Global Opportunities Beyond the Radar

Why Trump’s Tariffs Won’t Work

US China trade war

Trade war…?

No, it’s got nothing to do with it!

That’s what US officials were telling the press over the weekend.

In case you didn’t see, a Huawei executive and the founder’s daughter are now in handcuffs. And it was at the request of the US government.

China is outraged, of course.

They are demanding the release of both.

And now, investors see no hope for a trade truce.

It’s one of the reasons the markets collapsed yesterday.

The All Ordinaries fell more than 2%. We’re now down more than 8% for the year.

But it doesn’t matter.

This whole trade war is pointless anyway.

The US is fighting a losing battle and China is fighting an unwinnable battle.

Let me explain why…


Tariffs will not bring back jobs


When you look at China, you’re looking at a currency manipulator. They keep their currency cheap (compared to other foreign exchange rates). And that keeps their goods cheap.

They’ve also got a cheap labour pool, though it’s generally gotten more expensive over time.

For the American manufacturer, it’s a no brainer. You move operations to China or another nation like it. Otherwise, you get gouged on price.

The problem is, you can’t just set up factories in China.

You need to enter joint venture (JV) agreements. You can’t own the whole operation in most cases. Plus, there’s a chance you’ll have to give up property knowledge or processes to your JV Chinese partner or the government.

This is where Trump comes in.

He hates that China gets away with this.

Cheap goods from China are already killing US manufacturing jobs. On top of that, they’re taking American technology and American innovation to make themselves better and stronger.

It’s not something you want if you’re the ‘America first’ guy.

So, we find ourselves with a whole bunch of tariffs flying around.

The latest deadline for tariff hikes is March next year. By that time, tariffs on $270 billion of Chinese imports will jump from 10% to 25%.

So, the US is taxing China where it hurts. And China is taxing the US where it hurts.

The hope is one side will relent before the other.

Trump’s goal (I’m assuming) is to bring back those manufacturing jobs and limit technology transfers to China.

But no matter what taxes he puts on China, nothing will bring back those jobs.

And it has very little to do with China’s cheap labour advantage.

The impact of Trump’s tariffs on globalisation

I believe in the next few years, you’ll see globalisation and trade (especially for manufacturing) work in reverse.

If we wind back the clock for a moment, globalisation and trade was one of the biggest innovations of civilisation.

Nations specialised in their advantages. Prices for all goods and services dropped. Efficiency gains were exponential.

The commoners of the 1800s were for the first time living far better than the aristocrats and the royals a generation before.

And what I expect will happen is the opposite in the next few years.

Cheap labour will no longer be an advantage. Efficiency gains like automation and robotics will improve output to the point where domestic supply meets demand.

And because automation and robotics have gobbled up all the jobs, the US will have a jobless manufacturing revival.

To see the point, take a look at US manufacturing output (first graph). The industry is improving. There’s just little to no jobs associated with it (second graph).

Source: Federal Reserve Bank of St. Louis

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Source: Federal Reserve Bank of St. Louis

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We’ll reach a point where the US won’t need to import a whole lot of manufactured goods.

Local supply, from local suppliers, will be enough to meet local demand.

And instead of moving operations to China, advantages will be in local infrastructure and local customisation.

This won’t just happen in the US. It will happen in many developed nations.

Instead of being a net importer of cheap manufactured goods, operations will be domestic. And it will be the local low-cost producer, which can customise for local tastes, that will dominate.

The only problem is (well, Trump might see it as a problem) there will be little to no job creation associated with this manufacturing revival.

So, even if Trump puts more tariffs on Chinese goods tomorrow, US businesses will either buy from Vietnam or Thailand.

Or they’ll buy from the US manufacturer, who is letting more and more workers go each year.

This will be a tough transition for the labour force, there’s no doubt about it. Manufacturing workers are going to have to learn new skills, maybe even jump into the service sector.

It will put a lot of temporary strain on developing economies. But in the long run they’ll be better for it.

For you as an individual investor, you may want to look local. Local businesses that have existing infrastructure could make them dominant in their sector.

They could have knowledge, technology or physical assets competitors don’t have and would find hard to replicate.

Find these stocks and hold them!

Your friend,

Harje Ronngard

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