[Brooke Sutherland] Ford to Trump: That’s not how it works

By Bloomberg
  • Published : Sept 12, 2018 - 17:10
  • Updated : Sept 12, 2018 - 17:10

How many company warnings will it take to convince President Donald Trump that his trade war is backfiring?

In the months since Trump ratcheted up trade tensions with both China and erstwhile US allies such as Canada and Europe, there’s been no stampede of manufacturers back to America’s shores. There has, however, been a growing chorus of complaints about the profit pinch wrought by US and retaliatory tariffs as well as some early warnings about price increases and job cuts. Ford Motor, Apple and Intel are the latest to rebut Trump’s trade philosophy and lay bare his misjudgment of globalized supply chain management, echoing grievances from the likes of General Motors and Harley-Davidson.

Ford last month canceled plans to import its Focus Active crossover into the US from China because Trump’s tariffs have undermined the business case for a vehicle with expected annual domestic sales volume of fewer than 50,000 units. Trump touted the decision with a weekend tweet, noting that the car “can now be BUILT IN THE USA.” Ford almost immediately clapped back, noting that it would not be profitable to build the car in the US for such a niche market where there is heavy competition. The US remains a relatively expensive place to manufacture things, especially if you don’t have economies of scale, and this is a clear example of how there’s no clear-cut win-lose dynamic to US-China trade relations. The beneficiaries in Ford’s case may be its European and Japanese competitors.

Trump’s previous commendations of companies’ investments in the US were usually based on corporate press releases heavy on fluff and a recycling of preexisting expansion plans, but they at least had some sort of factual underbelly, however strained. The same cannot be said of Trump’s Ford tweet. That’s telling, and betrays a flawed logic that is rather worrisome as Trump contemplates tariffs on $267 billion of Chinese goods in addition to the $200 billion of levies his administration looks set to put in place soon.

Trump took a similar tack with Apple. The technology giant warned last week that proposed US tariffs would force it to raise prices for products including the Apple Watch and AirPods headphones. Trump’s response: “Make your products in the United States instead of China. Start building new plants now. Exciting!” The odds of Apple itself building new plants anywhere in the world are quite slim. The company has one plant of its own in Cork, Ireland. Elsewhere, it largely relies on contract manufacturers, including Foxconn Technology Group, which did in fact recently break ground on a new manufacturing facility in Wisconsin -- albeit thanks to heavy subsidies from the government.

I will note that we are still waiting for the “three big plants” that Trump last year claimed Apple CEO Tim Cook had promised to build. Apple has created a $5 billion fund to encourage innovation among its domestic suppliers, which are themselves getting caught in the trade crossfire. In an almost schoolmarm tone, Apple explained yet again that each of its products contains American-made parts or materials and that the goods are labeled Chinese imports only because final assembly takes place in that country. The result is that “the burden of the proposed tariffs will fall much more heavily on the United States than on China,” it said in a letter to US Trade Representative Robert Lighthizer.

Intel raised a different issue, arguing that the tariffs would make it more expensive and complicated for companies to make the necessary infrastructure investments to launch cutting-edge 5G technology. This initiative is so critical to the US government that it blocked Broadcom’s proposed takeover of Qualcomm in part because it feared the former’s cost-cutting CEO Hock Tan would underinvest in the technology.

Relocating supply chains is a lot more time-intensive and expensive than firing off a tweet. Eventually, Trump’s trade wars will force multinational companies to adjust their price-arbitrage analyses, and who knows, maybe in some cases that will mean shifting production to the US. But at what cost? If such rejiggering makes US companies less competitive, any local jobs they may have created could become redundant anyway.

Brooke Sutherland

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. -- Ed.