The Fed will not save them. American companies are not hurting for capital and don’t need lower interest rates. What they need is certainty. Their problem is the trade war. They’ve had enough of it.
“The trade war is all about uncertainty and people are sick of it,” says Scott McCandless, head of the U.S. trade practice at PwC in Washington DC. “To the extent the Fed cuts rates further, I am not sure how effective it would be because the people we talk with are saying access to capital is not the problem for them. They’re not investing because of trade uncertainty.”
Farm lobbies and others have said President Trump is making things worse for their businesses by increasing tariffs on China.
Tariffs increase again this Sunday, Sept. 1 and then on Dec. 15, marking the date when everything imported from China will be charged a minimum of 10% to as much as 30%. Previous pre-Trump tariff rates ranged between 3% and 7%.
An S&P Global Ratings report published yesterday, titled Global Trade At A Crossroads: Prospects For U.S.-China Deal Fade, also suggests that corporate investors are not spending money because of the trade variable.
In theory, that includes both foreign and domestic capital expenditures. By not spending on the U.S. economy, companies are not investing in expansion, which is a headwind for the job market.
China is imposing retaliatory tariffs of 5%-10% on approximately $75 billion worth of U.S. imports, possibly making other products made by non-U.S. competitors a bit cheaper. If that market is big enough for the U.S. company, it could also force companies to relocate to southeast Asia or mainland China to make it there.
Most items on that list are not major U.S. exports anyway.
Beijing is also reinstating the 25% and 5% tariffs on automobiles and auto parts starting Dec. 15.
See: This Is The Last Week For ‘Duty Free’ China — Forbes
Companies may not like the China trade war, but on some level all of them agree that something’s got to give when it comes to Chinese mercantilism.
Their state subsidy program permits companies to produce goods to over supply levels, deflating global prices. Their market size is large enough that everyone wants to sell to them, but in order to sell to them you might have to relocate there, at great risk to local manufacturing and labor markets.
There is also the age-old concern of businesses that their Chinese manufacturing partner will one day splinter off and create a rival product, having learned the ins and outs of its manufacturing.
Economies of scale are all in China’s favor.
As the trade war approaches the one year anniversary of Trump’s $200 billion tariff hit against China, companies are faced with the decision to either keeping waiting this out, or remap their supply chains.
“Everyone is belly aching and everyone is looking to do something,” says McCandless. He says Vietnam has been the biggest beneficiary in southeast Asia.
Other companies are sourcing or setting up shop in Colombia. Some are considering the Central American Free Trade Agreement as one potential spot to get low cost labor, and close connections to the U.S., McCandless says.
Shifting supply out of China is not easy.
For starters, many companies are there not only to build for the U.S. market, but also to sell to China and southeast Asia.
There is also the matter of logistics, labor skill level, and availability of supplies needed to get the job done. For the sake of argument, cotton producers not far from a textile mill making fabrics is a plus. And it has to be easy to get those textiles to a port by truck or train without erasing profit margins.
Corporations have benefited greatly from China.
Some companies will admit that even with a 25% tariff, China remains cost effective thanks to its world class logistics, massive work force, and the long-standing relationship between the Chinese supplier and the U.S. buyer.
Few companies are relocating to the U.S.
States with a skilled labor force and reliable regulations are top on the list. Texas has been winning on this end, but it’s not a big win because the volume is not there yet. And may never be.
Trump and China are digging in their heels in the trade war.
And Corporate America is looking for a reprieve.
Last week, Trump said it was within his right as President to “order American companies” to pack up and leave China.
“Many of Trump’s orders are initially dismissed, until he finds a way to enforce them,” says Ed Mills, a Raymond James analyst in Washington.
Trump aides have admitted that they are looking into this as a possible option in case of a protracted trade conflict but have no immediate plans to issue an executive order.
Mills recommends investors stay alert to surprising Commerce Department rules on protections for emerging and foundational technology. If a Chinese company is on the “entity list” and banned from certain American products, Commerce has the authority to prohibit supply chains outside the U.S. from selling it to them as a matter of national security.
“If we continue down the path of confrontation, (this) will take center stage,” Mills says.
Some companies are going directly to Republican Senators like Charles Grassley in hopes to convince him and others to railroad Trump’s powers, especially in regards to the Section 232 tariffs. That is the rule that allows for extra duties if the product is deemed nationally sensitive.
Steel and aluminum, for example, is a Section 232 tariff. If the U.S. has no domestic steel supply and has to rely heavily on imports, it could be blocked — in theory — in the instance of a wider feud with a foreign adversary.
In the case of an extreme escalation of the trade war, the U.S. could also impose financial sanctions that stop Chinese firms from raising funds in the U.S., TS Lombard analysts wrote in a note to clients on April 22.
In this scenario, the central bank of China would be forced to draw on its dollar reserves to support the local banking system. The wider ramifications of that kind of financial ban would undoubtedly cause global market turmoil as portfolio investors would now wonder if Washington can sanction major indexes from including China stocks in those benchmarks.
Such a move could also trigger a recession in China. A China recession would be disastrous for southeast Asia and commodity exporters like Australia and Brazil. American companies would then have new partners in Trump trade war misery.