advanced computing chips.
Energy
EU Considering Phasing Out Russian LNG
The European Union is considering restrictions on imports of Russian aluminum and phasing out imports of Russian liquefied natural gas (LNG), Bloomberg reported.
Foreign Policy
Rubio Says United States Will Have More Aggressive Policy toward China
Marco Rubio, nominee for Secretary of State, said the United States under the Trump administration will stay committed to core allies, have a more aggressive strategy toward China, and take a more “realistic” approach to humanitarian aid and global crises if they do not “advance U.S. interests.” Rubio outlined an “America First” foreign policy in testimony before the Senate Foreign Relations Committee. He said China is “the most potent and dangerous near-peer adversary this nation has ever confronted.”
Rubio noted that China dominates critical global supply chains and is a competitor in science and technology, global markets, and political and military influence, according to the Washington Post. It is wholly unlike the Soviet Union and other adversaries the United States has faced. “We have to rebuild our domestic industrial capacity, and we have to make sure that the United States is not reliant on any single other nation for any of our critical supply chains,” Rubio said.
“If we don’t change course, we are going to live in the world where much of what matters to us on a daily basis from our security to our health will be dependent on whether the Chinese allow us to have it or not,” Rubio said, according to the AP.
Economic Policy
Treasury Nominee Says Dollar Will Remain Global Reserve Currency
Treasury Secretary nominee Scott Bessent said he would ensure that the U.S. dollar remains the world's reserve currency. He also testified that the Federal Reserve should stay independent. He noted that high debt reduces the U.S. fiscal ability to fight crises. Bessent also expressed support for stronger sanctions on the Russian oil sector.