Tariff backlash

| Updated: August 31, 2018 21:35:26

Tariff backlash

Tariffs typically raise living costs, but when they backlash, the genie really comes out of the trade bottle: anything could happen, and anticipating actions usually, putting players on the defensive, breeds stock-market uncertainty, complicating an even thorny environment. Few in the 21st century really have visual knowledge of what a tariff war might entail, indeed, too few tariff skirmishes have happened since the grand-daddy example of them all, the 1930 US Hawley-Smoot Tariffs, retaliated by the British Empire's Imperial Preferences the next year, for anyone to see how the bullet is bitten.

That is about to change thanks to the tariffs myopically imposed by US President Donald J. Trump on the major industrialising countries, among others. Those products he began with, particularly aluminum and steel, have now broadened out through the retaliatory actions threatened by other countries: Canada, China, the European Union (EU), Mexico, to name the immediate responders. Among the new products to be affected are such heavyweight industries like automobiles and motor cycles, while lightweight industries, such as cheese, nails, and whiskey, have also been put on notice.

Businesses will be rocked. Except for US Steel, all the other 29 stocks on Dow Jones fell as soon as Trump's announcement was made in May 2018, the net loss pushing the Dow Jones Industrial Average more than 200 points down. That was not all. In true keeping with the retaliatory tone, stock-exchanges also fell in Canada, China, the European Union (Stoxx Europe 600 Index), and Mexico. As for US Steel, Century Aluminum also edged upwards.

Toyota fears it may have to add up to almost $2,000 more to sell its Camry model, while Daimler is scaling back its Chinese profits from the thriving Mercedes-Benz sales because of China's retaliatory tariffs. Added expenses and export cut-backs for any one product, or the producing country admittedly opening windows for other countries not caught in the quagmire setting similar product-specific tariffs: expectations of foreign corporations thriving while US-based companies take a hit adds a different market constraint whose net effects could show supply-chains redistributing themselves at a very difficult time when the rest of the world looked like just sloughing off 2008-11 Great Recession hangovers.

US agriculture will be badly affected. For a start, Wisconsin cheese-makers face new tariffs in the European Union and Mexico. The entire brewery industry may lose up to $350 million owing to the aluminum tariff with MillerCoors (one part of MolsonCoors) because it accounts for more than 10% of that net loss. US whiskey will be more expensive in Europe and Mexico, with Jack Daniels, for example, having to add 10 per cent more on every bottle sold.

Chinese importers of US soybeans will be strangulated, but in return, a promising export sector of the United States, agriculture, will also have to bear the brunt of retaliatory tariff-laced losses. For example, Shangdong Sunrise Group, a huge soybeans importer has already filed for bankruptcy. As one of the Top-500 Chinese companies (at the lower end), it was hit by both oil-prices climbing and this new tariff (whose owner, Shao Zhongyz, was one of the wealthiest Chinese entrepreneurs, the 230th richest Chinese on Forbes lists).

Just because of US Steel stocks rebounding upon new tariffs information does not mean a secondary industrial line also dependent upon steel imports will pull through. Mid-Continental Nail Corporation is contemplating closure, not just at some unspecified future, but in this very year.

Evidently some corporations will be swinging with joy, and from them will emerge a very nationalistic strain on business just when business success depends crucially upon opening new markets globally. On the other hand, some corporations will be hurt, devastatingly so for a fraction of them. Ironically, they will also feel very nationalistic about their losses, since no other sentiment can be rallied to for comfort: globalization will look cruel, off-shore production an impossible proposition, and boosting domestic operations would need a leap of faith (and a lot more cash) since start-up costs will be a lot higher just to keep up with the upwardly-spiralling living costs. As previously observed, foreign companies may profit from this US retreat, but the cost threshold will still be climbing. In short, businesses may face an unexpected and undesirable Rubicon.

Initial market performances many not show these consequences immediately. For a start, there will always be a time-lag before the full policy effects ripple down to the consumer, a time when inventory sales may even obscure the true scale of the losses. Most of all, though, the interim between policy announcement and policy implementation, typically varying from one month to no more than three months, will be seized by desperate importers to purchase more of the taxed product before the tax takes effect. This will end up boosting both stock values and profits. Once the tariff has been fully implemented, the damaging effects will begin to show. In other words, what might look like a Dow Jones Industrial Average (DJIA) rebound, or uplifting second-quarter 2018 sales and profits may end up in an Autumn of despair. We need to keep an eye particularly on the third-quarter performances when they are announced in early October.

Sadly for the United States, that would be too close to the mid-term elections. If Trump's intention was to sway those results by imposing tariffs on products associated with sensitive electoral states, then we will find out to what degree that paid off, and how much he may have benefited. Presently, though, the picture does not look good, but not because of the tariff imposition (which has barely begun to ripple to the consumer): it may be a string of other anti-Trump sentiments, either the 'Me-Too Movement' snowballing against his misogynistic administration, or the shortage of low-waged seasonal farmers to reap the harvests or cleanup metropolitan houses, or just reacting to the wildfire spread of racism, among other governmental stances.

Whichever way one looks at it, the corporate world to emerge in the next 2-3 years seems set to differ qualitatively from those we are familiar with: globalising tendencies will not stop, but become more trimmed and selectively pursued; much more governmental intervention can be expected, since this will become the sine qua non of business support for the administration, especially when the going gets rough; and most of all, more countries will boast more global corporations than ever before. We may be short on cash and with our favourite products, but one outcome is for sure: we will not be running short of tumult. Fasten your seat-belts, managers, directors, brokers, and bankers. And, of course, politicians.

Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.

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