Why Trade Wars Are A Four Letter Word For Business

Why Trade Wars Are A Four Letter Word For Business

It may well be business as usual for the White House and the MAGA (Make America Great Again) policies but the fallout from the “Trump versus the world” trade wars has been less than encouraging across virtually all stock exchanges in the world.

 

Earlier today, the MSCI All-Country World Index, a key overview of global indices, tracking stocks in 47 countries, recorded its lowest level since March this year.

 

Companies depend on sales for revenue, profits and rising share prices and when sales drop, the fall in share value isn’t that far behind. Business today is far more global than at any other point in history and one of the key drivers of that globalization has been the free movement of goods across countries and continents.

 

President Trump fired the first shots in this latest trade war with tariffs initially imposed on solar panels and washing machines, followed by a 25% tariff on imports of Steel and 10% on imports of Aluminium, with tariffs on over $50 Billion of Chinese imports come into effect in July this year.

 

These moves had prompted “tit-for-tat” tariffs on US goods with India proposing increased import duties on a whole slew of Made In America, ranging from Harley Davidson motorcycles to almonds and lentils.

 

Almonds might be just another nut to many but to US growers, with an annual export market of over $4 Billion, almonds to India are big business. India accounts for over 50% of all almond exports from the US so the 20% increase in import duty means major headaches for growers in the States.

 

It has become increasingly rare today to find a product of pretty much any description, assembled entirely from components manufacture in the country that product originates from. You may well be exporting gizmos from France for example, but it’s a fair assumption to make that at least some of the components in your French gizmos originate from somewhere else.

 

Trade wars build barriers and barriers build prices.

 

German car manufacturing behemoth Daimler is a prime example. With their Chinese markets supplied from their assembly plants in the US, any tariffs imposed on US goods into China will have an effect on their car sales there. In fact, Daimler takes this so seriously, they cut their earnings forecast citing that exact reason. Tariffs on Mercedes cars exported to China from the US.

 

So why not simply export from a plant in Germany?

 

The simple answer to that one is logistics. Leaving aside the actual supply plan conundrum (where do these extra cars to export to China magically appear from) where would Daimler be able to export from and at what price? The extra shipping cost alone would make cars exported from Germany to China more expensive than they are now with the same end-game result. Fewer sales, lower earnings.

 

Today also saw EU tariffs come into force on €2.8 Billion worth US imports, ranging from bourbon whiskey to orange juice, with Harley Davidson once again caught in the middle.

 

Canada plans to introduce tariffs on C$16.6 Billion worth of US exports on the 1st of July, while Mexico has already had tariffs in place on $3 Billion worth of US exports for the last couple of weeks.

 

Tariffs in trade wars go in cycles. You impose a tariff on me, I impose a tariff on you, you impose a further tariff as retaliation, I do the same… You get the picture!

 

Prices go up for all the gizmos made up of gizmos from other countries. Prices go up for consumers, consumers buy less, companies sell less, earnings go down, share prices drop.

 

European Commission president Jean-Claude Juncker pointed out, duties imposed by the US on EU goods go against “all logic and history”.

 

Remains to be seen where this one will go, but if notoriously staid Daimler-Benz executives are taking it seriously enough to lower their earnings forecast, it looks like this one had a long road to travel.

 

Probably not on a Harley Davidson though!

 

 

 

Disclaimer:
This article is for educational and informative purposes only and should not be considered as investment or trading advice.

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