Wednesday, 10 January 2018

Trump & Trade (3) - The More I Google, The More I Don't Believe US Can Turn Protectionist

Publish date: 

This is the third article I write about Donald Trump's threat to protect US workers by imposing tariffs on import.

As an investor in export stocks, I am very interested in this particular topic. After reviewing various articles and data, today I kind of achieved a Eureka moment which provided me with breakthrough understanding. This latest insight further reinforced my earlier belief that IT IS IMPOSSIBLE FOR DONALD TRUMP TO PROMOTE "BUY AMERICA" AT THE EXPENSE OF OTHER COUNTRIES. 

To understand why, first of all, let's talk about why so many people take Donald Trump's threat so seriously. Since Donald Trump mooted the idea of imposing tariffs on imports, from Calvin Tan to paperplane, many people have run for cover and stayed away from export stocks. Why do people find Trump's threat so credible ?

THIS IS BECAUSE US IMPORTS SO MUCH MORE COMPARED TO EXPORTS. As we all know, in business, when you are a buyer, you wield considerable influence. Customer is king !!! Because of the huge US trade deficit, many people believe that if a trade war breaks out, the US will have significant upper hand. Take China as an example : it sells USD400 bil to US while only imports USD100 bil. In the event of a trade war, US' loss was 1/3 of China - US will trump China (pun intended).

Is that really the case ? 

NO !!! A BIG NO !!!

This is because what is at stake is not merely import and export between the two countries. A trade war will also drag in ALL American MNCs doing business in China. For example : Starbucks. It is totally not involved in the export import trade between US and China, but it is doing a booming business in China. In the event of a trade war, China will not limit its retaliation to Amercian exporters, it will kick Starbucks out. The same can be extrapolated to cover many many other US companies such as AIG, Citibank, Hollywood movies, Hewitt Packard, Dell, JP Morgan, etc.

When you look at this whole thing in totality, it is not clear that America has upper hand against China at all.

The same is applicable to basically all other countries in the world. Take Europe as an example. Germany, UK, France and Italy exports USD125 bil, USD58 bil, USD48 bil and USD44 bil to US respectively. The total amount is USD275 bil. This is a huge amount ! Trump's "Buy American" will not only invite retaliation from China, but will also piss off a lot of Germans, Britons, French and Italians. Same as above, these countries are home countries to many American businesses. Despite ally status, I am sure none of them will sit idle and do nothing. You hurt my exporters, I will hurt not only your exporters but also your other MNCs.

Concluding Remarks

When viewed from trade point of view, US has extremely strong leverage against almost everybody else. However, if you take into consideration the interest of MNCs, those upper hand vanishes.

Imposing tariffs on strong countries such as China, Germany, UK and France will almost certainly invite retaliation. So it is quite clear that it is not doable.

How about small countries like Malaysia ? Can the US push us around ? It is true that our government might not be in a position to push back (we rely on US more than just trade. For example, they sit on Security Council and hence can make life difficult for us on certain issues). However, the displeasure can be expressed through grass root movement. If the U.S.' trade actions causes 50% of Penang's factories to close shops, with or without government prodding, many people will go to the street to express their anger. If you are an American MNC, you better have a Plan B, because Malaysians will not be buying your service or products anymore (unless no choice). 

In a nutshell, by turning protectionist, US risks turning itself into public enemy No. 1 for almost every country in the world. It might be able to balance its trade, but it can forget about trying to make money in other countries' market. God bless America.

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