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Following the European Union’s retaliatory trade tariffs on US goods, which sectors and stocks are worth watching as the tit-for-tat dispute over trade continues hurtling toward a full-blown trade war?
‘Politics greases the wheels of business,’ – Business and Politics under James I, by R H Tawney, 1958.
The wheels are still turning but friction is increasing. Squabbles over international trade are nothing new but the quarrel between the US and China has now engulfed the world economy and sparked a global trade war that, for the moment, is only escalating.
Read more on Trump taking the trade war to the world stage
US President Donald Trump had gained support from his closest international allies when he initially targeted steel and aluminium tariffs against China, with the likes of the EU having long stood by the side of the US in its attempts to stem the flood of cheap imported metal into western markets and the amount of intellectual property (IP) and technology leaking to Chinese companies.
Learn more about how a trade war will affect metal prices
But, following Trump’s decision to slap the same tariffs on its key partners including Canada, Mexico and the EU, what started out as a stand-off between the world’s two leading economies has now evolved into a global trade war that carries a much larger threat to the world economy than any trade dispute seen since World War II.
Unsurprisingly, the international community is outraged with Trump’s protectionist trade policy and has attempted to show a united front against Trump’s steel and aluminium tariffs. Canada didn’t flinch by immediately imposing tariffs on $12.8 billion worth of US goods, and the EU has now introduced ‘rebalancing’ measures by enforcing tariffs on $7.2 billion of US products to offset the $7.2 billion worth of European steel and aluminium hit by US tariffs.
Read more about the global trade war and what it means for steelmakers and miners
‘It is not in the interests of the United States to just be playing defence and creating a fortress America while the EU, China, and others play offense and attempt to set the rules of the game for the next century,’ – Scott Kennedy, China economy expert at Centre for Strategic and International Studies, Washington, DC, US.
Trump has already torn up trade deals such as the Trans-Pacific Partnership and looks increasingly likely to pull out of others like the North American Free Trade Agreement (NAFTA), and his attempt to mould better international trade for America goes much further.
The World Trade Organisation (WTO) is solely responsible for enforcing the rules of international trade and creating a level playing field across all markets, and has, for example, been a key body that both the US and Europe have used in their efforts to address the way China trades with the world. But Trump’s opinion of the WTO was well known before he entered the White House, having said in 2017 ‘the WTO was set up to the benefit of everybody but us’, before going on to win the presidency.
While the EU and China have many unresolved issues and China’s compliance with the WTO is questioned, the pair seem to have to put the animosity between them on hold. Speaking ahead of the recent EU-China summit in Beijing, Liu He, vice-premier of China’s State Council, said the pair had partnered up to take on Trump’s attack on international trade.
‘Both sides agree to firmly oppose unilateralism and protectionism and prevent such practices from impacting the world economy or even dragging the world economy into recession’, he told Japanese news agency Kyodo.
Enforcing the partnership was the former prime minister of Finland and the EU’s present-day vice president for jobs, growth and investment, Jyrki Katainen, who said ‘we have to reform WTO in order to make multilateralism better functioning in the future’, adding ‘this unites the EU and China at the moment’.
The EU does have a headache however, as it may not be able to respond to the fast-changing landscape as quickly as others. The EU is fiercely loyal to the WTO, its rules and what it stands for, and is therefore adamant not to breach international trading regulations when responding to US trade tariffs, China is committed in public but flouts the rules behind closed doors, and Trump is quite happy to play his own game regardless of who is watching.
Learn more about how a US-China trade war could impact markets
Equally, the EU is aware that the products it trades with the US differ markedly from that of China, and that any shot it fires at Trump will come with some degree of recoil. Imposing tariffs on US-made semiconductors would pose a problem for Trump, for example, but European industry would act as collateral damage and be hurt as a result.
Aware of that, the EU’s tariffs on US goods that came into force earlier in June are attempting to target US states who form the backbone of Trump’s support, eyeing the US midterm elections in November 2018 when the president will have to work hard to keep hold of his majority in both the House and the Senate.
