On May 17th, Donald Trump announced that both Japan and the European Union (EU) had just six months to mitigate the threat that their respective automotive industries posed to American national security. Mr. Trump is basing this threat on nothing more than his imagination, and both the EU and World Trade Organization (WTO) have clearly stated that they do not agree with his assessment of reality.
A week prior to this announcement, Trump followed through on his threat of increasing American tariffs on Chinese imports from 10% to 25%, a move that the Chinese government has declared to be an act of “economic terrorism.”
These are just the latest moves by the Trump administration in what is now a full-scale trade war against almost all of America’s closest trading partners.
While Trump insists that these moves are necessary in order to protect the intellectual property of American firms from being stolen by opportunistic Chinese producers, the imposed tariffs have so far done little in that regard. Furthermore, the tariffs placed on the EU, Japan, Mexico, and Canada have so far not shown any tangible benefit to the U.S. economy, and instead, there are many examples of how these moves have actually harmed American businesses.
One example is in Maine, where many who earn their living catching lobsters for the food industry have seen a reduction in sales of as much as 50% to their EU customers, and a whopping 80% to their customers in China. This dramatic slide is a direct result of countermeasures taken by America’s trading partners in response to Mr. Trump imposing tariffs on imports from China and the EU.
This rapid drop in lobster sales is occurring at the same time that new federal government regulation is requiring all 4,500 lobstermen to change their methods of lobster trapping, in order to meet new environmental standards aimed at sea life conservation. A change in methods requires innovation, which requires R&D that must be fueled by investment, which is of course now in short supply because of the shock in revenue to the industry.
Also affected by the decline in lobster sales is Riverdale Mills Corporation, another private New England based business located in Massachusetts. Riverdale supplies the entire North American lobster industry with 85% of all their lobster traps and further provides border fencing for both the northern and southern U.S. border. When the Trump administration imposed tariffs of 25% on steel imported from Canada, Riverdale’s costs skyrocketed, as Canada provides them with roughly half of their entire steel supply.
While the tariffs on Canada and Mexico supplied steel have recently been cut, the U.S. has reserved the right to reimpose them without notice should Mr. Trump deem it necessary, which he very recently suggested was the case once again. Furthermore, new enforcement provisions are now required that are intended to ensure that metal from China does not sneak into the United States via Mexico and Canada, and this adds another layer of complexity that drives the cost of imported steel from these countries.
In other words, businesses that rely on steel or aluminum from Canada or Mexico have no way of knowing when their costs will suddenly surge again, nor can they properly predict price changes, and this level of risk will certainly have a negative effect on a firm’s ability to secure a low-interest rate on debt.
A more well-known victim of the trade war with China has been Apple, who has seen its shares fall by almost 12% during the month of May. China has retaliated to the latest moves by the Trump Administration with tariffs of its own on $60bn worth of American goods, which includes many components that are vital for Apple’s supply chain.
The iPhone, by far Apple’s biggest source of revenue, will now either experience a lower profit margin, an increase in the sale price, or both. No matter what the resolution is, in the near term Apple will struggle to recover the lost profit from Trump’s trade war, which is untimely given that they now will face stiffer competition from Chinese rivals.
The increased competition has been exacerbated by the Trump administration who has all but blacklisted Huawei, China’s biggest high-tech company, and thus placed them at the epicenter of the power struggle between the U.S. and China. While Huawei is facing a growing backlash from many Western countries over possible risks posed by using its products in next-generation 5G mobile networks, employing trade war tactics against the firm may only make matters worse.
Huawei is seen as a national champion in China, and revenues of the firm exceed $105bn annually. Huawei also holds many critical patents on future 5G mobile network technology. If Huawei were to fail, the shock waves would reverberate around the world and jeapordize many companies in the tech world, including many American firms such as Qorvo and Micron.
A report from the Information Technology & Innovation Foundation, a think-tank, estimated the following:
“Depending on how restrictive export controls are, U.S. firms could lose $14.1 billion to $56.3 billion in export sales over five years, with the missed export opportunities threatening from 18,000 to 74,000 jobs.”
While the security concerns surrounding Huawei may be valid, the measures that the Trump administration is taking towards mitigating these threats are only making the situation worse. The Chinese government may decide to adopt the very same argument employed by the U.S. regarding national security and put a sudden stop to American companies from supplying Huawei.
China may also further opt to enact a widespread consumer boycott of Apple products that could further damage the already embattled company.
The impact of the trade war on Apple has already been anticipated by Wall Street, as Citigroup has recently halved its forecast for iPhone sales in China during the second half of 2019, down from 14.5m to 7.2m units.
The U.S. China Business Council has further warned that exports to China from the U.S. were down about 7% last year because of the trade war.
While the security threats posed from Huawei might be legitimate, the better approach to mitigating the risk might be criminal charges, such as those brought forth in January when U.S. federal prosecutors formally indicted Huawei CFO Meng Wanzhou with thirteen counts of bank and wire fraud, obstruction of justice, and misappropriating trade secrets. Moves like this send a strong message to those that would seek to undermine U.S. influence via illicit means, however, these type of actions do not jeopardize thousands of American businesses both large and small. Donald Trump needs to start living in reality, end his politically motivated trade war with the rest of the world, and adopt rational and productive approaches to fostering trade partnerships.