Wednesday, 10 January 2018

Trump & Trade (1) - 12 Reasons Why US Cannot Turn Protectionist

Publish date: 
When he was still a presidential candidate, Donald Trump threatened to impose 45% tariff on imports from China. Last week, he forced Carrier to cancel its plan to relocate to Mexico, thereby saving more than 1,000 US jobs. He said that he will apply the same pressure tactics on other US manufacturers. Is this the beginning of American protectionism ? As an investor of export stocks, I have given some thoughts to this issue. My conclusion is that trade is a very complicated thing. Donald Trump is not really in a position to shut US off and turn inward. The followings are some of the reasons. 
 

1. Discourage Manufacturing Investment
What Donald Trump did to Carrier recently will discourage companies from investing in US manufacturing. Who dares to set up operation in US if they can ony go in and cannot get out ? We have seen this happens in Europe and india - strong unions make it difficult to fire workers. As a result, companies are very reluctant to hire even during boom time. If you are not careful, you will be stuck with employees you cannot get rid of during downturn. Push come to shove, they would rather spend on automation to meet the surge in demand. How is that good for jobs creation ?


2. Risk Of Crony Capitalism
Businesses should be left alone to make decisions by themselves with minimal interference from government. The Carrier case set a bad precedence because in the future, US companies will have to seek government approval for their investment decisions. Red tapes create oppurtunities for corruption. Just imagine how the system can be manipulated to serve the interest of those friendly to Trump. We don't even do that in Malaysia, let alone US. There will be pushback if Donald Trump really implement it large scale.  


3. Extortion By Companies 
The Carrier case opens up a can of worms. It agreed to stay in US in return for USD7 mil tax break over 10 years. Now every US manufacturer will start claiming that they are planning to relocate overseas. Then they can start negotiation with US government for tax incentives. Free money.


4. Painful For Consumers
The first victim of protectionism will be US consumers. Last time a pair of jeans cost USD10, now it costs USD14.5. 


5. Detrimental To Competitiveness
Due to globalisation, most manufacturing companies in US import a huge amount of components from overseas. Imposing tariffs will push up manufacturing cost, destroying their competitiveness.


6. Benefits Competitors Of US Manufacturers
In reaction to news that Donald Trump is pressuring Apple to move manufacturing jobs back to US, Global Times, a newspaper closed to Chinese government published an article to explain that that will be fantastic news for Chinese brands such as Huawei and Xiaomi, and helps them to steal market share from Apple. This is because the shift back to US will increase Apple manufacturing cost by USD2,000 per phone. As Apple is unlikely to fully absorb the higher cost, it will have to increase its retail price. That will be a big gift to its competitors. This is not only applicable to Apple but to all US products. How is that good for jobs creation ?


7. Destroy Service Related Jobs
When Obama was president, he imposed tariff on tyres imported from China. An economic think tank conducted a study to ascertain how much benefit it creates for America. They found that the tariff saved 1,200 manufacturing jobs. However, due to higher cost, certain retail businesses that sell the products ceased operation. That resulted in more than 2,000 job losses. In other words, you can't just look at jobs from manufacturing point of view. There are other sectors that will be adversely affected. 


8. Redirected To Other Countries
In the abovementioned case of Obama tariffs on Chinese tyres, Chinese suppliers were adversely affected. But American manufacturers did not really benefit much. Most of the imports were redirected to Indonesia and several other Asian countries. 
This is not only true for China but applies to everywhere else. Any tariff imposed on imports will cause US companies to source products from other low cost countries. How is that good for US manufacturing industry ?     


9. Republicans Are Pro Trade 
Following the latest election, the Republicans control both Congress and Senate. It is true that Donald Trump is a Republican and he can count on his own party to support him. But Republicans are traditionally pro trade (Democrats have strong relationship with Unions). US president can impose tariffs on imports, but it is only for 150 days. Beyond that, it will require Congressional approval to extend it. Donald Trump will face a lot of resistence from his own party if he pushes it too far.


10. Donald Trump Is Not A Socialist
Protectionsim can be simplified in one sentence - take value from businesses and pass it to the people. To a very large extent, it is a zero sum. A socialist leader will do it irrespective of the outcome because he is driven by ideology. But Trump is no socialist. He is a business man. Unless desperate, the last thing he will do is to reallocate value in such a way. It is simply not in his blood.


11. Other Countries Will Retaliate
China will retaliate if US impose tariffs on its products. It is true that China exports USD350 billion more to US. But it will still be painful if a trade war developes. Tens of billion USD of American businesses will be affected if things turn ugly. China can impose tariffs on US products, limits toursits to US (spent USD21 billion in 2015), stops purchasing US treasuries, or do nothing when North Koreans get their nuclear missiles ready. 
Looked like China is a tough nut to crack. Why don't we whack some Malaysians or Vietnamese ? Well, they can do that. But life is not all about money. Please refer to next item.    


12. Geopolitics
Trade is only one aspect of a country's power. Geopolitics also influences how huge countries like US behave. Over the past few years, the US has engaged in a struggle with China for influence in East Asia. If the US turns inward and starts harming the interest of small countries like Malaysia and Vietnam, these countries will align themselves with China. This is the last thing that US wants to see. 

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