This has seen the EU slap tariffs on products like orange juice, exported from the swing state of Florida, cranberries and motorcycles from House speaker Paul Ryan’s state of Wisconsin, and bourbon whiskey from Senate majority leader Mitch McConnell’s state of Kentucky.
Below is a list of US products that will are subject to the latest tariffs imposed by the EU in June 2018:
US products targeted by EU retaliatory trade tariffs*
|Steel and aluminium||Agricultural||Electrical||Textiles/furnishings|
|Steel and iron products||Sweetcorn||Washing machines||Textile fabrics|
|Aluminium products||Kidney beans||Alkaline batteries||Garden umbrellas|
|Scaffolding equipment||Maize||Battery parts||Porcelain/China|
|Construction products||Rice||Microwave amplifiers||Household pottery|
|Steel cooking appliances||Peanut butter||Wireless game control||Other ceramics|
|Heaters and air conditioners||Orange juice||E-readers||Statuettes|
|Stainless steel cutlery||Cranberry juice||Kids tablets||Bedding|
|Steel kitchenware||Cranberries||Aerial amplifiers|
|Steel ladders||Plant extracts||Lamp and light fittings|
|Automotive||Tobacco and alcohol||Cosmetics||Clothing and misc.|
|Motorcycles and mopeds||Bourbon whiskey||Eye make-up prep||Apparel|
|Sail/motor boats and yachts||Whiskey (exc. scotch)||Manicure/pedicure||
|Automotive safety glass||Cigarettes and tobacco||Lip make-up prep||
|Automotive mirrors||Hair lacquers||
|Fishing vessels||Facial tissues||
|Radioactive transport vehicles||Paper hand towels|
(*Not the full list of products, some product categories have been generalised. Tariffs to be imposed vary by product. Please see full list for more details)
The full list of US products subject to new EU tariffs is available here.
While the full implications of the global trade war are not yet known, they are starting to trickle through. With tariffs now being thrown by the US, EU, Canada, China and others the situation is rapidly developing and posing huge risks to businesses that have thrived under globalisation and open international trade for decades.
With the latest EU tariffs having been introduced let’s have a look at some of the companies and sectors that could be affected by them and what it means for markets.
One of the primary aims of Trump’s tariffs is to promote ‘Made in America’ and entice US companies to bring their manufacturing back home as he attempts to restore jobs lost to cheaper overseas workers over the decades.
Renowned motorcycle maker Harley-Davidson had been in Trump’s good books, having previously been used by the president as an example of resilient US manufacturing in the Rust Belt. But the company was the first to directly respond to the EU’s retaliatory tariffs on motorcycles and, as a result, the first of many pawns in the US-EU trade war.
Contradictory to Trump’s plan, Harley-Davidson has announced it will shift production overseas to circumnavigate the EU tariffs. While the majority of its manufacturing is in the US, where it still has a ‘strong commitment’, it does have plants in the likes of India, Brazil and Thailand that it plans to utilise to avoid the higher costs of its bikes, which it refuses to pass on to customers (for now).
This means the company will absorb an extra $2200 in costs for every bike it exports from the US to the EU – bearing in mind it sold 40,000 bikes in Europe last year. This year, it will amount to $30 million to $45 million for 2018, and up to $100 million on an annual basis.
Harley-Davidson has said ramping up international operations would also come at a cost, and take nine to 18 months to complete. While Harley-Davidson has said moving overseas ‘is not the company’s preference’, the EU has tried to leverage what is a small win for the bloc. EU trade commissioner, Cecilia Malmstrom, said the motorcycle maker’s decision showed there was ‘consequences’ for US firms as a result of Trump’s tirade against international trade.
And this has ruffled Trump’s feathers. The president, having initially responded with requests for patience before criticising Harley-Davidson for being the first to wave the ‘white flag’, has now threatened to ‘tax them like never before’ if it moves jobs overseas.
