Investment26 September 2018

Trump trade war: the Harley Davidson example

Ian Lundy
Ian Lundy
Chief Investment Officer

US Tariffs

Earlier this year Donald Trump announced tariffs on some imports into the US, initially on steel and aluminium. He argued that these tariffs were necessary to protect US national security, although many perceived this to be exploiting a loophole in World Trade Organisation rules.

The US currently imports much more than it exports, and the aim of the tariffs is to address this imbalance.

While the tariffs are meant to help US steel and aluminium producers, it actually increases prices for other US manufacturers that use aluminium and steel. This will increase prices for US consumers and make US exports less competitive.

Who’s being affected?

The companies that are most affected initially are non-US steel and aluminium producers that export to the US. As the trade war has intensified, other non-US companies that compete with US manufacturers have been targeted with tariffs. The tariffs are intended to protect manufacturers, so primary producers that don’t compete with the US will be less impacted. The impacts on primary producers will be less and mostly be by a reduction in overall demand for resources.

How have other countries responded to the US tariffs?

Some countries have responded with tariffs on imported US products. A recent example of this is Harley Davidson, where the EU put a tariff on Harley Davidson motorcycles. In response, Harley Davidson announced they’ll move some of their manufacturing out of the US and in to Europe. They believe this is the only sustainable option to maintain a viable business in Europe. This is because US manufacturing now has higher input prices for steel and aluminium, but also tariffs on products that they export to Europe. On top of that, Donald Trump has singled them out for criticism, stating he was surprised that they would be the first to wave the White Flag.

Where does it go from here?

It’s not clear yet whether the ongoing threats are just negotiating tactics, or whether they’ll escalate further.

A potential future issue that could play out is around technology companies and the potential for spying through software or hardware. There may be tariffs or outright bans on some companies and technologies in the future. This is likely to persist beyond a trade war as it relates to strategic positioning between the two main players: the US and China.

So, what does this mean for investment returns?

The answer depends on whether the retaliation continues and how long for. Some outcomes appear more certain but the issue is very complex and will also depend on how investors respond.

The trade war could potentially also impact currencies and valuations of government bonds.

One example is that a lot of US government bonds are currently owned by the Chinese government. If they decided to sell these down it would cause bonds prices to fall, which means US long-term interest rates would rise. This money would then be invested somewhere else and that asset would gain. This is an example where capital flow is more important for returns than investment fundamentals.

However as a long-term investor, it’s important to not overreact. It’s difficult to predict with any certainty how the complex interactions will play out. Companies that are domestically focussed may do better in this environment. Our portfolio is well diversified which means it will hold some losers as well as winners, however on balance we believe the portfolio is well placed to weather any trade war.

The trustee of Tasplan Super (ABN 14 602 032 302) is Tasplan Pty Ltd (ABN 13 009 563 062). AFSL 235391.

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