Trump’s Tariffs’ Troublesome Tentacles
The world is spending a great deal of time trying to justify the dubious hypothesis that tariffs help domestic manufacturers… even if it is true, it ignores the large potential cost to exporters and consumers.
Tentacle 1: Small domestic business. 40% of imports into the US are for domestic manufacturing use, often consisting of intermediate goods used as inputs in domestic manufacturing processes. 37% of US imports from China are indeed these intermediate goods for which prices have now doubled, and whilst domestic production of these input goods may cover some of the gap, it cannot replace all the imports in the short-term. Less than 5% of iPhone components are currently manufactured in the US, and aside from the chipsets coming from Taiwan, most of the phones are made in China. Whilst Apple may be able to get a reprieve on import tariffs, we are not sure the rest of the small-to-mid-cap firms will be so lucky. We have not yet mentioned that small businesses make up 36% of exports, and there could be significant retaliatory tariffs on their exports too. As a reminder, in 2024, small businesses in the US accounted for 46% of all employees and are historically more sensitive to margin compression.
Tentacle 2: Freight. In attempts to encourage US shipbuilding, steep fees are being levied on Chinese-owned or built ships. There is no doubt this will raise freight costs, but we are yet to see how profound the ripple effect will be. This will impact US exporters trying to seek out the cheapest shipping options. Oil and Liquefied Natural Gas (‘LNG’) will have other problems too. Only three of the eight hundred complex LNG carriers are US-built ships, dating back to the 1970s! Interestingly, the only US shipyard looking to build one right now is owned by Korea’s Hanwha Ocean.
Tentacle 3: Loss of confidence from non-US investors. The 90-day pause has not helped reduce uncertainty. Trump compared the US to a department store, stating: “I am this giant store. It’s a giant beautiful store and everybody wants to go shopping there. On behalf of the American people, I own the store and will set the prices”. However, the jump in longer-term yields suggests that not everyone wants to go shopping in the US. Furthermore, the store may start running out of stock. The port of Los Angeles is the largest entry point for Chinese goods, and they expect arrivals to be down by a third. Airfreight is also down significantly. US importers will be running down stockpiles while looking to store new deliveries, duty-free for now, in bonded warehouses or divert them to Mexico or Canada. If the department store has no stock and no one wants to shop there, can they still set prices?
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