Trump’s response to Harley-Davidson’s plans echoes similarities to how he has dealt with General Motors (GM). The company is the largest automaker in the US and was one of the first to be threatened by Trump. Before Trump was even formally in office (as president-elect), he warned General Motors about plans to build its Cruze model in Mexico and threatened to impose a border tax, rallying on news that Ford Motor Co had reversed plans to build a plant in Mexico for one in the US.
More recently, it has been revealed that GM is planning on resurrecting the Chevrolet Blazer using an assembly plant in Mexico – heightening exposure to the ever-more costly US-Mexico border.
While the US steel and aluminium industry has rallied behind Trump following his tariffs that should, for the short term at least, allow them to reignite their plants and cheered his tax cuts and infrastructure spending plans, Harley-Davidson has shown Trump that he does not hold all the cards and that the US does indeed have weaknesses.
With the EU attempting to push Trump voters between a rock and a hard place - testing their loyalty to their job versus their loyalty to their president – Trump is telling his supporters that the blame falls at the feet of America’s neighbours and allies.
While the current situation has been described as tit-for-tat, there is a very real risk that it develops into a full-blown international trade war. As quickly as his international counterparts signed through their retaliatory measures against the US, Trump revealed what would be next on his list should the EU not back down: European cars.
The European automotive industry has never been steered down such an uncertain path. Having been used as a pawn in Brexit negotiations over the last 18 months, they now know they are the next pawn in the US-EU trade off.
The stand-off between the US and China is also starting to have an impact following Daimler's profit warning because China’s tariffs on US cars will knock sales of Mercedes-Benz SUVs in the Chinese market, although this is not the sole driver of Daimler’s troubles.
Most of the European carmakers like Volkswagen and BMW operate manufacturing plants in the US to serve the US market, but even if cars are produced or assembled there the industry has an international supply chain that can see materials, parts and semi-finished auto-goods cross international borders tens of times before reaching their final destination and readied for sale. The EU’s latest tariffs target several US car components like safety glass and side-mirrors.
Trump’s threat is, unless the EU removes the recently introduced tariffs on US goods, to impose a 20% tariff on European cars imported into the US, placing $58 billion of European cars at risk according to EU estimates – nearly ten times more than what Trump’s current steel and aluminium tariffs target.
The fact European cars have fallen into Trump’s crosshairs may not be a coincidence. Germany is at the heart of the automotive market and, with Chancellor Angela Merkel’s position weakened in the country, the industry holds huge influence over the country, and therefore carries a loud voice in chambers in Brussels. German carmakers lead the argument for business in Brexit negotiations and have urged Merkel to support a post-Brexit trade deal between the UK and the EU, and Trump may be hoping Merkel will provide a calming voice that pushes the EU toward a strategy of talking to the US about trade, not one based on escalating tariffs.
Meanwhile, Polaris Industries, who make motorcycles, off-road vehicles and snowmobiles, have previously warned of the potential impact of trade tariffs on their operation of 16 manufacturing locations, predominantly based in the US but also overseas. While only a small proportion of its sales are made outside of North America, its growth strategy is aimed outside of the US, with its Polish factory already serving European markets and further afield.
Fox Factory, which makes parts for a wide array of vehicles, from bicycles to motorcycles and all-terrain vehicles, moved its bike suspension component facility from California to Taiwan, converting the US plant to make powered vehicle suspension products. When the trade war was still contained to the US and China it warned the effect had so far been limited but still posed a risk, and cited the major risk that a ‘broader trade conflict could ensue’. This is likely to play a part in its expansion strategy, which it had already said might involve moving more facilities abroad.
The EU has also slapped tariffs on US whiskey, most notably bourbon whiskey that specifically targets the likes of Brown-Forman, the owner of Jack Daniels. The company had already warned of the detrimental effects of tensions heightening and said the prospect of retaliatory EU tariffs meant it was ‘difficult to accurately predict future results’.
