Daily Picks Monday: Trade War Costs in a Supply Chain World
June 25, 2018
5 Min Read
Trade War Costs in a Supply Chain World
- The firms exporting vehicles from Mexico to the U.S. have set up very deep supply chains between the two countries.
- About 74% of all the foreign parts used by vehicle assemblers in Mexico that export to the U.S. are imported from the U.S. itself.
- 38% of the value of the average finished vehicle exported from Mexico to the U.S. is American value returning home, more than double the 17% figure that had been commonly considered.
- It is important to account for international trade along all stages of the supply chain.
- In a conventional world, a tariff only reduces efficiency at the margin as it relocates production from foreign to domestic firms who in the initial equilibrium have equal costs.
- In a deep supply chain world a tariff isn’t just a tax on imports it also raises the costs of production of domestic firms. In a deep supply chain world, for example, a tariff on car imports from Mexico raises the cost of US auto production.
- Trump’s trade war would be less costly than Brexit because Trump’s tariffs will raise revenue and only distort production on the margin. In contrast, Paul Krugman argued that Brexit would raise costs on all units of production.
- In a deep supply chain world, however, the differences are not so large. In such a world, tariffs increase the price of imports and make it more costly to produce goods domestically.
Most Americans have inadequate savings, but they aren’t sweating it
- A quarter of Americans (24%) say they are very comfortable with what they’ve put away in savings, and 37% are somewhat so.
- Another 1-in-7 say they aren’t too comfortable, while 22% are not comfortable at all.
- Which means many families are living on a knife’s edge, yet not resolute to do anything about it.
Soybean Futures Plunge to Lowest Point in Two Years on US-China Trade War Fears
- The China trade war has dimmed hopes that U.S. farmers might still have a chance to reprieve from tariff on the crop to take effect next month.
- Prices of grains and livestock have been negatively affected by the unstable relationship between two trade partners because local traders bet Chinese tariffs would take away a considerable amount of orders.
- Iowa farmers, who earn the living for growing and selling soybeans are estimated to lose up to $624 million for the losing market; over 60,000 pig farmers as well as U.S. meat processors are caught in the crossfire.
- Minnesota farmer Tim Velde is worried that if the crop price keeps declining, he could be hard to pay for the loan for the for next year’s crop; Farmer Michael Petefish also complained the value of his crop had slashed about $60 an acre due to the falling soybean price.
- The long-term fear they face is that China would seek for a more lasting alternative to U.S. crops.
- China consumed over half of U.S. soybean exports in the past years, if China gradually stops buying from U.S., other soybean exporter like Brazil would be the biggest beneficiary.
Harley to Move Some Production Out of U.S. to Avoid EU’s Tariffs
- The trade war with the European Union is going to cost Harley-Davidson as much as $100 million a year.
- Harley estimated facing $30 million to $45 million in costs linked to the tariffs for the remainder of 2018.
- Each motorcycle shipped to Europe will mean a $2,200 expense because of the EU’s retaliatory tariffs for Trump’s steel and aluminium duties.
- Passing that on to dealers or customers would cause an “immediate and lasting detrimental impact” on the company’s business in its second-largest market, so it will absorb most of those levies.
- The company sold almost 40,000 bikes in Europe last year, and the continent’s share of total deliveries was the highest since 2011.
- The EU’s tariffs are only the latest blow-back Harley has faced from Trump’s trade policies. The company has warned the president’s tariffs on steel and aluminium will drive up raw materials costs.
- While Trump has repeatedly claimed that the U.S. can easily win trade wars, victims are starting to pile up at home and abroad.
- Harley shares fell as much as 4.2% and were down 4% of 10:35 a.m. in New York. The stock is down 17% this year.
Mnuchin Suffers Setback in U.S. Plan to Limit China Investments
- The White House will use one of the most expansive legal tools available to declare China’s investment in U.S. companies involved in technologies such as new-energy vehicles, robotics and aerospace a threat to economic and national security.
- Mnuchin has been working on the plans since as early as December, but has consistently urged a less aggressive approach that is negotiated with the Chinese behind closed doors.
- He cast the restrictions to be announced later this week as “not specific to China, but to all countries that are trying to steal our technology.”
- Some administration officials are concerned that restricting Chinese investments on the grounds of a supposed national economic emergency could trigger reprisals against U.S. firms operating in China.
- It’s a move that would put Washington’s brewing trade war with Beijing on a potentially irreversible course.