Tesla and BMW expose the ugly side of tariffs.

Source: Tesla

Source: Tesla

Today I thought it interesting to look at the competitive responses so far to the Trump Administration’s tariffs, including the underbelly recently exposed by Tesla and BMW.

The Ugly

This week Tesla and BMW both announced how they are each intending to respond to the 301 tariffs. Simple - move manufacturing to China!

In a big win for China, anti-protectionists and the two companies (assuming Tesla can actually afford to do this) Tesla and BMW announced plans to build vehicles in China, thereby accessing input benefits and dodging China import duties.

Both groups currently manufacture units in the US (Tesla solely manufactures in the US), so investing in China plus Tesla's Presidential slap in the face will most likely become a pretty ugly stain on the White House protectionist agenda.

This 'back door' response has also been made possible by China's recent relaxation of foreign direct investor ownership rules, in contrast to Trump protectionism.

The Bad

As mentioned in “Protecting US Steel might get Ugly for US Oil” the effect of protecting jobs in one industry can actually increase prices in another, thereby stifling competitiveness on a 'net' basis.

The example given was the heavy use of steel casings, piping and vessels used in the US oil and gas industry.

Even if crude and gas prices rise, margins will be lower and that’s still going to be bad. This week crude dropped around 5%, so that’s a double whammy if it continues.

The Good (maybe?)

In "Half a Billion Dollar Bet on the Trump Steel tariff," I wrote about the half billion US dollar bet from Indian based Jindal Group that wants to “bring steelmaking back to the United States,”.

US subsidiary, JWS has announced that it will build a Plate Mill plus an additional 1mtpa of manufacturing capacity.

On the face of it, this sounds good for jobs in Baytown, Houston, where 500 jobs are expected to be created. Also, some steel imports will stop.

However, the not so good aspect for the US is that the profits from becoming competitive again, via the tariffs, will flow back to India.

Speaking of profits flowing back to India, another Indian family juggernaut, Tata Group, happens to own the biggest steel plant in the UK.

Tata is notably concerned about the future of steel making in the UK, particularly if China starts to dump steel in the UK again. Its Port Talbot plant was saved in 2017 only because workers agreed to cut their pensions.

I wonder what this means for the Brexit/protectionist movement in the UK, and what about Indian investment in steel - Tata, Gupta, JWS, etc?   

Bottom Lines

So far and other than for 800 new jobs in US Steel’s Illinois plants and a few other similar headlines I have spotted, I am yet to see overwhelming ‘good’ flowing out of the trade war, so far.

Bottom line for the US is that because of these knock-on effects and competitive responses, it has become difficult to see how any of this will “Make America Great Again”.

Bottom line for us here in WA is that tariffs expose our 'price taker' positioning when it comes to steel and aluminium making bulks.

That's why broadening our economic base means supporting and investing in alternative industries. The good bets are those in which we can build advantage and capture more of the value chain.

These include lithium processing, battery/EV mineral advanced technologies and in time, downstream processing, high tech, waste management and other circular economy industries which also recapture margin, defence manufacturing, professional services/educational exports, and others.

Mike 


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Michael Ganon