MNCs Don’t Like Tariff Wars
Ever since 1975, the U.S. has had the largest trade deficit in the universe.
People are terrified because many in the U.S. establishment claim that if it’s not kept in check, national security will be in serious danger. Unemployment will skyrocket and basic industries will be devastated.
This scare tactic has convinced many voters into crossing over to the protectionist camp. But how real is the threat?
Let’s talk numbers first. In 2017, the deficit in goods and services was US$566 billion. The U.S. could easily fend for itself, but it just makes more sense to import certain goods at a lower price.
Trading goods with China accounts for 65 percent of the deficit. We’re talking about US$506 billion worth of goods imported from China, while the U.S. exported a mere US$130 billion worth of goods to China.
That’s a trade deficit of US$375 billion with China.
The below graph clearly illustrates just how big the deficit with China is compared to other countries.
To finance this deficit, the U.S. has been issuing treasury bonds left and right.
The graph below shows who the major foreign holders of these bonds are.
If a trade deficit persists for too long, there could be some serious consequences.
Economic growth and stability could be affected and a country could lose domestic jobs.
Then there’s the fact that China manipulates its currency, the yuan. The country keeps the yuan pegged to the U.S. dollar and they keep it artificially undervalued, so their own goods stay competitive.
By doing this, China sustains the U.S. trade deficit.
MNCs Get Caught in the Crossfire
Imposing tariffs on imports could make American goods competitive again. This seems to make perfect sense, but the fact is that trade balances are not usually a result of trade policies.
Rather, it’s determined by various macroeconomic factors like relative savings, investment rates and differential growth rates.
So taking the trade deficit and using it to gauge whether or not the economy is working for the U.S. or not is pure folly.
Now say that these tariffs have their desired effect and the deficit improves.
The government may have less debt due to a smaller trade deficit, but the private sector would be seriously damaged.
You see, many multinational companies (MNCs) have outsourced to Asia to benefit from cheaper rent and labor. This has enabled MNCs’ impressive growth over the last few decades.
Of course, assembling in China to cut costs won’t make sense anymore if these MNCs are blasted with tariffs back in the U.S.
This Trade War could annihilate many MNCs, because they would take hits from both sides of the policy divide.
But MNCs like Wal-Mart, Target, Best Buy and Macy’s stand united against their overlord and sent him a message on March 19th, urging the President to not go through with his plan to impose tariffs on imports from China.
A separate letter was sent by the Alliance of Shoe Companies, consisting of 82 members including Nike, Genesco, Payless ShoeSource, Under Armour, Shoe Carnival and the Weyco Group, bearing a similar message.
Despite the loud volume of the request, it seems to have fallen on deaf ears.
The performance of S&P 500 companies with heavy exposure in Asia in reaction to the Trump tariffs is telling, as can be seen below:
Of course, wherever there are losers, there are also winners.
Exciting opportunities could arise for other nations on China’s side of the galaxy.
For example, one MNC heavyweight, Apple, has already started to move some manufacturing operations to India with the iPhone SE in 2017.
Other nations like Thailand, Vietnam and Indonesia could also see a significant increase in investments from these MNCs.
That is if the President of the U.S. doesn’t see the trade balances with these countries as a threat too.
However, the risk is that tariffs make everything more expensive for everyone in the end, risking a slowdown at a point and time when the fragile global economy just started to feel like it was getting back on its feet. What happens next will have to wait and see.