US auto giant General Motors (GM) recently announced plans for a major layoff of 14,000 jobs in North America. The move was designed to help GM slash costs by US$6 billion in face of the slowdown in the US and China markets, as well as higher raw material costs driven higher by the import tariffs on aluminium and steel.
When the import tariffs on aluminium and steel were officially levied, US domestic producers took advantage of the situation to raise their prices. As a result, higher steel and aluminium prices in the US hit car producers like Ford and GM to the tune of US$1 billion in profits.
Facing increasing cost pressures, GM announced its intention to shut down four American factories and lay off the workers. The news would likely erode support for the US President who professes to be a champion of creating jobs for Americans. Not surprisingly, GM’s moves drew Trump’s ire.
The incident brought to light an important message: Trump’s steel and aluminium tariffs failed to lift the productive capacity of the US domestic industry. Rather than becoming more competitive against imported steel and aluminium, US producers have merely jacked-up prices to fatten profits. Without raising output and productivity, the main beneficiaries are merely the few major shareholders and not the common American workers.
To support the US auto industry, Trump may have to toy with the idea of imposing import tariffs or quotas on imported cars. Then again, it could provoke the disgruntlement of major US allies like the EU and Japan that are also the major car exporters to the US. At the beginning of the year, Trump had initially threatened to impose tariffs on imported cars but later rescinded from his threats after considering about the diplomatic implications.
But if little is done to shore up the US auto industry, things could get grim as the industry could brace for more decline. In the short-term, the effects of a shrinking US auto industry to the US economy may not be felt as the steel and aluminium industry could compensate for the short fall. However, a prolonged contraction would ultimately spill over as a result of lower demand for raw materials.
The repercussions of Trump’s trade war are slowly emerging and it is for this reason that I am optimistic that Trump would be motivated to end the trade war soon. Clearly, the haunting lessons from the past taught us that there are no winners in trade wars. If past trade wars had produced winners, previous US administrations before Trump would have taken this path. While Trump’s populist policy could win him some votes, it definitely could not stand the test of time.
Over the past two weeks, the US market plummeted, led by the flight from US tech stocks. The Bureau of Industry and Security under the US Department of Commerce announced that it would be seeking public opinion on likely the strictest ever technology export restriction. The long list of technologies under the proposed new limits includes 14 advanced technology categories. This could impact US tech companies as they will face restrictions from exporting their goods or services to certain markets.
The restrictions, if imposed, could see US tech companies losing their foreign market share. If US technology is completely banned from being exported, the US market – with a population of just 300 over million residents – will not be large enough to sustain the US tech industry. Naturally, the news dealt a devastating blow to US tech stocks.
Based on my observation, the 14 advanced technology categories listed to face export restrictions were largely similar to China’s “Made in China 2025” blue print. Not surprisingly, many viewed the restriction as a move to contain China’s plan for high-tech dominance.
Not long ago, Trump told reporters that China has scrapped the programme though it remains to be seen whether that was the case. China’s President Xi, however, is more likely to stay on course in steering the Chinese economy towards achieving the Chinese Dream of 2025.
Trump aims to forestall the “Made in China 2025” plan by employing a two-pronged strategy. First he plans to restrict exports of US technologies that could be susceptible to intellectual property theft. The second plan entails restricting access into the US market by slapping import tariffs of 25 percent on Chinese technology goods. Apart from restricting US companies from adopting the use of Chinese technology products, Trump is also pushing other US allies to blacklist Chinese technology equipment based on cybersecurity concerns.
Only recently, with the 5G telecommunications debuting onto the world stage, the US and Australia have taken the lead to ditch China’s Huawei network services and its equipment on national security grounds.
Not long ago, Trump banned the sales of components to China’s ZTE Corporation, bringing the Chinese telecommunication equipment manufacturing giant to its knee as operations grinded to a halt. Though the sales ban was eventually lifted, Trump fears the reliance of US telecommunication companies on Huawei-made equipment would lead to its own retribution in the future.
Indeed, Trump may be right that with China technology companies losing the US market, less revenue would be made and hence channelled into their research and development (R&D) programmes. However, Trump missed the part where China’s state capitalist economic model meant that the Chinese government could heavily subsidies Chinese tech companies to encourage R&D.
Like every cloud has its silver lining, US-China tech war could bode well for Singapore. This is because given the uncertainty in US and China, Singapore could attract investments as a hub for R&D.
Recently, the ruling People’s Action Party has also named its fourth generation of leaders. Finance Minister Heng Swee Keat was appointed the first assistant secretary-general while Trade and Industry Minister Chan Chun Sing was appointed the second assistant secretary-general to the Central Executive Committee. With more clarity who would succeed PM Lee, it is something Singaporean investors can cheer about.