Technology policy has been a low priority for most voters in presidential elections in the post-war era. The most recent contest was no exception. Arguments about technology policy never made it into campaign commercials, to say the least, nor even a minute of the televised presidential debates.
So it goes.
Many denizens of the high-tech world did not expect Donald Trump to win, woke up to his triumph, and suddenly wondered what impact his new policies might have on their business. Needless to say to anybody who paid attention, his campaign was not much help answering those queries, since he was not very specific about his technology policy.
This column considers two nonpartisan questions. How will his (likely) technology policies affect the value of US firms in information technology markets? Details about policy should become known in the first half of 2017, and they suggest a second question: What details should an investor care about, as the new administration hashes out the details?
Let’s start with trade, which was a visible aspect of Trump’s campaign. He expressed dissatisfaction with the position of the US in the world trade system. He focused on the exit of jobs in footloose manufacturing industries, the North American Free Trade Agreement (NAFTA), and China’s mercantilist actions.
What can changes in trade policy do to IT firms? At a general level, every large US tech firm is integrated into the world framework for trade, so tearing up the system could cause considerable damage.
Generally speaking, every large US firm sources inputs from outside the US and sells final products outside the US. Every major software firm uses programmers in the US and outsources some amount of work to programmers outside the US, and, again, sells their products to buyers outside the US. That goes for Apple, Cisco, IBM, Microsoft, HP, Oracle, Google, Facebook, and on and on. These firms will lose market share and profits if the costs of inputs and labor increase, or if the number of the potential buyers declines.
Since Trump’s populist antitrade tirades conflict with his generally pro-business attitudes, we should expect quite a fight inside the administration over the practical details of trade policies. Whether input and labor costs will increase, and how much, and whether market buyers will decline, and how much, cannot be determined until those details get set.
As for Trump’s dissatisfaction with Chinese mercantilism, most experts predict that his confrontational policy will go nowhere. I find these experts so persuasive that I’ll take a bet—$100 to your favorite charity or mine. You win if a major US IT firm improves its mainland Chinese market share in the next four years.
Beyond that, one additional trade question is worth watching. Several US firms, including Cisco, IBM, Google, Apple, and Facebook, have a large foreign presence and would like to repatriate their foreign earnings as US dollars without paying taxes. The Obama administration refused to initiate such a tax holiday, and Trump might think differently. That would move stock prices if implemented.
That adds up to a big unknown for firm values. The value of virtually every US-based IT firm depends on the outcomes of these policy debates. That supports an approach for investors: expect volatility across the entire sector and adopt investment strategies to hedge against it.
During the campaign Mr. Trump focused hostility toward immigration. Attention was directed at unskilled immigrants from south of the US border, as well as those from nations with Muslim majorities. Quite frankly, if immigration from Mexico slows, then industries other than high technology—such as agriculture, service work, and construction—will be most affected. It is hard to see any direct effect for IT firms arising from that type of policy.
What if the US (deliberately) started processing visas from Muslim-majority countries with more laborious delays? It would affect the visits of foreign executives from countries such as Dubai, Saudi Arabia, and Malaysia. That might affect boutique tourist and consulting businesses, but that touches only the edge of US IT firms.
Investors should focus on policies for high-skill immigrants. Every major high-tech firm employs high-skill immigrants, and this group comprises founders for many venture firms. Many high-skill immigrants have master’s degrees or PhDs from US universities. The present system works reasonably well for those with degrees.
Drastic changes—such as slowing the granting of visas and green cards to those with degrees—will slow down innovation in the commercial IT sector. That holds for virtually all US IT firms, so any slowdown hurts investments across the sector.
One aspect of high-skill immigration is difficult to forecast—namely, changes to the system for H1-B visas. The H1-B system is already rather constrained, and nobody expects that the Trump administration will try to reform it. More to the point, any tighter limits would hit a few firms hard. Will that happen? It is hard to say right now. Investors have to watch and wait.
Research and Development
A new administration also can change policy for R&D. Although it’s less visible to the average voter, the US government is the single largest funder of basic science and also a large funder of experiments in applied science.
This matters to US IT firms, who have benefited from this funding in the past. For example, new network engineering, search engines, AI, and robotics can trace their invention to federal funding. In addition, many computer scientists got their first experiences on projects funded by this federal money, which effectively subsidized US technology workforce training.
There is no reason to expect the emergence of additional technologies to be any less sensitive to federal funding, so changes to the funding level at DARPA and the National Science Foundation are key budgets to watch. The same goes for R&D funding at the National Institutes of Health, NASA, and the Department of Energy, which also support R&D that works its way into commercial IT products.
That adds up to a straightforward forecast: If the budget for R&D at these agencies declines, that is bad for the whole sector. Drastic cuts slow down innovation, whereas growth speeds it up across the entire portfolio.
The administration can have immediate impact through staff and personnel appointments to agencies that make commercial policy for high tech. For example, most observers expect the administration to appoint directors to the Securities and Exchange Commission who oppose government actions. Expect government regulators not to stop Wall Street banks from returning to the kind of self-serving (and sometimes unethical) actions observed in the 1990s during the IPO boom. Frankly, I think this will be bad for the US startup economy.
Investors also should expect the Federal Communications Commission (FCC) to appoint decision makers who will not intervene in Internet markets. Net neutrality will not be enforced, and many other recent initiatives will be reversed, such as those aimed at opening up the set-top box for cable television.
That will raise the value of big cable firms, such as Comcast, and other carriers, such as Verizon, because it will give them the upper hand in negotiations on a range of issues, such as zero rating, interconnection fees for moving data into ISP networks, and collocation fees for content delivery networks. Again, frankly, I think this will be bad for the value of content firms with big data applications, such as Netflix, YouTube, Facebook, and venture capitalists backing new streaming entrants.
Antitrust is a more ambiguous area. The Obama administration let 99 percent of mergers go through, and that will continue. The only open questions concern big mergers.
Watch the early test cases for clues about the general approach of the new administration. On the campaign trail, Trump expressed dismay about the proposed merger of AT&T and Time Warner, but most of his circle of advisors are hostile to blocking mergers. So, the outcome to that merger proposal will show a lot. Another test case could be a proposed merger between T-Mobile and Sprint, which the Obama administration’s appointees talked down before it was formally proposed. Will management attempt to resurrect it? We’ll have to watch and wait.
Also watch the administration policy in privacy, which the FTC took a lead on in the last few years. The issues are varied, subtle, and difficult. The policy outcomes make an enormous difference to product design and the operations of many firms, especially those in online advertising and healthcare. Again, investors will have to wait and see.
Similarly, Apple faced a quandary protecting privacy when it negotiated with the FBI about breaking into an old iPhone. The FBI learned of another way into the phone, so the broad issues never got resolved. The Obama administration sided with law enforcement, and Trump did too (even calling for a boycott of Apple). Expect more volatility from these issues. It is a wild card for values at many firms.
Overall, Trump’s policies look like a mixed bag for the value of many US IT firms, and contain many dangers. This much I can forecast: most savvy tech firms woke up the day after the election and added staff to their Washington lobby organizations. The cynic in me also expects the Trump administration to try a quid pro quo, such as offering a tax holiday as a bribe to gain silence on other issues.
That suggests a somewhat partisan forecast. I do not expect that most CEOs want their issues to be invisible in the next election. I also expect their stance next time to depend on their experience in the next few years.
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