Tag Archive for: Tariffs

Could Trump’s tariffs deliver luxury to the masses?

My TikTok feed has been hijacked by group of Chinese manufacturers lamenting the decline in business associated with the Trump tariffs.  Many claim that they are the manufacturers for high end products from Gucci, Hermes, Prada and others, where the bulk of fabrication takes place in China with minimal finishing in Italy or France.  Whether this is true or not (and the luxury brands have not denied it!), the chinese manufacturers are urging consumers on TikTok t0 buy direct from them.

Again, if true, the savings are enormous.  A birken handbag is estimated to cost USD1,100 to manufacture with the item selling for USD38,000 in the US.  LuLuLemon yoga gear for $6-8 per piece and Nike shoes for $4.  By going direct to consumers the manufacturers cut out the brands as middlemen taking the bulk of the revenue.

How do the manufacturers prove their provenance when they are restricted from selling the brand directly?  This is  a question of how well the direct sellers can guarantee quality and design of the good in question.  Many work with teams in Italy who design the items which then get mass manufactured in China.  Enticing some of these designers to join the Chinese firms can ensure that Western tastes are catered to and the product line refreshed.  Quality control is easy to maintain by not cutting corners.

Ironically,  Trumps tariffs could have the effect of stimulating the mass importation of Chinese made luxury products into the US by making them affordable and cutting out the middlemen.

Markets and penguins

Tariffs I. Long-sighted or over-reacted?

While it remains unclear what the point of the Trump tariff episode is, the markets had either (i) underestimated their duration and reach, or (ii) over-reacted.  Some facts…

The Petersen Institute for International Economics in Washington DC estimates that trade adds USD2,500 per household annually where household GDP is USD210,000 in 2024.  Trade adds 1.2% to household GDP.  This is a single shot to household income and not an increase in growth, so that the capital effects of trade are felt once.  If all the benefits from trade are lost through tariff hikes then this amount constitutes the maximum loss that the US economy would suffer.  US stockmarkets in aggregate measure the present value of US GDP so a fall of 1.2% should be the maximum cost to markets from the tariff imposition.

On this metric, the US and Global stock markets have over-reacted, falling more than 5% since the tariffs were announced.  Of course, the taxes will not curtail all trade with the US which means that the real cost to GDP will something less than 1.2%.  The market looks like it has over-reacted and so represents a good buy.

Tariffs II.  Happy little penguins

Arbitraging tariffs is simple but you shouldn’t boast about it.  China has built a presence in Canada and Mexico, manufacturing and assembling goods to benefit from the North American Free Trade Agreement rules.  This arb has been effectively reduced by imposing tariffs on the US nearest neighbours.

The principle is that trade will flow from nations with the lowest tariff rate.  During Trump’s first term, some countries, such as Australia, received exemptions from the tariff taxes.  This made Australia a conduit for commodities like aluminium for can manufacture.

The tariff arbitrage this time around must negotiate a 10% minimum tax on every country, island and protectorate.  The media made fun of the 10% tariff imposed on Heard and McDonald islands in Antarctica and populated solely by penguins.  These protectorates are still advantaged with the minimum tariff of 10% so expect that someone will quietly route cargoes of stuff through these jurisdictions.  The penguins are about to get rich.

 

 

How to win the tariff war

In social games of cricket, if a dispute arises it is common to pick up your bat and ball and go home.  A similar strategy would seem optimal to counter the effects of a Tariff war.

Donald Trump has embarked on a Tariff war with a number of countries and regions.  At stake is trade access to the US domestic markets.  This used to be a bigger deal several decades ago than it is now.  The US consumer is still voracious but the rise of the Asian Tigers, BRICS countries and the EU has marginalised the US.  Trump recognises this marginalisation with the MAGA-slogan – Make America Great Again is an admission of decline.  Do the leaders of industry need to succeed in the US domestic markets to be successful or can they take their bat and ball and go home?

US Corporations have already demonstrated their mobility by decamping their HQs to Ireland to avoid US taxes and it is common for companies to partition activities in response to US versus the Rest-of-the-World regulatory regimes so that they don’t conflict.  A Tariff war sounds like a bad thing when there are only 2 countries involved.  Add in a few more and the equilibrium becomes dominated by those that do not impose Tariffs – they trade with themselves without distorting taxes, they switch from a dependance on the Tariffed market to one that provides open access.  The trick is to be flexible with whom you trade with.

One complication of the Tariff agenda is to influence political decisions rather than focus on trade issues alone.  By this I mean that some of the Tariff war is about trying to stop the flow of drugs across the US-Mexican/Canadian border.  This seems like a noble initiative and behooves countries to address their shortcomings regarding using their country to facilitate the distribution of drugs.  But this should be easy to counter by articulating a political response that conveys the intention to be tough on drugs etc.

It is difficult to see any advantage to the US arising from their Tariff policy.  It is interesting that many countries are wearing the Tariffs without retaliation (e.g Australia), but this might just reflect the fact that the US is not that important to them.  Rather than engaging in battle, this may be the way of picking up your bat and ball and going home.