Other US companies are equally vulnerable.
Boeing’s airliner business is in a slump. Serial large-scale layoffs of engineers and production workers have been percolating through its operations since early 2016, with another big wave announced a week ago, as net orders have collapsed 53% from 2014, to a seven-year low. The last thing Boeing needs is help from President Elect Trump to speed up the process.
But that’s what might happen next if the trade and investment policies proffered by Trump become reality after his inauguration.
In an interview published on Monday in the German tabloid Bild, Trump threatened BMW, Daimler, and Volkswagen with a 35% tax on imported vehicles, which would make them very expensive for US consumers. The automakers and their dealers would respond by cutting their margins, but it might not be enough to stem a large sales decline.
The three companies already have assembly plants, research & development offices, and logistics operations in the US, including:
- BMW has a manufacturing plant in Spartanburg, South Carolina; with the $1 billion expansion announced in 2014, the plant would become BMW’s largest in the world.
- Daimler has bought into the US heavy truck business (Detroit Diesel, Freightliner, Thomas Built Buses, etc.) and has those manufacturing plants in the US. Plus it has a passenger vehicle assembly plant near Vance, Alabama.
- Volkswagen has a manufacturing plant in Chattanooga, Tennessee.
As global manufacturers, they all have plants scattered around the world. So Trump:
“If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35% tax,” he said, which Bild translated into German, which Reuters translated into English.
And as expected with these Trump interventions, shares of German automakers got hit – along with the overall German stock market. Trump has a way of setting the world atwitter, so to speak.
He has also lashed out repeatedly against Mexico and China, among others. Both are trying to counter. Mexico may be a pushover in that respect, though it’s trying not to be. The peso has crashed, and it doesn’t have enough leverage to trip up the US. But China is responding with the time-honored carrot-and-stick method.
The EU and China know how to fight trade wars. And they’re big enough to cause a lot of damage. When push comes to shove, you retaliate. You take a strategically chosen product and slap a big tariff on it. This might start small, as a shot before the bow. China just did that, sort-of preemptively, to show that it means business.
Last week, the Chinese Commerce Ministry, in its final ruling, slapped punitive anti-dumping duties of 42.2% to 53.7% on US distillers’ dried grains (DDGS), a byproduct of the ethanol industry that is used as an animal feed ingredient. This tariff is up from 33.8% first proposed in September. It also raised the anti-subsidy tariffs to a range between 11.2% and 12%, up from the previously proposed range between 10% and 10.7%. This escalation is a warning.
And the consequences for the US? Reuters:
It also deals a blow to US ethanol manufacturers already bracing for Beijing’s higher import taxes on their main product. DDGS are a byproduct of the corn-based biofuel that have become a key contributor to profits. The industry is pumping out record volumes of biofuel and is facing domestic political uncertainty as they wait for President-elect Donald Trump to take office.
But if trade partners, particularly the EU, really want to send a message to Trump they might send it via passenger jets, and they have a huge and also struggling beneficiary of such a move: Airbus.
Airbus would be happy to compete against jets from Boeing that are priced out of the market by the imposition of, for example, a 35% import tax. If you want to sell Boeings here, you might have to build them here, they might say.
China is already doing some of this. Boeing has agreed last year to build a plant in China for its bestseller, the 737. This joint venture with a Chinese company will install interiors and paint exteriors. It will come along with the requisite technology transfer. In return, Boeing has signed a deal for 300 planes with three Chinese companies. But the plant in China is not helping jobs at Boeing plants in the US.
And if the EU begins playing hardball for the benefit of Airbus, it could cause a jobs massacre at Boeing in the US.
There are plenty of other US companies in a similar position, including US defense contractors with lots of highly-paid jobs in the US that are competing with companies in the EU, Russia, China, and elsewhere. If they have to face punitive measures, it could get very ugly for them.
US agricultural producers are commonly lined up as the potential first targets in a trade war. As China shows, that’s how it may start because it’s small and easily reversible. It’s a shot before the bow that might wipe out some growers and agricultural enterprises and their lenders in the US, and it might hit farmland prices, and equipment sales by Deer and others, but it won’t cause a massive jobs massacre in an expensive urban area that suddenly pops up all over the media.
Targeting Boeing is different. Boeing is to the US what Daimler is to Germany. The commercial aircraft industry is already struggling, and politicians, particularly in France, are just looking for an excuse to prop up Airbus and the jobs it provides by giving it a huge competitive advantage over Boeing.
For the moment, everyone is in a shocked wait-and-see mode. Trade partners are still clinging to the hope that after the inauguration, the rhetoric will stop and some sort of moderation will set in. But they may get disappointed. And then all bets are off.
That great global economy is already doing a job on Boeing. Read… Three More Waves of Layoffs in 2017, as Orders Collapse to 7-Year Low. Boeing Shares Near All-Time High