Should Retailers Worry About A Trade War?

The following is a guest contributed post from Andreas Hassellöf, founder of Ombori.

Less than a month into his Presidency, Donald Trump has made it abundantly clear that he was serious about his plan to boost American jobs and American businesses by initiating a global trade war. He pulled the United States out of the 12-nation Trans Pacific Partnership within days of taking office, sending a clear message to major trading partners including Japan, Canada and Australia that he was not interested in bipartisan free trade. He’s been talking about imposing tariffs of up to 45% on goods imported from China, and up to 35% on Mexican goods. Analysts worry that India, Thailand, Hong Kong, Indonesia, and South Korea will be next, and earlier this week he reaffirmed his commitment to “tweak” NAFTA, which he describes as a “disaster”.

Trump’s logic is obvious: by imposing import tariffs imports, he hopes to force American businesses to manufacture in America, and to persuade American consumers to buy American-made goods. However, it almost certainly won’t work exactly as intended.

On the one hand, it’s great news for American businesses, especially retailers. They’ll face less competition from cut-price vendors around the world who are selling directly to American consumers. Currently, customers can easily purchase items from India, China, Hong Kong, or Japan, completely bypassing American distributors. Applying a significant tariff wouldn’t stop customers doing that, but it would put the prices on a more even footing. Imported goods may still work out cheaper, but American companies could offer faster delivery and cheaper shipping, potentially a deciding factor for consumers who are used to the “I want it now” economy.

It’s also a powerful incentive for American manufacturers. Instead of going to low-price factories overseas, they’ll build factories in America and employ American workers. Even though American goods will still be more expensive than Chinese-made goods, those import tariffs will allow them to compete on prices.

So, more business for American vendors and manufacturers, more jobs for Americans. So far, so good – for America, at least. But let’s look at the flip side of that.

Customers would have to get used to paying more for almost everything. Staples such as food and clothing would be hard hit, and electronics, mostly made in Asia, would see massive price rises. The next generation of iPhones could cost Americans an extra $100 or more. Even Wal-Mart is worried. Tariffs may mean more profits for American businesses, but unless that’s accompanied with pay increases for American workers, it also means a significant decline in their standard of living. They’ll be focusing more of their buying power on the necessities of life, leaving them less for non-essential purposes, and threatening whole market sectors, particularly small businesses.

It’s naive to think that other countries won’t retaliate if America imposes tariffs. Apple, General Motors, Qualcomm, Boeing and Intel between them do over $125bn in trade with China. For Apple and other tech giants, China represents over 50% of their revenue. Punitive taxes could hammer US exports, leading to stock crashes, up to 4 million job losses and a decline in GDP growth. As the Wall Street Journal notes, “[what] would make a trade war most catastrophic is not just that things like iPhones might be more expensive to buy and take longer to make; it’s that China might decide that it doesn’t want to buy any.” For American retailers who are starting to open up lucrative foreign markets, this could be a serious blow.

It’s arguable that America does not actually have the capacity to bring manufacturing back to the US. Assembling technology such as an iPad is a truly global endeavour, with parts sourced from around the world. Companies like Foxconn are successful because they operate on an almost inconceivably massive scale, with billions of dollars in government support. In Zhengzhou, known locally as “iPhone City”, where they make up to half a million iPhones a day, all the infrastructure, the raw materials, the components, and the suppliers are already in place.  America has none of that, and it would take years to build it. When Motorola tried to manufacture the Moto X in the US, it was, in their own words, a disaster. Local manufacturing would stifle innovation in the mobile world, as the US struggles simply to get factories set up. Ironically, manufacturing won’t necessarily mean more jobs: these factories are becoming increasingly automated, so most of the work will be done by robots anyway. Even more ironically, the only way America can afford to build this infrastructure is with the assistance of Chinese investors.

The knock-on effects go deeper, reverberating around the world. Manufacturers in Asia and Mexico aren’t going to shut up shop. They’ll be looking for new markets, and they’ll be dumping cheaper goods on Europe, upsetting existing trade relationships here. We’re all going to be affected.

So should we all panic? Not necessarily. If there’s one thing we know about Donald Trump, it’s that he’s an expert in the art of bluster. A single hostile tweet from @realdonaldtrump at 2am can send stock prices plummeting or currency markets into freefall. He knows it, and he’s not afraid to use that power to get what he wants. The mere threat of a trade war will be enough to get foreign leaders and American businesses to the negotiating table. As Chinese President Xi Jinping said in Davos, “nobody wins in a trade war.” Faced with an impetuous US President who is seemingly ready to unleash the economic equivalent of all-out nuclear war, any trade deal is better than none. A 5% import tariff may seem like a good option compared to the alternative.

Changes are inevitable. Business as usual is not an option. The next few months will show us all what to expect in coming years. Let’s make sure we’re ready.