Since the EU tariffs were announced, Brown-Forman has said it will pass the additional costs on to some European customers by raising prices of not only Jack Daniels but also the likes of Woodford Reserve in response. It is thought prices would rise over a period of months rather than immediately as stock unravels, demonstrating the time it may take before consumers start to feel the effect of the tit-for-tat responses.
Read more on whether you should take a shot on spirits or bet on beer
This response will be more in tune with Trump’s ambitions, pushing up the prices of popular products for European consumers, but could also sway customers to other spirits or whiskies that become more price-advantageous as drinks like Jack Daniels become more expensive. The UK, Germany and France alone account for 15% of Brown-Forman’s total net sales, way behind its core US market which accounts for 46%. But Europe is providing considerably more growth, with annual net sales up 12% last year compared to growth of 7% in the US.
The EU cannot target the US agricultural industry in the same way that China can because agricultural imports of American goods is much lower, thanks to strict European hygiene regulations against US meat and genetically-modified crops. Still, it has imposed tariffs on not only seeds and grains but also fresh fruit juices that are grown in areas like Florida.
This could hit companies like Tropicana, owned by PepsiCo, who have cited the risks to their ingredient supply chain as a result of trade tariffs in the past. Florida-based Alico, growing citrus fruits, sugarcane and raising cattle, is one of the major suppliers to Tropicana, as well as Coca-Cola-owned rival Minute Maid. Alico has already been benefitting from pre-existing US government tariffs on imported oranges and has been more concerned with what would happen should the US drop or lower these tariffs, rather than retaliatory tariffs being imposed elsewhere.
While predominantly known for growing lemons and avocados, Limoneira also grows oranges and other citrus fruits. Much like Alico, although Limoneira mainly sells to product manufacturers or bottling companies that will usually be US-based, any issues for companies like Tropicana to ship product abroad could eventually dampen demand for the fruit needed to make the beverages back home.
In terms of other US agricultural products the EU has only so far targeted the likes of rice, maize, sweetcorn and kidney beans. If the trade war intensifies then there are many US agricultural firms that have embedded themselves in global operations, potentially making them vulnerable to expanding tariffs.
S&W Seed, which produces alfalfa, sorghum (which has been a target in the US-China trade war), sunflower, corn and stevia, has warned its ambition to be the world’s leading seed company could be threatened by ‘burdensome taxes and tariffs and other trade barriers’. Similarly, global salad and fruit provider Fresh Del Monte Produce sources product from both North America and Europe, although its own plantations are predominantly located in Central and South America, Africa, and the Philippines, where product is sent to an array of preparation facilities spread worldwide in countries like the US, UK, France and Japan. With the US-Mexican border also looking more costly for companies as the trade war continues, Fresh Del Monte could be hit, as North America accounts for 58% of its total sales compared to Europe, where it makes just 16% of sales.
Other companies like Calyxt, a biotech company helping boost crops of soybeans, wheat and canola, have further highlighted the consequences that can come from trade wars. The company has previously said the likes of tariffs, taxes and subsidies influences the planting of certain crops as farmers respond to changing market conditions, potentially affecting its own business. That would also hold true for fertiliser suppliers like CF Industries or CVR Partners, pesticide provider Marrone Bio Innovations and potash producer Mosaic Co.
While the EU has slapped tariffs on imports of US cigarettes, the tobacco firms mainly produce their products locally and therefore should be able to mitigate the direct risks of the tariffs. But still, sticking with agriculture, the likes of British American Tobacco (BAT) sources ingredients from 35 countries, including the US and Europe. BAT has only just acquired its US arm after buying Reynolds American, expanding its reach outside of Western Europe, Asia and Latin America.
Similarly, Philip Morris has some of its largest factories in or bordering on Europe, based in the likes of the Czech Republic, Germany, Poland, Turkey and Ukraine. Interestingly, the company has previously admitted that its smallest factories are predominantly located in Latin America and Asia because of ‘tariff and other constraints’.
Alongside motorcycles and whiskey, jeans are another American staple that the EU has targeted, although companies are more concerned about relations with the likes of China, where a lot of apparel is made.
G-III Apparel Group, which sells brands like Levi’s, has said tit-for-tat tariffs between the US and China could significantly hit its business as a ‘substantial majority’ of its product is imported into the US, and to a lesser extent Canada and Europe. Active and outdoor clothing maker Columbia Sportswear has said tariffs involving any countries where it sells or produces product could have a ‘material adverse effect on our financial condition’ – adding existing barriers to trade, including tariffs, ‘often represent a material portion of the cost to manufacture and import our products’.
Clothing brand Guess? has been cautious since Trump started withdrawing and renegotiating existing trade deals like NAFTA, which has left it uncertain about the future and what trading conditions it will have to deal with. International growth is big for the company; it now generates 69% of all revenue outside of the US compared to just 32% back in 2005, and investment in recent years has been funnelled to Europe and Asia.
Then there are companies like PVH and Under Armour that are worth keeping an eye on. PVH, the Calvin Klein and Tommy Hilfiger owner, is one of the largest global apparel firms in the world that imports a ‘substantial portion’ of products into all its operations including the US and Europe. Again, China will be the main concern, including for firms like VF Corp, the owner of Vans footwear and Lee jeans, which sourced 17% of all product from China last year. VF Corp has also been concerned about Brexit in Europe, and has said it is concerned about possible developments in both the US and the EU.
The impact of the escalating global trade war on stocks both side of the Atlantic is not yet known, but the strategies of the countries involved are becoming clear and giving investors the clues as to which sectors to watch: with agriculture, industrial metals, electrical components, textiles and automotive industries all in the frame. The likes of Harley-Davidson and Brown-Forman will be the first of what should be many companies to issue responses or warnings over the coming months, should more tariffs be introduced.
China’s tariffs on US goods have so far focused on agriculture: 78 of the 128 products slapped with duties under its initial $3 billion worth of measures were on US agricultural products, mainly fruit, nuts and pork, in addition to retaliatory ones of steel and aluminium. Mexico’s response was similar, targeting US pork, cheese, apples and bourbon – announcing it would begin importing more pork from Europe over the US to provide an example of possible benefits, in this case for European pork producers, and demonstrating the opportunities as well as drawbacks for markets in the current climate.
Canada’s retaliatory tariffs were a more like-for-like response to Trump’s steel and aluminium tariffs, responding in-kind with duties on US metal, as well as a string of other products including coffee, maple syrup and soya sauce, and many items that have also been targeted by the EU including washing machines, whiskey and boats.
Europe’s (and Canada’s) game is to use the five months before the US midterm elections to rattle Trump’s voters by targeting goods produced in swing states or states led by key Trump allies in the hope of persuading the president of stepping back from his war on trade. But Trump is aware the EU has a lot on its plate - Brexit and the eurozone to name just two – and his latest threat against the European car industry is no doubt a move designed to unnerve Merkel in an attempt to gain, albeit reluctantly, support from the most powerful voice in the EU.
Trump’s aim has always been to get a fairer deal for the US when it comes to international trade, delivering his ‘America First’ motto, but the president’s strategy becomes less clear as more countries are engulfed in his trade tariffs, and the fact he is even unhappy with the WTO (and essentially, the world trading system that governs the world) means the foundations for talks are not set. Trump may want ‘America First’, but the EU is determined to uphold the WTO’s level playing field.
However, he has had widespread support from both business and his voters only up until now. Steel producers applauded Trump when he imposed his tariffs, after they spent years calling for measures against imported metal, and many of the country’s Big Tech giants have supported his efforts to stem the leak of US technology to Chinese firms. But now that the international community has retaliated, Trump is facing a potential revolt from both business and his supporters.
Trump has always leveraged the US’s title as the world superpower, but with even the EU and China banding together to stop Trump’s war on trade, the president faces the risk of isolating the US more than anyone expected.
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